Like non-convertible, double-dip participating preferred stock, convertible, double-dip participating preferred stock has a fixed, accruing dividend and a 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. However, unlike with non-convertible, double-dip participating preferred stock, the participation in any remaining sales proceeds is not stated as a fixed percentage. Instead, it is the amount that the shareholder would receive if its preferred stock had been converted into common stock immediately prior to the sale of the company.
This type of preferred stock is economically very favorable to the preferred shareholder because it receives both its senior liquidation preference plus its pro rata share of any remaining sales proceeds that it would have received if the preferred stock had been converted into common stock immediately prior to the sale. This type of preferred stock is most often used in a late stage, growth stock investment where the investor anticipates that the value of the investment will appreciate considerably. It can also be used in a buyout to help achieve a tax-free rollover due to the participation features of the stock.
This post was written by Matthew D’Ascenzo.