Term sheet clauses
Also called participating preferred, double dip preferred
Participating preferred stock lets an investor take their liquidation preference back first and then also share in the remaining proceeds alongside common shareholders, rather than choosing between the two.
Preferred stock carries a liquidation preference, normally 1x the amount invested, paid before common shareholders receive anything. The question participation answers is what happens to the money left over.
With non-participating preferred, the investor picks whichever is larger: the preference, or their pro-rata share of the whole exit as if they had converted to common. They cannot take both.
With participating preferred, they take the preference first and then also participate pro rata in what remains. This is why it is sometimes called a double dip. It is materially worse for founders and employees at modest exit values.
Participation is often capped, for example at 2x or 3x the original investment, after which the investor is deemed to convert to common. A cap limits the damage at large exits but does nothing at small ones.
Full participation without a cap is now uncommon in competitive early-stage rounds and is generally a signal of a difficult market, a distressed company, or an investor with real leverage. It appears more often in later rounds and in structured or down rounds.
It reduces founder and employee proceeds at every exit value where the preference matters, and the effect is largest at modest exits. At very large exits the difference narrows in percentage terms.
A ceiling on total return from participation, commonly 2x or 3x the amount invested. Once reached, the investor converts to common instead, which limits the term's impact on big outcomes.
Uncommon in competitive seed and Series A rounds today, more common in later, structured or down rounds where the investor has leverage.
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