1) Debt holders
2) Most senior shareholders and their liquidation preference
3) Less senior shareholders and their liquidation preference
...
99) Common stock holders
This is actually to align the founder incentives in shooting for a big exit. Insert any other order of preferences, and the founders have a stronger incentive to flip the company as quickly as possible in order to create a payday for themselves, screwing investors in the process (which also happens to be a very irrational proposal for investors, which is why you rarely see a round on those terms).
Investor puts in $1m for 20%.
Founders quick flip for $30m. The investor just made six times his money, and earned a payout fully aligned with the founders. Absolutely nobody got screwed.
The reason investors like liquidation preferences, is so they can improve their odds of getting their money back at least (and yielding the first dollars of return). They aren't aligning their interests with the founders in this case, they're putting their interests in front of the founders, just as debt does. Liquidation preferences are a way of saying: my equity is more important than your equity; you need my money, so I'm going to make sure my money is treated with more importance than your equity.
Liquidation preferences exist solely to protect investors from their own poor choices at the expense of the founders / earlier shareholders.
In that scenario, without liquidation preferences, the interests of the founders and investors aren't aligned--the founders profit while the investors lose money.
100) Employees
Why? They founded a company which tanked. They made poor decisions along the way which led to said taking. They did it on someone else's dime. No one made money here, so why shouldn't the investors get some of the investment back?
It's a tradeoff. And sometimes it can work to your benefit. E.g. if you and your potential investor disagrees about the level of risk and/or about the potential size of an exit, you can try to negotiate a multiple liquidation preference in return for less shares.
Without liquidation preferences, the founders could earn a profit even if the investors lost money.
(Plus the founders and employees earn salaries, often paid from the invested funds.)
Unfortunately, the only way to afford that luxury is to not actually need the money, but be in high demand for investors to keep pinging you, and relent at some point with "alright, we don't need money, but if y'all agree to X valuation with common stock, we'll take your money".
The alternative is for the company to tank and the founders - who tanked the company - walk away with your money. That is completely wrong.
Founders don't accept deals for money which are bad for them if they don't need it. You need money, you get the terms.
Same goes if you lose a house by default and then go and ask for money for another house. The subsequent mortgage is going to be at terms significantly less desirable than you may have got on your first try.
Failing companies create no winners.
They got something before. They are paying for that now.
