A clause defining who gets paid first—and how much—if the company is sold, liquidated, or goes bankrupt. Usually expressed as a multiple (e.g., 1x).
Why it matters: It protects downside for investors. A standard 1x non-participating preference means the investor gets their money back before founders get anything in a fire sale.
In practice: A VC invests $5M with a 1x liquidation preference. The company is sold for $6M. The VC takes $5M off the top, leaving only $1M for the founders and employees.