Considering the high risks of venture capital
investments, investors hope for outsized gains. To make that
possible, the investment is normally structured in a way that gives
the investor a preference in receiving back all or most of its
funding and the right to participate in the incremental profits
jointly with the other shareholders on a pro rata basis.
In the United States this structure is usually achieved through
the issuance of participating preferred stock or convertible notes
(or a combination of both), or similar contractual
arrangements.
The participating preferred stock (also called "double
dip" preferred stock) entitles its holder to an amount equal
to the original investment (or its investment plus a specified
yield) upon a liquidation event (merger, acquisition or
liquidation). It also typically grants to its holder a pro rata
share of the residual proceeds corresponding to the amount the
preferred stockholder would have received on an
