Participating preferred.
In plain English
Participating preferred stock carries a fixed preference, usually the original investment plus any accrued dividend, that must be paid before common shareholders receive anything. What makes it participating is the second step: after that preference is satisfied, the shares also share in the remaining proceeds alongside common stock. It shows up most often in venture and private-equity deals, where it protects the investor if a company sells for less than hoped. Some versions cap participation at a multiple of the original investment. Founders and employees hold common stock, so participation comes out of their share of a sale.
01Why it matters
If you hold common stock or options at a startup, participating preferred sitting above you means a sale price that looks large can still leave very little for your shares.
02The math, step by step
An investor puts in $10 million for participating preferred worth 20 percent of the company. The firm sells for $30 million. The investor takes the $10 million preference first, leaving $20 million, then takes 20 percent of that, or $4 million. Total $14 million, while common holders split $16 million.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Non-participating preferred forces a choice: take the fixed preference or convert to common and take the percentage, not both. Participating preferred takes both. On a modest sale price that difference decides how much reaches common shareholders.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice