Participating vs. Non-Participating Preferred

In short. An investor holding non-participating preferred shares takes one of two amounts at a sale: its money back, or its percentage of the price. With participating preferred it takes both: its money back first, then its percentage of what is left. On a $30 million sale, with a $3 million investor at 20 per cent, the second structure leaves the founders $2.4 million poorer, and the gap is the same at $300 million.

Table comparing a $30 million sale under non-participating and participating preferred: the investor takes $6.0 million or $8.4 million; the founders receive $24.0 million or $21.6 million, a difference of $2.4 million.

The two terms

A liquidation preference is the investor’s right to be paid its money back, usually one times the amount invested, before the common shareholders receive anything. Participation is the term that decides what happens after that money comes back.

Non-participating preferred. At a sale the investor chooses. It can take its preference, or it can convert its shares to common and take its percentage of the sale price. It takes whichever is larger, and never both.

Participating preferred. The investor does not choose. It takes its preference first, and then also takes its percentage of what remains, as if it had converted. The structure is often described as a “double dip”, and the description is accurate.

The same sale, two outcomes

A company raised $3 million from one investor for 20 per cent. The founders hold the other 80 per cent, there is no option pool, and the preference is one times. The company sells for $30 million.

Under the non-participating structure the investor compares $3 million with 20 per cent of $30 million and takes the larger amount, $6 million. Under the participating structure it takes $3 million first and then 20 per cent of the remaining $27 million. Same company, same price, same investor: the founders receive $2.4 million less.

Why the gap does not shrink

The usual reassurance is that participation matters only in a poor exit and becomes negligible in a large one. The dollar figures say otherwise.

Below $15 million the investor would take its money back under either structure, and the gap is only its 20 per cent of what is left after that. From $15 million upward, the point at which 20 per cent of the price first equals the $3 million invested, a non-participating investor would convert, and participation costs the founders the full $3 million preference less the 20 per cent of it the investor would have received anyway as a shareholder. That is $2.4 million, at every price above that point.

What falls as the price rises is the $2.4 million measured as a share of the total. That is the whole basis for the claim that participation does not matter in a large exit, and it is a statement about percentages, not about money.

Capped participation

Between the two structures sits a third. With capped participation the investor takes its preference and then its share of the remainder, but only until its total reaches an agreed multiple of its investment, commonly two to three times. Above that point it holds at the capped amount until converting to common would pay more, and then converts like any non-participating holder.

Two points deserve a careful reading in a term sheet. The multiple counts the preference itself: a three-times cap on a $3 million investment means $9 million in total, the $3 million back plus a further $6 million, not $3 million plus $9 million. And the cap is the number that moves in negotiation. Where participation cannot be removed, a low cap and a one-times preference confine its cost to the range of modest exits; once the investor’s percentage of the sale is worth more than the cap, it converts, and the two structures pay the same.

How common is participation in Canada

Rare, and becoming rarer. Osler’s 2025 Deal Points Report, published in May 2026, found a participation feature in 3.2 per cent of the Canadian venture financings it reviewed for 2025, below the 6.9 per cent average of the four preceding years, with a one-times preference the standard in 94.6 per cent of rounds. In the United States, Fenwick’s Venture Beacon for the first quarter of 2026 describes participating preferred, cumulative dividends and preferences above one times as remaining rare. The CVCA model term sheet offers participation as one of three alternatives beside non-participating and capped, which is why it still appears in drafts. Where it does appear, it tends to accompany a down round, a life-sciences financing or a later, structured round rather than a first financing.

What to negotiate

The terms of the first priced round are the starting point for the next. Later investors ask for at least what the last ones received, and each new series adds its own preference ahead of the common shares, so a participation right conceded in a $3 million round is the opening position when the round is $30 million.

Three positions follow from the arithmetic. The opening position is non-participating preferred with a one-times preference, which is also the Canadian norm. If participation is conceded, the cap is where the negotiation belongs: two to three times, with a one-times preference, and with cap language that counts the preference. And before signing, the exit should be modelled at the prices the founders would actually accept, with the terms as drafted, because the economic terms of a term sheet are only understood once the numbers have been run.

Questions founders ask

Does participation matter in a large exit? In dollars, yes. Above the point where the investor would convert anyway, the cost to the common shareholders is fixed at the preference multiplied by the founders’ share: $2.4 million in the example, at $30 million and at $300 million alike. As a percentage of the proceeds it shrinks, which is where the reassurance comes from.

What does a three-times cap mean? The investor’s total take, preference included, stops at three times its investment; on $3 million that is $9 million in all. Once 20 per cent of the sale price is worth more than the cap, the investor converts to common and the two structures pay the same.

Is participating preferred the same as a two-times liquidation preference? No. A multiple raises the amount paid back first. Participation adds a share of the remainder after the preference is paid. A round can carry either, both or neither; the example above uses a one-times preference throughout.

How common is participating preferred in Canadian venture deals? Osler’s review of 2025 financings found a participation feature in 3.2 per cent of rounds and a one-times preference in 94.6 per cent. Where it appears, it tends to accompany a down round, a life-sciences financing or a later structured round.

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Next in this series: Anti-Dilution: Weighted Average vs Full Ratchet

Related: Liquidation Preferences Explained · Liquidation Preference Math · Simulated Exit Waterfalls

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Published 29 December 2025 · Updated 14 September 2026 · Khaled El Fauri