Investors' right to get their money back before common shareholders receive anything in a sale or liquidation — typically 1x their investment.
A liquidation preference is a term in a preferred stock agreement that gives investors priority over common shareholders (founders and employees) when the company is sold, merged, or shut down. The most common form is a 1x non-participating preference: investors get back their original investment first, and whatever remains goes to common holders.
Liquidation preferences matter most in "middle outcome" scenarios — when a company is acquired for a modest amount relative to its last valuation. If a company raised $5M at a $20M valuation and then sells for $8M with a 1x non-participating preference, investors get their $5M back first, and founders split the remaining $3M. Without the preference, founders would have gotten a larger share.
More aggressive structures include participating preferred, where investors get their preference back AND then participate pro rata in the remaining proceeds. "Capped participating" limits this double-dip to a certain multiple. These terms are negotiating points on term sheets, and understanding what you're agreeing to before signing is critical.