Participating Preferred Stock

Term Main definition
Participating Preferred Stock

A type of convertible preferred stock that has liquidation preference and related features advantageous to the holder (amplifying potential ultimate returns) at the expense of common stockholders. In a participating preferred stock, the holder is entitled not only to receive the stated liquidation preference (usually the original investment amount plus accrued dividends), but also a pro rata share (assuming conversion of its shares into common stock) of the balance of remaining proceeds available for distribution to common stockholders. This may occur with respect to a merger, sale, change of control or other designated deemed liquidation event, and also may relate to dividends (where, after a holder receives its cumulative dividend, it also has the right to receive, on a pro rata as-if-converted basis, any dividend payable on the common stock). Given these features, participating preferred stock has been characterized as a "double dip" (or "having your cake and eating it to"), and business founders and owners have sought to eliminate or soften the impact (e.g., via a cap on return or sunset provision) on these provisions.