Capped-Participating Preferred Stock
A kind of participating preferred stock.
In a liquidation or a transaction treated as one, a series of preferred stock can participate in the value of the common equity on a parity with the outstanding common stock by receiving distributions pro rata alongside holders of common stock, which is called participating in a distribution on an as-if-converted basis. If an unlimited amount can be distributed in this way, there is no limit or cap set by the original terms of the participating preferred stock. A capped-participating preferred stock is the product of a conscious design and a mutual agreement on the amount that the participating preferred stock can receive because that amount of participation is limited. If an investor cannot on a liquidation or a sale of the company receive as a holder of the capped-participating preferred stock, a participation amount per share greater than a specified limit, it can consider whether it is beneficial to exercise a right, if any, to convert the preferred stock into common stock. The unlimited participation of common stock can be more or less valuable than the preferred stock's liquidation preference and its limit of participation. If not limited or capped, a participating preferred stock could be entitled in a liquidation to a pro rata distribution along with common stockholders of the net value of the company that remains after all the company's debts, obligations, and liabilities are satisfied and after all the preferred shares receive their preferences. See Participating Preferred Stock.