Preferred equity (or preference shares) is a class of ownership in a company that has a higher claim on assets and earnings than common stock. In private company financings, institutional investors almost universally take preferred stock, which typically includes: a liquidation preference (entitlement to recover invested capital before common shareholders in a sale or liquidation), anti-dilution protection (adjustment provisions if shares are later issued at a lower price), and sometimes accruing dividends.
Preferred shares are generally convertible into common shares — usually on a 1:1 basis — and automatically convert at an IPO. Participation rights determine whether preferred holders participate in upside beyond their liquidation preference on a pro-rata basis with common shareholders. The stacking of multiple rounds of preferred shares with different terms is a key complexity captured in cap table models.