Definition
The term participating convertible preferred stock refers to a security commonly issued as part of venture capital financing. Participating convertible preferred stock provides the holder with the rights to both dividends as well as a conversion feature.
Explanation
Participating convertible preferred stock (PCP) is a security that is frequently issued by venture capitalists and private equity investors as part of their financing arrangements. This security provides the holder with two important features:
Participating: dividends are paid to these shareholders before any dividends are paid to the holders of common stock. In the case of liquidation, these shareholders are also entitled to payment before common shareholders.
Convertible: these shares are also convertible to common stock at the discretion of the shareholder.
The above two features, combined in one security, make PCP stock very attractive to the venture capital industry. In the event of liquidation or sale of the asset, the holder receives face value of the security plus equity participation. If the company goes public, the preferred shares are convertible to common stock.
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