When a company goes into liquidation, holders of preference shares are entitled to receive the amount of capital they invested. The liquidation preference clause specifies when and how much of the capital will be returned to shareholders in the event of liquidation.
Standard terms are ‘Rank’ and ‘Participation’.
Rank decides the order in which the capital is returned to investors. Holders of preference shares are always ranked ahead of equity shareholders.
Participation decides the amount of proceeds from liquidation payable to investors. This could be an amount equal to investment (1x), twice the amount (2x), and so on.