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January 22, 2015Published Article

Partially Participating Preferred: An Alternative to Participation Caps?

VC Experts

In an earlier blog (Capping Preferred Participation: A Compromised Compromise), I argued that the usual middle ground between entrepreneur-friendly “non-participating” preferred stock and investor-friendly “participating” preferred stock – capping participation at some multiple of an investor’s base preference – is seriously flawed. Herewith an alternative approach.

By way of a quick refresh, we are talking about “participation” in the context of a preferred stock liquidation preference. In an exit transaction, other than an IPO, an investor holding “participating” preferred shares gets two bites at the exit proceeds apple. First, a bite equal to his base preference (typically an amount equal to his investment) and then a second bite equal to his pro-rata share of the remaining exit proceeds.

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