Liquidation Preference

A liquidation preference is a right that preferred shareholders (investors) have to get their money back before common shareholders (including ESOP holders) receive anything during a liquidity event.

"1x non-participating" means an investor gets at least their investment back first. "Participating" preferences are more aggressive: investors get their money back AND share in remaining proceeds.

Why it matters for employees: if a company raised $100M with 1x preferences and sells for $120M, only $20M flows to common shareholders regardless of total shares outstanding. Always ask about the preference stack when evaluating equity.