Convertible, conventional participating preferred stock entitles the preferred shareholder to receive the greater of (a) the senior liquidation preference pursuant to which the preferred shareholder receives back its invested money plus all accumulated, unpaid dividends before the common shareholders get paid or (b) what the preferred shareholder would receive if the preferred stock was converted into common stock upon a sale of the company (commonly known as conventional participation). Note, however, that, as with convertible, non-participating preferred stock, the shareholder does not receive both the senior liquidation preference and participate in any remaining sales proceeds (in other words, it is not a double-dip participation).
This type of preferred stock is often seen in both venture capital transactions and in later-stage growth stock investments. It can also be used in buyouts to help achieve a tax-free rollover.
This post was written by Matthew D’Ascenzo.