Cheat Sheet for HealthTech and MedTech Founders: Understanding Participating v Non Participating Preferences

Non‑participating = investor gets either preference or pro‑rata; participating = investor gets preference plus pro‑rata, often with a cap.

Participating means investors get their money back and then share the rest; non‑participating means they get their money back or share the rest, whichever is higher. For HealthTech and MedTech founders, that difference bites hardest in middling exits, not in unicorn outcomes.

Core definitions

Liquidation preference: The amount investors get paid before common shareholders (typically 1x of what they invested, sometimes 2x or 3x in tough markets).

Participating preferred: Investor gets (1) their preference back off the top, then (2) also participates pro‑rata in the remaining pool – the “double dip”.

Non‑participating preferred: Investor chooses between (1) taking their preference or (2) converting to common and taking their pro‑rata share; they do not get both.

Capped participation: Participating preferred, but only until the investor has received a set multiple (e.g. 2–3x); above that, they stop participating and behave like non‑participating.

Simple numerical example (1 round, 1x preference)

Assume:

Investor: £10m for 20% ownership, 1x preference

Founders + ESOP: 80%

Exit: £50m

Non‑participating: Investor compares £10m (1x) vs 20% of £50m = £10m; if the pro‑rata share is higher, they convert, otherwise they take the preference. In a typical growth exit where the company is worth several times the money in, they almost always convert and just take their 20%.

Participating: Investor first takes £10m, leaving £40m, then also takes 20% of that £40m (= £8m), for a total of £18m. Founders and employees share only £32m instead of £40m – that 20% difference is the “double dip”.

Same headline valuation, but the participating structure shifts £8m from the common to the investor in this example.

How it changes across exit sizes

Rule of thumb for 1x preferences:

Low exit (at or below money in):

Both structures behave similarly; investors take their preference, common gets little or nothing.

Mid‑range exit (2–5x money in):

Participating hurts founders most here: investors recover their 1x then still take their full pro‑rata slice of the remaining upside.

High exit (big win):

The preference matters less; the company is far enough above the preference stack that investors usually convert (in non‑participating) and the economics converge.

Each additional round of participating preferred stacks another layer of double‑dipping, worsening the founder outcome in anything but very large exits.

Market norms founders should aim for:

Default ask: 1x non‑participating preference – now considered standard and founder‑friendly in venture deals.

Multiples: 2x–3x preferences are out there but are much more punitive and usually reserved for distressed or very investor‑friendly situations.

Participating: Less common at seed/Series A in competitive deals; more likely to appear in later stages, structured rounds, or where the investor has strong leverage.

UK/EU nuance: Local documents may phrase it slightly differently (e.g. “A ordinary” with preference), but the economic logic is the same: check if investors get both the preference and participation or have to choose.

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