Participating preferred is the preferred-stock structure where investors receive both their liquidation preference AND share in remaining proceeds alongside common stockholders. The double-dip compares to standard non-participating preferred (where investors choose between preference OR as-converted share, whichever is higher), making participating preferred investor-friendly and founder-unfriendly, increasingly rare in modern venture rounds except in distressed financings. It is the preferred-stock structure founders should treat as a red flag in term sheets.
The mechanics:
Standard non-participating preferred (modern default):