Participating preferred stock
- Participating preferred stock
Participating preferred stock is capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. This form of financing is used by private equity investors and venture capital firms. Holders of participating preferred stock get both their money back (with interest) and the money that is distributable with respect to the percentage of common shares into which their preferred stock can convert.
Like common stock, preferred stocks represent partial ownership in a company. Preferred stock shareholders may or may not enjoy any of the voting rights of those holding common stock. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate. Often the dividend is cumulative. Thus, the company must pay all unpaid preferred dividends accumulated during previous periods before it can pay dividends to common shareholders. If the company is unable to pay this dividend, the preferred shareholders may have the right to force a liquidation of the company.
Venture capital and private equity firms prefer participating preferred stock because it mirrors the terms on which they raise money from their investors. The typical VC or PE fund structure returns money to their investors plus a preferred return (of 7 or 8%) and then the general partners of the fund participate in 20% of the upside (carry), with 80% going to the investors. A VC or PE fund that uses a participating preferred security should be willing to agree to higher valuations or higher option pools.
Participating preferred is often used as a "bridge" between a company that desires a higher valuation and a VC that believes in a lower valuation. A VC will agree to a higher valuation if it is accompanied by a participating preferred security—essentially challenging the company to earn the upside of the higher valuation.
The main benefit to owning preferred stock is that the investor has a greater claim on the company’s assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before the holders of common stock. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible.
References
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2010.
Look at other dictionaries:
participating preferred stock — preferred stock that provides the holder with a specified dividend plus the right to additional earnings under specified conditions. Bloomberg Financial Dictionary * * * participating preferred stock participating preferred stock ➔ stock * * *… … Financial and business terms
Participating Preferred Stock — A type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition. The additional dividend… … Investment dictionary
participating preferred stock — That type of preferred stock which is entitled to additional dividends beyond its stated dividend after the common stock dividend has been paid … Black's law dictionary
participating preferred share — UK US noun [C, usually plural] UK (UK also participating preference share, US participating preferred stock, US participating preference stock) FINANCE, STOCK MARKET ► a type of preferred share that, in addition to paying a fixed interest rate,… … Financial and business terms
participating preference stock — UK US noun [C] US FINANCE, STOCK MARKET ► PARTICIPATING PREFERRED SHARE(Cf. ↑participating preferred share) … Financial and business terms
preferred stock — A type of equity or capital representing shares of ownership in a corporation. May or may not receive distributions of corporate income in the form of dividends. Has a higher priority claim to corporate earnings or assets than common stock but… … Financial and business terms
Preferred stock — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond … Wikipedia
Preferred stock — A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is… … Financial and business terms
participating convertible preferred stock — preferred stock that can be converted into common stock at the option of the holder. In contrast, to the usual preferred stock, the value of the preferred stock is refunded to the holder. That is, one gets conversion plus the value of the stock.… … Financial and business terms
participating preferred — Stock Exchange. a preferred stock entitled to its fixed dividend and to additional ones on a specified basis after payment of dividends on common stock. [1925 30] * * * … Universalium
