Liquidation preference
The investor's right to take their money out first when the company is sold, before common shareholders receive anything.
The liquidation preference defines what preferred shareholders receive, ahead of common, when the company is sold, merged or wound up (a “liquidity event”, not just an actual liquidation). The standard term is 1x non-participating: the investor chooses the better of getting their money back or converting to common and taking their percentage. The aggressive variants multiply: a 2x or 3x preference returns multiples of cost first; participating preferred takes the preference and then shares in the remainder (“double dip”), sometimes softened by a cap.
Stack order matters as much as size. Across several rounds, preferences are either stacked, the latest money out first, or pari passu, all preferred sharing proportionally. A deep, stacked, senior preference pile changes who gets paid at every exit value below the stack’s total.
The discipline is to negotiate the term with the waterfall open, not in the abstract: 1x non-participating, pari passu where it can be had, and a model showing what common receives at a range of exit values. A flattering headline valuation bought with a participating 2x preference is frequently worth less to founders, at every realistic exit, than a lower valuation on clean terms.
A quantum roadmap crosses several rounds before product revenue, so the preference stack grows for years before any exit is plausible, and the realistic downside exit (an acquihire or an IP sale at a modest price) is exactly where preferences decide everything. Model the waterfall at low exit values before signing: with a deep stack, a $30,000,000 sale can return meaningful money to investors and close to nothing to common, including the team's options.
An investor put $5,000,000 at 1x non-participating for 20% ownership. At a $20,000,000 exit they take the greater of their preference ($5,000,000) or their as-converted share (20% × 20,000,000 = $4,000,000): they take $5,000,000, and common splits the remaining $15,000,000. At a $50,000,000 exit they convert and take $10,000,000. The crossover where converting beats the preference sits at a $25,000,000 exit. The same stake switched to 1x participating takes, at the $50,000,000 exit, the $5,000,000 preference and then 20% of the remaining $45,000,000 ($9,000,000), for $14,000,000 against $10,000,000 as-converted: the extra $4,000,000 is the double dip, paid out of common.
From definition to decision
Model this in your own round, scenarios, dilution and runway, in the founder workspace.