Participating Preferred stock, sometimes called the “Double Dip”, gives investors two bites at the apple when a company exits. First, investors get their original investment back through their liquidation preference. Then, they convert their shares to common stock and split whatever’s left with everyone else (founders, employees, and other shareholders).
You’ll usually see this structure pop up in down rounds or when market conditions are tough and investors have the upper hand. It can be brutal for founders, who might walk away with little to nothing after an exit. But sometimes accepting these terms is the only way to secure funding and keep the company going.
The standard advice? Take the deal, survive, and focus on growing the company’s value. If you can make the pie big enough, the double dip becomes a much smaller slice of a much bigger pie.
