Participating Preferred, or the “Double Dip,” allows investors to get two payouts during a liquidity event such as a sale or IPO. First, the investor retrieves their initial capital through a liquidation preference. Second, they convert their shares to common stock and participate in the remaining proceeds alongside other shareholders.
Yonatan Stern emphasizes that this term fluctuates with market conditions: it disappears in hot markets when startups have leverage but often appears in down rounds when companies are desperate for funding. The impact on founders can be severe, as illustrated in the “Theriva” case study, where the founder ended up with zero from a $25 million exit after Participating Preferred payouts and previous dilution consumed the proceeds.
