What is participating preferred stock?

Participating preferred stock takes its liquidation preference first and then also shares in the remaining proceeds alongside common stock — the 'double dip'. In a modest exit, a participating investor does meaningfully better than a non-participating one at the direct expense of founders and employees.

Participation is off-market in healthy US venture deals and typically signals leverage — a rescue financing, a late-stage round with structure, or a difficult company. It is sometimes softened with a cap (e.g. participation until the investor has received 3x).