Wednesday, May 6, 2009

Participating Preferred

My buddy Healy Jones wrote an excellent post on Participating Preferred Stock, which is an investing instrument in startups. Participating Preferred basicly means that the venture investor get's their initial investment out, and then participates pro rate based on ownership percentage on everything after. This compares to regular preferred where proceeds are divided based on ownership percentage from the very first dollar out. It's a heavily negotiated term and something many entrepeneurs don't fully understand. 

"Anything that provides extra return to a VC at an exit takes return from the founders, so it is important for entrepreneurs to understand participating preferred stock and its impact on the exit value of the common stock."