Non-convertible, straight preferred stock is the most basic type of preferred stock. It is called “straight” preferred stock because it has a fixed dividend (often 8%) that continues to accrue if it is not paid. It also has a senior liquidation preference, meaning that the preferred shareholder receives back its invested cash plus all accumulated, unpaid dividends, before common shareholders get paid.
The senior liquidation preference is all that the preferred shareholder receives. It is called “non-convertible preferred stock,” meaning that it cannot be converted into common stock. Also, it is “non-participating” because it does not entitle the shareholder to participate in any remaining proceeds in excess of the senior liquidation preference upon a sale of the company.
This class of stock provides a stable, fixed return for the preferred shareholder. It does not, however, give the preferred shareholder any ability to share in any excess proceeds of a sale of the company and accordingly limits the shareholder’s return in case of a lucrative sale. This type of preferred stock often is seen in buyout deals, where the sponsor wants a relatively certain return.
This post was written by Matthew D’Ascenzo.