Usually it's common shares that are affected. If your company sells for $15 million, but $20 million was invested with 1x preference, there's not enough money to pay out investors, let alone common. It doesn't require dirty tricks like issuing more shares, and happens reasonably often.

In cases like the above, investors will often agree to take even less and allow some of the money to go directly to employees as retention bonuses. It's still sometimes better for them to get some rather than no money back.