Investors are willing to pay higher prices for less equity for two reasons: 1. Normal investment of $Y at valuation X implies that you, the investor, think th

Investors are willing to pay higher prices for less equity for two reasons: 1. Normal investment of $Y at valuation X implies that you, the investor, think that the company is worth more than X. If it exits for more, you'll get more, less you'll get less. But investing $Y at valuation X with a 2x liquidation preference means that you think the company is worth merely Y. The valuation basically doesn't matter any more. If I invest $10 at a $100 valuation and the company exits at a $500 valuation, I get a $40 profit. If it exits at a $50 valuation, I've lost $5. The valuation I invest at makes a big difference for my profitability. But consider the same scenario with a 2x liquidation preference - in the happy case, I get the same profit. In the sad case, I've still doubled my money. 2. Investors in startups are not perfectly rational investors. If I own an existing stake in a company, I would fight tooth and nail to prevent any new money coming in from having a liquidation preference over me. But in truth, if the company can raise money at a $2 billion valuation normally, or a $4 billion valuation with a preference, a fund can report double the gains to the people who actually put money in it. So they stay quiet, show off the impressive paper returns of their current investment fund, and go on raising the next one. This effect is doubly pernicious when the later investors are also earlier investors - they can basically juice their own balance sheet. On paper, the existing stake is worth more because of the inflated valuation, and the new stake is a heads-I-win-tails-you-lose. And at the lowest preference are all the employees. Founders take money off the table in the inflated new rounds, so while they technically have a lower preference they've still cashed out significantly.