VC Term Sheets: "Type of Security
Investors typically receive convertible preferred stock in exchange for making the investment in a new venture. This type of stock has priority over common stock if the company is acquired or liquidated and assets are distributed. The higher priority of the preferred stock justifies a higher price, compared to the price paid by founders for common stock. 'Convertible' means that the shares may be exchanged for a fixed number of common shares.
When the company is sold or liquidated, the preferred stockholders will receive a certain fixed amount before any assets are distributed to the common stockholders. A 'participating preferred' stockholder will not only receive the fixed amount, but will also share in any additional amounts distributed to common stock."