Deal StructureValuation
Participating Preferred
Also known as: Participating preferred equity, double-dip preferred, full participation preferred
An equity structure where the PE firm recovers their full investment plus a preferred return, then also shares pro-rata in remaining proceeds. The founder needs an exceptional exit just to break even on rollover.
WHY IT MATTERS
Participating preferred is the most buyer-favorable equity structure in PE deals. The PE firm gets their investment back first, plus a compounding preferred return. Then they also participate pro-rata in the remaining proceeds alongside common equity holders (including the founder's rollover). The PE firm gets paid twice: once through the preference, once through participation. For the founder, this means the exit has to clear the preference wall before their equity is worth anything — and even then, the PE firm takes a cut of the proceeds on the other side. Non-participating preferred forces the PE firm to choose: take the preference or convert to common and share pro-rata. Participating preferred gives them both.