What is a liquidation preference cap?

The liquidation preference can also have a cap if it is a participating liquidation preference:

After preferred liquidation proceeds, preferred participates in liquidation proceeds on the common with a cap on participation at [ ]x.

This is a participating liquidation preference but caps the total participation amount so that any amounts in excess of 2X or 3X (or any other multiple) of the liquidation preference is solely for the common stock. I’ve seen up to a 5X cap (which is really high). Once the preferred stock has received the capped amount, the remaining liquidation proceeds go to the common stock. However, don’t forget, the preferred stock can still convert to common stock if the distribution would be greater on a pro rata basis with the other common stockholders.

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What is liquidation preference?

A liquidation preference gives the preferred stock the right to get paid before the common stock. It sets forth the order of return to the investors...