Non-Participating Preferred

Preferred shares that receive either their liquidation preference or their share of proceeds as if converted to common, whichever is greater, but not both.

Example

A 10,000,000 preference with 25% ownership takes 10,000,000 at a 20,000,000 exit and 25,000,000 at a 100,000,000 exit.

Important

Its crossover point is the preference divided by ownership; above it, the holder converts to common.

Related terms

• Participating Preferred — Preferred shares that receive their liquidation preference first and then also share in the remaining proceeds alongside common shares.
• Liquidation Preference — A contractual right for preferred shareholders to receive a stated multiple of their investment back before common shareholders receive anything, in a sale or wind-down.

Lessons that explain it

• With several preferred classes, each one decides whether to convert — When a company has several classes of preferred shares, exit proceeds are divided in order of seniority, and each class chooses between its preference and converting. Working through exits of different sizes shows how common shareholders are affected. (12 min)
• Run the waterfall at three exit values, and the preference type becomes obvious — A 1x non-participating preference returns the investment or the investor's share, whichever is higher. A participating preference returns the investment and then a share of the rest. The difference is largest at modest exits. (13 min)

All 578 terms in the Investing glossary