This refers to an investment done on a "convertible note." These particular terms mean that the valuation at which their investment will "convert" from what is nominally a loan into equity will be at most $5m, but if a subsequent investor invests in an equity financing at less than 6.25m, their investment will convert to equity at 20% less than the valuation. Read up on convertible notes for more detail.
> senior liquidity preference of 1x to protect their downside since they feel the valuation is rich
Means that in a sale, the investor will get the full amount (1x) of what they invested before others (i.e. founders, employees) see anything.
> Peter, is stoked that he is getting his $1 million investment converted into roughly 20%
Since the valuation was > 6.25m his valuation was capped at $5m, whereas the investors who are investing got a valuation of $40m "pre-money" or $50m "post-money" which are much less favorable terms than what Peter invested at.
> the preference overhang of $211 million
Means that if the company is to be acquired, it would take an acquisition offer of at least $211 million for founders and employees to see even a penny. That is because that amount was invested with the "1x" preference.
> They ask prior investors to recap
I think this means they are asking previous investors to lower the amount of liquidity preference they have such that in the event of a sale under $211m the founders would see some return.
> the ‘overhang math’.
The wiser employees understand the math that says an acquisition has to be enormous for them to see anything. If they don't think that's likely they will see little motivation to continue working at the company.
> senior preference and a 2x guarantee.
2x guarantee means that they would be guaranteed twice the amount the invested in the event of a sale, possibly ahead of other investors, but I'm not sure.
> waterfall spreadsheet
Indicates how much each interested party would get in proceeds in the event of exits of various amounts. E.g. if company sells for X, investors get Y and founders get nothing. If company sells for Z, investors get X1 and founder gets Z. Etc.