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, effectively getting paid twice. "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.