Preferred shares come in two forms: Participating and non-participating.

With non-participating preferred shares, investors receive whichever is greater at exit:

They do not receive both.

For example, suppose an investor puts $5M into a company for 5% ownership and receives preferred shares with a 1x liquidation preference. If the company is acquired for $500M, the investor can either take their $5M preference or convert to common shares and receive 5% of the $500M in proceeds ($25M).

Participating preferred shares work differently. The investor first receives their $5M liquidation preference and then also shares in the remaining proceeds. In the same $500M acquisition, they would receive $5M plus 5% of the remaining $495M ($24.75M).

That single term can materially change how exit proceeds are split between investors, founders, and employees.

Mach Industries, a defense-tech startup valued at $470M a year ago, recently raised $300M in Series C funding at a $1.8B valuation, roughly a 4x jump in twelve months. Around the same time, it acquired Exquadrum in a $50M deal paid partly in Mach stock.

Paying for an acquisition with stock is a common move for fast-growing startups: it conserves cash and ties the seller's payout to the buyer's future. It works only when the buyer's shares are seen as valuable and likely to appreciate, which is why richly valued companies tend to use equity as currency while others pay cash.

For founders, a rising valuation is not only a fundraising milestone. It becomes a form of currency, one that can fund acquisitions and expand what the company can do without spending cash.

Source: TechCrunch

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