Often, the owner of preferred stock gets a guaranteed return of 1X their investment. Imagine a VC that buys 50% of a company for $50 million, for a $100 million post-money valuation. If that company then sells for $75 million, the VC gets more than 50% of the $75 million. The VC gets his or her $50 million out first, and then half of the remaining $25 million ($12.5 million) for a total return of $62.5 million. The common stock holders split the remaining $12.5 million. That's a 1X liquidation preference. In recent years, it's become the most common liquidation preference for VC firms investing in startups.

Startup Employees Think They Are Going To Get Rich — Then A Horror Story Like This Happens - Yahoo Finance Sunday, March 9, 2014 @ 9:05pm