A liquidation preference specifies a claim on proceeds before common holders receive the residual, subject to the actual seniority and available proceeds. A 1× preference commonly refers to a multiple of the original invested amount in the example.

The source payoff diagrams separate preference, conversion and participation. These features answer different questions: the amount paid first, whether the holder can elect common treatment, and whether the holder also shares the residual. Headline ownership alone cannot describe the resulting payoff.

Under the simplified non-participating example, the holder takes the available preference or converts to common for a pro-rata share, whichever is better. The holder does not receive the preference and then also participate in the remaining proceeds.

For a 2m preference and 40% ownership, conversion becomes better above an exit value of 5m because 40% × 5m = 2m. Below that crossover, the preference can allocate more than 40% of proceeds to the investor. Available proceeds still limit the payment.

Uncapped participating preferred first receives its preference and then receives its ownership share of the remaining proceeds under the example. This changes the payoff even when the investment, headline valuation and ownership percentage remain identical.

Caps and conversion rights can change the comparison, so the actual terms must be read together. A payoff table over several exit values makes the difference visible and exposes which range matters most to the parties. A single large-exit comparison can hide a consequential downside transfer.

A real payoff calculation begins with proceeds available after obligations such as debt and transaction costs, then applies the relevant seniority, preferences and conversion choices. Multiple classes can interact in ways a single-investor illustration omits.

The teaching diagrams isolate one feature at a time so its effect can be understood. State those omissions before using the result in a comparison. Also distinguish economic rights from control rights, which can affect decisions before an exit occurs.

The Series A priced the company on 21,377,551 fully diluted shares. At an exit, the 1,710,204 unallocated pool shares have not been issued and receive nothing, so the as-converted base is 19,667,347.

Both preferred classes are 1× non-participating and pari passu (illustrative assumption from the Relay term sheets). Granted options are treated as vested and exercised with strike price ignored; former SAFE holders are treated as converted holders per the Relay cap table.

$40M: the Series A would get only $8.70M by converting, so it takes $12M. The remaining $28M is shared by 15,391,837 shares; the seed's 22.22% is worth $6.22M, above its $4M preference, so it converts. Rechecking the Series A leaves its choice unchanged, so the solution is stable.

$150M and $600M: both classes convert and every holder is paid strictly in proportion to as-converted shares. Figures in $M; rows may not sum exactly due to rounding.

Seed crossover: with the Series A in preference, the seed converts when 22.22% × (X − $12M) > $4M, i.e., X > $30.0M. Series A crossover: with the seed converted, the Series A converts when 21.74% × X > $12M, i.e., X > $55.2M.

The preferences change the outcome only below $55.2M. That is the range where founders and investors can disagree about accepting an offer.