Participating vs Non-Participating Preference: How to Compare the Exit Waterfall

A silent winding-up sentence ranks one class ahead and has not chosen a path: the preference or the as-converted share, the preference and then a share of what remains, or a second bite that stops at a written cap.

Under the law of England and Wales, compare participating preference with non-participating preference by who is paid on an exit. Non-participating holders take the preference amount or the as-converted share, one of those two sums. Participating holders take the preference and then a pro-rata share of the remainder, unless a written cap stops that second bite. Before you sign, name the exit, the multiple, and seniority, and attach three labelled proceeds rows.

For example, a draft may say only: “On a winding up, the Investor Shares rank in priority to the Ordinary Shares.” In practice it does not say how the money is paid. The typical mistake is to treat the cap-table percentage as cash already promised.

Disclaimer: Checkory provides AI support, not legal advice. Consult a qualified lawyer for binding decisions.

Which exit does the winding-up sentence actually trigger?

The preference is paid on a winding up. A share sale or an asset sale counts only when the draft deems it a liquidation. A listing is not assumed to pay it. Peter Sugden at RPC treats an IPO as a further issue of shares for cash, so on his view it should not be a deemed liquidation.

The GOV.UK Track 2 note, published 2 December 2025, is space-sector programme guidance, not the Companies Act. The RPC note adds a deemed liquidation for a share sale or a sale of substantial assets, and the holder still sits behind debt and may be paid nothing. Matchpoint separates an asset sale, reduced by liabilities, tax, and costs, from a share sale to the holders. CGPH, on 17 September 2026, puts debt and costs before equity.

When is non-participating one path, and when is the label a ceiling?

On the GOV.UK programme note, the standard seen is non-participating preference at a 1.0x multiple. 1x is the multiple, not participation. The Withers table of BVCA changes, February 2025, sets article 5.1(b) as the greater of the Preference Amount and the as-converted distribution.

Article 5.2 assesses that price collectively. Pillar, on 3 July 2025, quotes that NVCA wording as US practice. Gunderson’s early-stage table calls the greater-of test usual in that table. RPC’s illustration, not this company’s price, is £5 million for 20%. Conversion beats £5 million only above £25 million, in Sugden’s dead zone. The draft states no percentage.

Where does a participating second bite stop?

Participating preference pays the preference first, then a pro-rata share of the remainder as converted. That second payment stops only where a cap is written. If the sentence is silent, there is no cap.

Gunderson’s valuation note, framed on 2022 and 2023 valuation pressure, caps participation until holders receive 3x, and fully participating preferred removes the choice. Carta (updated 29 April 2026) calls the extra share a double dip. A cap is typically two or three times the preference; CRV, in US charter practice, says usually 2x, then the holder chooses the cap or conversion. This sentence sets no cap.

Why mark the multiple and seniority before one round?

Mark the multiple and the rank on every series before you model one round. A 2x multiple repays capital twice. Participation is a further share of what remains. An earlier class is not junior unless the documents rank it so.

Gunderson’s seed table treats 1x as usual and 2x as off-market at early stage on that page, and pays preferred together, pari passu, before common. Carta calls that treatment “standard”, and a later series in front “stacked”. HSBC calls preferred-then-ordinary “standard priority”. A new senior class typically needs current preferred consent. CRV’s US stack, not this draft, is seed $5 million, Series A $15 million, and Series B $40 million — $60 million at 1x. On a $50 million exit, last-in-first-out pays Series B in full and Series A $10 million; seed and common receive nothing. This draft ranks no earlier class.

What do three proceeds rows show that the cap table hides?

A cap table shows ownership and a waterfall shows value, so the percentage alone does not show the payout. The draft states no price. Carta’s US grid — one million preferred at $1.00 and one million common — sets out $2 million, $3 million, and $4 million, with no sale below the $1 million preference.

Which path do you write into the sentence?

Before you sign, write the preference or the as-converted share, or the preference plus a pro-rata share that stops only at a written cap. Gunderson’s early-stage table and the GOV.UK note both put 1x non-participating as the usual ask unless the investor shows the cap and the three figures.

Cooley’s 17 August 2026 report is not a UK census. Of 166 Q2 2026 financings, 95.8% had a 1x preference and 96.4% had non-participating preferred. On CRV (2 September 2026) at a $30 million exit, $5 million at a $25 million post-money with 2x participating pays the investor $14 million and common $16 million; $5 million at a $20 million post-money with 1x non-participating converts at $7.5 million and common receives $22.5 million.

In this order: winding-up trigger → path or none → multiple and cap → seniority → three labelled rows, then rewrite the sentence and the articles, or walk.

A management carve-out is a separate amount. An earn-out formula is a later price. A locked-box price fixes the leakage date. Drag-along versus tag-along decides who forces the sale. Then run a first pass — a first read that marks the sentence, not the decision to sign — on the term sheet and the articles.