Upon a liquidation event, the Investor gets its liquidation preference and receives nothing else unless it converts its Preferred Stock to Common Stock, in which case it foregoes its preferred liquidation preference. With a nonparticipating liquidation preference, preferred holders would only convert their shares to Common Stock if they would earn more in a liquidation scenario by holding common than if they continue to hold preferred. This can often be hard to figure out and requires complicated spreadsheets (called “waterfalls”) that model the amounts payable to the stockholders at various enterprise values to help stockholders determine whether they are better off holding preferred or converting to common.
Glossary