BROWSE

Participating Preferred Stock

Definition

Participating preferred stock is preferred 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 and the money that is distributable with respect to the percentage of common shares into which their preferred stock can convert.

What is a 'Participating Preferred Stock'

Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends are paid to preferred shareholders as well as an additional dividend based on some predetermined condition. Participating preferred stock can also have liquidation preferences upon a liquidation event.

Explaining 'Participating Preferred Stock'

Like other forms of preferred stock, participating preferred stock takes precedence in a firm's capital structure over common stock but ranks below debt in liquidation events. The additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that common shareholders receive exceeds a specified per-share amount. Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back as well as a pro rata share of any remaining proceeds that the common shareholders receive.

Example of Participating Preferred Stock

Suppose Company A issues participating preferred shares with a dividend rate of $1 per share. The preferred shares also carry a clause on extra dividends for participating preferred stock, which is triggered whenever the dividend for common shares exceeds that of the preferred shares. If, during its current quarter, Company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) as well.


Further Reading


Participating convertible preferred stock in venture capital exits
www.sciencedirect.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Understanding venture capital structure: a tax explanation for convertible preferred stockUnderstanding venture capital structure: a tax explanation for convertible preferred stock
www.jstor.org [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Financial literacy and stock market participationFinancial literacy and stock market participation
www.sciencedirect.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Financial illiteracy and stock market participation: Evidence from the RAND American Life PanelFinancial illiteracy and stock market participation: Evidence from the RAND American Life Panel
books.google.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Venture capital on the downside: preferred stock and corporate controlVenture capital on the downside: preferred stock and corporate control
www.jstor.org [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Stock-market participation, intertemporal substitution, and risk-aversionStock-market participation, intertemporal substitution, and risk-aversion
pubs.aeaweb.org [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Participation financing: A comparison of the characteristics of convertible debt and straight bonds issued in conjunction with warrantsParticipation financing: A comparison of the characteristics of convertible debt and straight bonds issued in conjunction with warrants
www.jstor.org [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

What economists have taught us about venture capital contractingWhat economists have taught us about venture capital contracting
papers.ssrn.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

Covenants and accounting information in the market for classes of preferred stockCovenants and accounting information in the market for classes of preferred stock
onlinelibrary.wiley.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …

The effects of reconstruction finance corporation assistance on Michigan's banks' survival in the 1930sThe effects of reconstruction finance corporation assistance on Michigan's banks' survival in the 1930s
www.sciencedirect.com [PDF]
… Participating convertible preferred stock gives its holders preference in dividend payments and at the same time allows them to participate in excess … PCP holders thus concurrently hold both a debt-like claim (preferred equity) as well as an equity claim (participation rights) …



Q&A About Participating Preferred Stock


Are all companies required to issue both bonds and equity securities ?

No , only those that need financing beyond what they can raise from investors will

How do you calculate the amount of extra dividends for participating preferred stock?

You can calculate it by taking the normal dividend and adding it to any extra dividend.

What are the main differences between preferred and common stocks?

Common stocks are generally more liquid than preferred stocks because they carry no preference over dividends. Also, in case of liquidation, common shareholders receive their share of assets before preferred shareholders do.

What is Participating Preferred Stock?

Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends are paid to preferred shareholders as well as an additional dividend based on some predetermined condition.

How does a company's articles describe the rights attached to its shares?

The rights attached to its shares are described in the issuing company's articles of association or articles of incorporation.

Is it possible for a company to issue both bonds and preferreds ?

Yes , this can be done through convertible bonds .

What does participating preferred stock give holders?

The ability to receive dividends at a higher rate than other common shareholders.

Can you convert from one type of security into another ?

Yes , this can be done through conversion privileges .

When would you use participating preferred shares?

You would use them when you want your investors to have more control over your company's actions, but still want them to be able to make money if things go well.

What determines whether a share is considered "preferred" or "common"?

A share is considered "preferred" if it has any combination of features not possessed by common stock including properties like seniority over ordinary (or "common") stock with respect to dividend payments and/or claims on assets upon dissolution; priority over ordinary (or "common") stock with respect to voting rights; preferential subscription rights; conversion privileges into other securities or cash at fixed prices; redemption privileges at fixed prices or premiums; etc..

How do you compare bonds and preferreds ?

Bonds have higher credit ratings than most preferreds .