Participating Preferred
Preferred stock that gets its money back first AND shares in remaining proceeds (double dip).
Definition
Participating preferred stock gives investors their liquidation preference first, and then they also participate pro-rata in the remaining proceeds alongside common stockholders. This is sometimes called 'double dipping' because investors effectively get paid twice. It is unfavorable for employees and less common today, but still appears in some deals, especially in tough fundraising markets.
Why it matters
Participating preferred dramatically reduces what common stockholders receive in mid-range exits. In the worst case, investors get their money back AND their ownership percentage of what is left, leaving much less for employees.
Example
Investors put in $20M for 40% at 1x participating preferred. Company sells for $60M. Investors take $20M back first. Then they get 40% of the remaining $40M ($16M). Total to investors: $36M. Common holders split $24M instead of the $36M they would get with non-participating.