Non-Participating Preferred
Definition
Non-participating preferred stock lets an investor choose, at an exit, between taking back their liquidation preference or converting to common stock and taking their pro rata share of proceeds, whichever pays more, but not both.
How it comes up in fundraising
Non-participating preferred is the founder-friendly market standard in most US venture deals; investors only get participating preferred, which stacks both payouts, when they have unusual leverage.
Frequently asked questions
What is the difference between participating and non-participating preferred?
Participating preferred pays the liquidation preference first and then also shares in the remaining proceeds as if converted, a double dip. Non-participating preferred forces a single choice between the preference or converting to common.
When would an investor convert non-participating preferred to common?
When the exit value is high enough that their pro rata common ownership is worth more than their fixed liquidation preference, which is common in strong outcomes.
Round Funded resources
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