Most entrepreneurs come to believe that liquidation preference is evil. The truth is that liquidation preference is not evil and it is a right that should be granted to investors to give them proper protection (against liquidation, not liquidity). It is the "participation" right that is evil (allowing greedy VC's to double dip and essentially turning their equity investment into a senior note plus warrants). So give them non-participating liquidation preference and everyone is happy. However, the reality is that no VC's will let you do that unless you have all the negotiation power. This is a very good article. If you want to know more, I also write about the other do's and don'ts regarding VC's. For struggling entrepreneurs, it is an important topic and worthy of further discussions. Thanks for posting.
It's not just about the negotiation power. It's about the total price for the whole deal. A VC might be willing to negotiate away a liquidation preference, but he would be very worried that he was buying a lemon. The total price would go down. Similarly, maybe you start negotiations without a liquidation preference. Putting it on the table in exchange for a higher valuation isn't a bad idea.
A liquidation preference helps prove that you're not selling a lemon. It says "look, if this thing goes sour, you get your money back first." That's worth a lot to a VC because it signals that you are serious. The money itself isn't nearly as important as the fact that the company founder is putting his money where his mouth is by saying, in effect, "I won't get paid unless this is as big of a success as I think it is."
I can only talk about my own experience, hoping that it can be useful to someone and I try hard not to generalize. And my own experience with negotiation (with VC's) is that it is not one-to-one but one-to-many. My best experience was when I had three termsheets on the table and I went to one VC and said, "I like the price on A, I like the terms on B, but I like you". The end result is that I get to work with the VC that I like and I get the pricing and terms that I can live with. So by negotiation power, I don't mean negotiation skills. The only true power you have as an entrepreneur is when you don't need their money. But if you need their money, then you have no power and you are "meat on the chopping board". In that case, liquidation preference is the least of your problems.
http://www.lovemytool.com/blog/2007/10/vc-worst-enemy.html