In the last post, we touched upon liquidation preferences. In this post, we will discuss participating preferred, also called double-dipping. Apart from the return of the invested dollars, the investor also gets the share based on the ownership of the company. The impact of such a clause on the other stakeholders (esp founders and employees) can be huge.

For example, an investor owns 50% of a company after an investment of $10M.

Scenario 1: The company gets sold for $50M. In this case, the investor gets $10M as per the liquidation preference and $20M (50% of the remaining shares). Other stakeholders get the remaining $20M.

Scenario 2: The company gets sold for $15M. In this case, the investor will get $10M as per the liquidation preference and $2.5M (50% of the remaining shares). Other stakeholders get the remaining $2.5M.

Liquidation preferences among multiple series of fundraising can follow two approaches:

  1. The new investors stack their preference on the top of others, that is, Series B investors get its preference first and then Series A.

  2. The series are equivalent in status and Series A and B investors share pro-rated until preferences are met.