Freedom of contract. Think about this situation: a company is in dire straights, and will likely go bankrupt and be worthless. The founders and the employees s

Freedom of contract. Think about this situation: a company is in dire straights, and will likely go bankrupt and be worthless. The founders and the employees still believe they can turn it around, however. As an investor, you may be unwilling to invest with a 1x liquidation preference, given the high likelihood you lose all your money. So the company and the investor may negotiate a 2x liquidation preference as a way to sweeten the deal and induce the investor to invest in a riskier than usual proposition. Similarly, right after the dotcom bust when many investors lost their shirts, terms became much more investor friendly because the risk was perceived to be higher. At the end of the day, the terms are negotiated between the company and the investors, and it’s a market - if the environment is founder friendly and there’s plenty of capital looking to invest (like today), it’s almost always 1x. If capital is scarce, you take what you can get, otherwise, no capital. The founders are well aware as they negotiate these terms. The rank-and-file employees may not understand the company’s liquidation preference stack, but they can always ask, and if not given or satisfied with answers, ask for more cash comp than equity. It’s again a free market.