A liquidation preference is the contractual right of preferred shareholders (investors who bought preferred stock in a priced round) to be paid out before common shareholders when the company is sold, liquidated, or otherwise distributes cash. It determines who gets what at exit, and it's one of the most consequential terms in a Series A and onward.
Each preferred-stock investment carries a multiple, almost always 1x in modern term sheets. A "1x non-participating" preference on a $10M Series A means: at exit, those investors receive their $10M back before any common shareholder sees a dollar; after that, they choose either to keep the $10M or to convert their preferred into common and share the remaining proceeds pro-rata, whichever is bigger. The investor takes the better of the two paths.
Non-participating preference (the modern default) gives the investor either their preference or their pro-rata share, not both. Participating preference (also called "double-dip") gives the investor their preference plus a pro-rata share of the remaining proceeds. Participating preferred is much worse for founders, especially at low-to-moderate exit valuations. Most clean term sheets in 2026 are 1x non-participating; anything with participation should make you read carefully.
When a company has multiple priced rounds (Series A, B, C), each later round usually has senior preference over earlier rounds. At exit, Series C is paid first, then Series B, then Series A, then common. In a "stacked" preference structure with 1x preference at each round, the total dollars that have to be paid before common holders see anything can quickly exceed the company's exit value, especially in down-round scenarios. Founders ending up with zero on a $50M sale of a company that raised $80M is the canonical example.
Push for 1x non-participating, no caps, no senior tiers across rounds (treat all preferred equally where you can). At low exit valuations, the difference between 1x and 2x preference, or between non-participating and participating, can be the difference between founders walking away with millions and walking away with zero. Every term sheet's "implied payout to founders at $X exit" should be modeled before signing. Most law firms can produce this in an afternoon.