July 8, 2022 | less than a minute read

A Dive into “Partial Participation”: A Better Alternative to Capped Participation?

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Paul Jones

Of Counsel

Tiara Brown

Summer Associate

Kam Faines

Summer Associate

Get in touch

Paul Jones

Of Counsel

Tiara Brown

Summer Associate

Kam Faines

Summer Associate

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.

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.