Liquidation preference

A liquidation preference is the clause that decides who gets paid first, and how much, when a company is sold or wound down. A 1x preference means an investor gets their money back before founders and ordinary shareholders see a penny; anything above that, or a participating preference that pays the investor twice, tilts the split further their way. The preference only bites in a modest or bad exit, which is exactly when it hurts most. For a lean founder, this is the single most important term to understand on a term sheet, because it can mean selling for a respectable sum and walking away with almost nothing while investors take the lot. A clean 1x non-participating preference is the founder-friendly standard. Multiples and participation are red flags worth negotiating hard against, because they quietly reassign the value you built to whoever wrote the cheque, in precisely the outcomes where every pound counts.