A participating preferred stock is one that participates with the common stock in receiving the proceeds of the liquidation of a company. This participation can be contrasted to a preferred stock that has a fixed return that is paid ahead of any money to be paid to the holders of common stock. For example, one company that we are aware of has issued a preferred stock with a fixed return, commonly referred to as a preference, that provides for a payment of five times the amount invested. If, upon a liquidation, the company has more than that amount, the return to the holder of preferred stock is limited to five times the invested amount with the excess being distributed to the holders of common stock. If, upon a liquidation, the company has less than that amount the holders of preferred get everything and the holders of common stock get nothing. By way of contrast, a venture capital preferred stock may have a preference and a participation. In the typical situation upon liquidation, the venture investor may have a preference equal to its initial investment, referred to as a 1x return. Once that preferential return is paid, venture investor also has the right to receive payment from any additional amounts available for distribution on an as converted basis with the common stock. Such an instrument is referred to as a participating preferred. The double dip is that it gets both the preference and the participation. [Participating preferred stock is not the only way to structure an investment. The exact economic rights should be addressed at the term sheet stage.]