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Convertible vs. Participating Preferred Stock

Posted on 04. Aug, 2008 by squareroots in Graphical Examples

Convertible Preferred Stock will either convert into common or stay as preferred (and take out its liquidation preference and dividend) in a exit event. For Participating Preferred Stock, the liquidation preference and dividends are taken out, and then converts into common. In common, the Participating Preferred Stock takes their ownership amount along with the other common shareholders. Sometimes this is referred to as “double dipping”.

The example to the right illustrates how each type of preferred stock behaves given the same exit event. Participating will always give a higher return to the investor than convertible. Try some different exit values to see how each type of stock behaves.

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