Participating Preferred, or the “Double Dip,” allows investors to get two payouts during a liquidity event like a sale or IPO (Initial Public Offering). First, they get their initial capital back through a liquidation preference. Then, they convert their shares to common stock and participate in the remaining proceeds alongside other shareholders.
This term tends to fluctuate with market conditions. In hot markets when startups have leverage, it typically disappears from term sheets. But in down rounds, when companies are desperate for funding, it often reappears. The impact on founders can be devastating. Take “Theriva” for example, the founder walked away with nothing from a $25 million exit after Participating Preferred payouts and previous dilution ate up all the proceeds.
