Participating Convertible Preferred Share (PCP)

A participating convertible preferred (PCP) share is an equity holding that gives investors the right to claim excess earnings (along with common-stock shareholders) in addition to the preferred dividend. PCPs are commonly used in venture-capital financing; venture capitalists will often exercise the option to convert their PCPs to common stock when they intend to exit an investment. The type of exit – initial public offering or trade sale – determines the security's cash flow right.

The National Venture Capital Association is the industry lobbying and advocacy organization for venture capitalists. According to a 2009 Global Insight research study, companies with venture-capital backers accounted for 12.1 million jobs and $2.9 trillion in revenue in the U.S. in 2006 alone.

The structure of participating convertible preferred shares offer the venture capitalists who receive them other advantages than later shareholders, who invest in a company further on in its development receive. The PCP shares may be particularly attractive to venture capitalists because of guarantees they offer to pay back the money that is invested, as well as generate a return for these early backers in the company before it goes public.

With participating convertible preferred shares, the investor is granted dividends that must be paid to them before the release of any dividends to holders of common shares. Furthermore, if the company were to enter into bankruptcy proceedings and forced to liquidate, the holders of participating convertible shares would be entitled to payment from the assets of the company before any payments would be made to common shareholders.

Typically, in a liquidation, the holder of PCP shares will receive the face value of the security along with their equity participation, effectively refunding their initial investment and giving them a share of what remains after the liquidation preference is resolved.

The investor has the option to convert their shares to common stock at any time, not just when the company files an initial public offering. This allows them flexibility on when they might want to exit or change their position on the company. However, it can be more lucrative for the investor to keep these shares as “participating” in order to receive early dividends rather than to convert them to common shares.

The options that PCP shares offer to investors is sometimes referred to as double-dipping, because it offers them the first dividends as well as the leeway to convert to common stock.