Raising money
Participating preferred
Participating preferred stock lets an investor take their money back first when the company is sold, and then also share in whatever is left alongside everyone else.
Also called participating preferred stock, double dip
In effect, the investor is paid twice from the same pot. Some versions cap the total. Common shares are the ordinary shares founders and employees hold. Non-participating preferred gives a choice instead: take the money back, or convert and share, but not both.
This is not legal or tax advice, check with a lawyer or accountant.
When this shows up
Example, not a real founder: two term sheets, short summaries of each deal's terms, offer the same valuation. One gives participating preferred and one does not. In a modest sale, the first would leave you noticeably less, even though the offers looked the same.
What to do next
Check your term sheet for the word participating or non-participating next to the liquidation preference (the right to be paid back first). If it says participating, ask your lawyer to show the payout at a modest sale price.
Go deeper
Participating preferred with a 1x cap, and what it costs you
Each clause it finds explained in plain words, with the ones that may be worth raising with a lawyer pointed out.
Read the guide