Brad Feld does an excellent job with his post on the “double dip” otherwise known as the Participating Preferred.
His post is relatively long but absolutely essential reading for any entrepreneur that has never seen a Participating Preferred before.
While Brad didn’t take sides, I will.
I insist on participating preferreds and get them in almost all of my deals eventually. Maybe its my “east coast” heritage. But I believe that the risk capital has the right to get its cost back and then share in the profits with the other shareholders who do not have capital at risk.
That’s how we do it with our investors, called LPs. And it works fine for us. And I think the same should apply to the entrepreneurs.
I also believe in caps. I think double dips are too generous if the investment works out very well. And so I generally always agree to cap them. When and how depends on the deal.
I generally don’t like the “multiple participate” as Brad calls it. There are some cases where its needed to structure around certain valuation and ownership issues that crop up. But its not a good way to align interests among shareholders and causes a lot more problems than it solves. I try to avoid it as much as I can.
That’s my view of the double dip.