Liquidation preference is an essential part of preferred stock (the stock typically given to startup investors). It ensures that holders of preferred stock receive a fixed amount before assets are distributed to common stock. Holders of “participating preferred stock,” a rare type of preferred stock, not only receive a fixed amount but also participate in some manner with the common stock in further distributions. Such participation is sometimes limited to a certain multiple of the issue price of the preferred stock.
Read more about liquidation preferences here.
