Liquidation Preference

In a liquidity event, this is the return multiple that each preferred shareholder can take in the proceeds. It's designed to protect these shareholders from downside by setting a baseline return.

For example: let's say a sole investor has invested $2MM for 30% of the company at a 1X liquidation preference. Soon after the company gets acquired for $10MM.

The investor can either take their liquidation preference of $2MM (calculated from $2MM x 1X = $2MM), or they can convert to Common stock and take 30% of the proceeds for $3MM. Clearly the better option is to convert to common, but if their liquidation preference had been 2X it would be favorable to take $2MM x 2X = $4MM of preferences.