Non-participating Preferred

Non-participating preferred shares give their holder a choice between two options. In a sale, the holder receives either the fixed preference amount or the amount corresponding to their normal ownership percentage, but not both. The holder therefore takes the option that is more favourable.

An example illustrates the mechanics: if an investor put in ten million euros for 25 percent and the company is sold for 30 million, the ten million preference is worth more than 25 percent of 30 million, which is 7.5 million. If instead it sells for 80 million, 25 percent equals 20 million and is clearly better, so the investor waives the preference and converts. The economic character of the clause follows: it protects the downside without distorting the upside, which is why it counts as the more founder-friendly variant and, alongside a one times preference, is market standard in German venture capital. Its counterpart is the participating variant, where the investor takes the preference and additionally shares pro rata in the remainder, which in mid-range exit scenarios shifts a substantial part of proceeds from founders and employees to the investor. The conversion threshold matters in practice, because it marks the range in which founders and investors again have aligned interests.