Participating Preferred

Preferred shares that receive their liquidation preference first and then also share in the remaining proceeds alongside common shares.

Example

A 10,000,000 participating preference with 25% ownership takes 17,500,000 of a 40,000,000 sale.

It can significantly reduce common holders' proceeds at modest exits, and is sometimes capped at a multiple of the investment.

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.
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.

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)
A higher valuation with harsher terms can leave common holders worse off at every realistic exit — Run the numbers and a lower valuation with clean terms often beats a higher valuation with a large or participating preference, across the range of outcomes that are actually likely. (11 min)