Non-participating preferred

1× non-participating preferred is the market default for most US seed and Series A deals as of the mid-2020s. In a sale, the investor chooses the better of:

1. Take the preference — typically 1× invested capital, sometimes plus declared dividends, or
2. Convert to common and take their as-converted ownership of the whole pot.

They do not get the preference and a full pro-rata share of the rest. That would be participating.

The big idea

Think of a ticket that is also a refund voucher. If the show is a dud, cash the voucher. If the show is a hit, use the ticket and share the upside. You cannot cash the voucher and keep the ticket.

The analogy breaks once seniority and multiple series enter: several voucher-holders line up, and some stand in front.

Walking through $10M for 25%

Investor put in $10M for 25% as-converted. Founders and employees hold 75% common. Ignore debt, fees and escrow.

$20M exit — take preference

Investor preference     = 1 × $10M = $10M
Remainder to common     = $20M − $10M = $10M
Investor if converted   = 0.25 × $20M = $5M
→ Preference ($10M) beats convert ($5M)
→ Common gets $10M, not 0.75 × $20M = $15M

Common's "75%" was worth $10M, not $15M. The preference ate $5M of the naive model.

$100M exit — convert

Preference   = $10M
Convert      = 0.25 × $100M = $25M
→ Convert wins
→ Common gets 0.75 × $100M = $75M

Above the indifference point, non-participating preferred behaves like common. Solve:

Investment = Ownership% × E
E = $10M / 0.25 = $40M

Below about $40M, preference wins. Above, conversion wins.

Same ownership, $30M exit: convert = $7.5M, preference = $10M → take preference. Common gets $20M instead of $22.5M. Mid-sized exits still favor preference when ownership is not huge relative to capital in.

Common mistakes

• Multiplying ownership by exit and stopping. Below indifference, common gets the residual after the preference, not their %.
• Thinking 1× non-participating is "investor hostile." It is the clean market term. Fight participation and extra multiples instead.
• Forgetting convertibles. Notes and SAFEs become preferred with preferences of their own.

Check yourself

$10M invested for 25%. At a $20M sale, what does common receive?

$10M — investor takes the $10M preference; common gets the rest.

At what exit does this investor become indifferent between preference and converting?

$40M — $10M / 0.25.

Key takeaways

• 1× non-participating is max(money back, ownership × exit).
• Below indifference, common's % overstates what they receive.
• Indifference is investment / ownership%.
• This is the standard; model it before you add extras.

Further learning

Brad Feld's classic post, still the clearest prose on the clause:

Term Sheet: Liquidation Preference (Feld Thoughts)I’ve written about liquidation preferences (and participating preferred) before, as have most of the other VC bloggers (and several entrepreneur bloggers.) However, for completeness, and since lFeld Thoughts

Next: participating preferred.