Liquidation preference

A liquidation preference is preferred stock's core downside protection: at an acquisition, sale, or dissolution, preferred holders are paid a defined multiple of what they invested (typically 1x) before a single dollar reaches common shareholders — founders, employees, and anyone else holding plain common stock.

1x is the norm; higher multiples exist

A 1x preference returns exactly the investor's principal ahead of common. Multiples above 1x (1.5x, 2x, occasionally higher) exist and skew heavily investor-favorable — they're more common in distressed or highly competitive late-stage deals than in typical seed/Series A terms, and are worth pushing back on as a founder.

Stacking order — seniority

When multiple preferred series exist, they're paid out in seniority order — most senior (usually the most recent round) first — before the next series in line sees anything. Series that share the same seniority rank are paid pari-passu: pro-rata by preference amount if there isn't enough left to cover everyone in that rank in full. See the seniority glossary entry.

Preference alone isn't the whole story

A preference determines the floor an investor is owed; whether they take that floor or convert to common instead is a separate decision — see participating preferred and exit waterfall. Non-participating preferred always takes whichever is larger: its preference, or what it would get by converting to common and forgoing the preference entirely.