Why it matters
Cumulative dividends turn equity into something that looks a lot like debt. A $5M Series A with an 8% cumulative dividend grows the preference by $400k each year, compounded. After five years to a modest exit, the preference is no longer $5M — it's roughly $7.35M, all of which sits ahead of common. Combined with even a 1× preference, cumulative dividends quietly inflate the investor's claim while you grind through the build.
How to negotiate
Push for non-cumulative dividends payable when and if declared by the board (functionally never, in venture). If cumulative is non-negotiable, cap the rate at 4-5%, ensure dividends only accrue and are paid in cash (not stock), and have them stop accruing on a qualified financing or IPO. Excluded categories: redemption, change-of-control, dissolution.
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
The Series A Preferred shall be entitled to receive cumulative dividends at the rate of eight percent (8%) per annum, compounded annually, payable upon liquidation, redemption, or conversion.
TURNSHEET provides intelligence, not legal advice. This page describes typical market behaviour and common negotiation tactics; your specific deal may have nuances that change the analysis. Always review your term sheet with qualified legal counsel before signing.