Preferred stock sits between debt and common stock. Holders usually receive dividends at a stated rate before any dividends go to common holders, and if the company is sold or liquidated, they are paid back before common holders, though after creditors. In return, they typically have limited or no voting rights and a smaller share of the upside.
The terms are set in the company's charter and vary a lot. Preferred shares can be convertible into common stock, redeemable by the company, cumulative or non-cumulative in their dividends and may carry a liquidation preference of one times the investment or more. Venture-backed private companies commonly issue preferred stock to investors, and it converts into common stock when the company goes public.
Because of its priority claim, preferred stock is less risky than common stock, and because the payouts are capped, it also has less potential for gain.
Read the exact rights in the prospectus or charter, in particular the dividend, the liquidation preference, the conversion terms and the voting rights.