✍️ Essay
✓ Link checked
Free
Intermediate
Why we picked it Feld (co-author of Venture Deals) does the arithmetic most founders never run: on a $5M investment for 50% and a $20M exit, a plain 1x preferred pays the investor $10M, but participating preferred pays $5M back plus half of the remaining $15M, so $12.5M, and founders drop from $10M to $7.5M on the same headline. He then stacks it across three rounds ($40M in, $200M exit) where participation quietly moves investors from 70% to 76% of the proceeds, and walks through what a participation cap actually does. This is the worked example that makes 'participation stacks against you at exit' concrete.
To Participate or Not (Participating Preferences)
From Feld Thoughts by Brad Feld 10 min read
- Participating preferred lets investors double-dip: money back first, then split the rest as if they held common, which silently shifts millions at exit
- The damage compounds across rounds; every participating round adds another layer that comes out of founder proceeds
- A participation cap softens the hit but creates a 'flat spot' where investor and founder incentives diverge on moderate exits
