Why it matters
Imagine a $50M exit on a $10M Series A at $40M post-money. Non-participating: VC chooses $10M (the preference) OR ~$12.5M (their 25% share). They take the larger number. Participating: VC takes $10M off the top, then takes 25% of the remaining $40M — that's $20M total, vs. $12.5M under fair terms. The founder pays the difference.
How to negotiate
Insist on non-participating preferred. If the lead won't move, propose a participation cap (typically 2× or 3× the preference) so the participation switches off above a fair return. Capped participation is a reasonable compromise; uncapped participation in a primary round is not.
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
After payment of the liquidation preference, the holders of Series A Preferred Stock shall participate with the Common Stock on an as-converted basis in any remaining proceeds.
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.