A liquidation preference is one of the primary economic terms of a venture finance investment in a private company.
The term describes how various investors' claims on dividends or on other distributions are queued and covered.
Liquidation preference establishes that certain investors receive their investment money back first before other company owners in the event the company is sold, has a public offering, pays dividends, or has another liquidation (payout) event.
If the company then sold for $15M the investor would get back 2x of their investment first for $2M (2 × $1M) and then the rest of the remaining $13M ($15M – $2M) would be distributed among all shareholders.
If the company again sold for $15M, the investor would have a choice of either receiving $2M (2 × $1M) for their liquidation preference or $2.2M (14.4% × $15M) for their participation.