These clauses generally don't cause any grief if the outcome is a win or a complete failure. It's only when it's a partial failure and people are dividing up what there is -- typically less than was put in -- that these cause major differences in outcomes.

You're describing participating preferred (that is, investors get paid out once as preferred and again after conversion to common). A liquidation preference is more common than participating, where the preferred investors get paid out (for example) at least 2X their investment (can be any multiplier, the highest I ever heard was 5X).

Most investments in Silicon Valley are clean deals, with a liquidation preference of 1X and nonparticipating preferred. Companies without a clean deal usually were too thirsty for unicorn status ($1B valuation) or had difficulty raising money.

> You're describing participating preferred

I'm describing non-participating preferred, which as you point out is far more common.

Here's how it would go with participating preferred. As before, I invest $10 million at a $90 million pre-money valuation. If the firm sells for $200 million, first I get back my $10 million. Then I convert to common and get 10% of the remaining $190 million, or $19 million. Before I got $20 million (10% of $200 million). Now I get $29 million. (In the down round scenario, the outcome is the same.) Participating preferred is--nowadays--increasingly confined to distressed finance.

TL; DR Participating preferred gets to have its cake and eat it too. Non-participating preferred must choose between (a) its preference or (b) converting to common.

I misread your comment, thanks

These terms are by no means confined to distressed finance. Many unicorns got their “billion dollar” number using adverse terms such as these

Which explains this outcome, Fanduel was a “unicorn”:

https://seekingalpha.com/article/4010443-fanduel-unicorn-bac...