A liquidation preference determines the order and amount of payments on a sale or liquidation, and it frequently matters more than ownership percentages.
Non-participating preferred. The holder receives the greater of its preference or what it would receive on conversion to common. This is the market standard in most venture financings.
Participating preferred. The holder receives its preference and then shares in the remainder as if converted — a double dip. Frequently capped at a multiple of the investment, after which conversion becomes more favourable.
Multiple. One times the investment is standard; higher multiples appear in down rounds and distressed financings and substantially reduce common proceeds.
Accruing dividends added to the preference, compounding over time and often overlooked in exit modelling.
Seniority. Whether later rounds rank ahead of earlier ones, or pari passu. Stacked seniority in a modest exit can leave earlier investors and common holders with nothing.
Deemed liquidation. Whether a sale of the company, a merger or an asset sale triggers the preference, which it almost always does by definition.
Modelling. The only way to understand a capitalisation table with preferences is to run exit scenarios across a range of values. Percentage ownership is not informative on its own.