A dreaded equity structure (often called 'double dipping') where an investor first gets their investment back (liquidation preference), and then also shares in the remaining proceeds according to their ownership percentage.
Why it matters: Founders must avoid this. It significantly reduces founder payouts in an exit. Standard venture deals use 'non-participating preferred'.
In practice: VC invests $5M for 50% with participating preferred. Company sells for $15M. VC takes $5M back first. Then VC takes 50% of the remaining $10M ($5M). VC total: $10M. Founders: $5M.