When a startup sells, the money runs through a waterfall. Preferred investors hold a liquidation preference — a contractual right to be paid first, before common stock (the founders and employees) sees a cent.
A 1× non-participating pref returns the investor's money, then steps aside. A 2× pref demands twice the check first. A participating pref is paid its preference and then keeps a pro-rata slice of everything left — the "double dip".
Stack enough of these and you get a dead zone: a headline exit that looks like a win pays the founders almost nothing, because the whole price is swallowed satisfying the stack.
Yet a preference is only worth taking while the company is small. Past a convert flip, an investor earns more by converting to common and riding its ownership — so it gives the preference up. The paperwork, not the valuation, decides the ending.
This lab hit a snag — the lesson continues without it.