As the VC market cools, entrepreneurs will see more term sheets with participating preferred stock, whether full participation or capped participation. This blog explores a new, more balanced take on participation – partial participation – that entrepreneurs might find a better approach.
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A Dive into “Partial Participation”: A Better Alternative to Capped Participation?
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At first glance, capped participation seems like a reasonable alternative to full participation and non-participation options. Digging deeper, though, there is a problem: Regardless of the cap value, capped participation creates a range of exit proceed values where the investor is indifferent to how much the company receives in an exit transaction.
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