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Startups Should Always Negotiate a Cap on Participating Preferred Stock

participating preferred stock

In this interview with Jeremy Glaser, who is a partner at the law firm Mintz Levin and also serves as Co-Chair of the firm’s Venture Capital & Emerging Companies Practice, we discuss the importance of negotiating a cap on the participation in upsides in a participating preferred stock offering. There are other key deal terms, but this is paramount.

According to Jeremy:  “The key for entrepreneurs out there is that there are a lot of deals done with participating preferred. Everything is market driven, whether you can negotiate something different. If you have the market power to do it, you want to negotiate a cap on that participation, at the minimum.  This is so that, at some point, when there is a successful M&A exit, they’re going to convert. They will give up that initial liquidation preference and just share equally with the common on the sale proceeds.”

To learn more about participating preferred stock, see Investopedia.

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This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.