Participating Preferred Stock: The Double Dip Danger
Startups often celebrate a ?100 Cr valuation without reading the fine print — especially the “Participating Preferred” clause.
What does it mean?
Investors get their investment back first (like debt).
Then, they also share in the upside — like equity.
Let’s break it down:
A VC invests ?20 Cr with 1x participating preference
Company exits 3 years later at ?60 Cr
VC owns 50% equity
Here’s the Waterfall:
1? VC gets ?20 Cr back (initial capital)
2? Remaining ?40 Cr is split 50-50
VC gets another ?20 Cr
Founders get ?20 Cr
Final Outcome:
VC walks away with ?40 Cr
Founders & team split just ?20 Cr — despite building the company
Without Participation?
VC gets ?30 Cr (50% equity share)
Founders walk away with ?30 Cr
Lesson for Founders, CFOs & Valuers:
Participating Preferred = "Debt + Equity" in one instrument
Look beyond valuation — terms matter more
Negotiate for non-participating preferred or cap participation
Because in startup funding, participation preferences can silently rob the upside.
Absolutely. We have IBBI-Registered Valuers under all three categories—Land & Building, Plant & Machinery, and Securities/Financial Assets. Our team also includes experienced chartered accountants and engineers.
Yes. We offer remote/desk-based valuation for startups, financial assets, and select use-cases. For physical assets, we usually require on-site verification.
Yes. Client confidentiality is paramount. All data shared is stored securely and not disclosed to any third party without your consent.
