What Are Participating Convertible Preferred Shares (PCPs)?

A participating convertible preferred (PCP) share is a financial term referring to a security most often issued as part of a venture capital financing deal before a company experiences an initial public offering (IPO). Participating convertible preferred shareholders enjoy many advantages over investors who come later to the game after a company becomes a more established entity.

Key Takeaways

  • Participating convertible preferred (PCP) share investors enjoy a bevy of advantages over common stockholders.
  • PCP investors are entitled to collect dividends, knowns as "preferred dividends," before common shareholders may follow suit.
  • Should a company declare bankruptcy and liquidate its assets, PCP shareholders are first in line to collect any leftover funds, by receiving the face values of their stocks at the time of purchase.
  • PCP holders may exercise the right to convert their shares of stock to common shares at any time.
  • Participating convertible preferred shares are mainly offered by venture capitalists looking to bankroll startup companies before they file initial public offerings. 

Understanding Convertible Preferred Shares (PCPs)

Participating convertible preferred shares are securities typically offered by venture capitalists financing startup companies, that afford stockholders distinct advantages over investors who come later to the game. There are three chief advantages linked to this type of investment. First, PCP investors have the right to collect dividends before common stockholders in the same company may do the same. Those dividends are aptly referred to as preferred dividends.

Secondly, in the event that a company files for bankruptcy and liquidates its remaining assets, PCP shareholders are entitled to receive part of those assets before common shareholders may access such funds. Under traditional liquidation circumstances, PCP shareholders receive the face value of the security they purchased at the time of the initial transaction, effectively refunding their investment.

The final advantage PCP investors enjoy, is the ability to convert their preferred shares into common stock, at their discretion. They may do so any time--not solely when a company launches an IPO. But as a rule, it is generally more lucrative for investors to maintain their preferred shares, rather than converting them to common shares, because the former scenario enables them to receive the aforementioned early dividends.

Participating convertible preferred shareholders are often whimsically referred to as "double-dippers," because if they exercise their options correctly, they can be early dividend collectors for years, and then decide to convert their shares into common stock.

The Venture Capitalist Effect

The vast majority of participating convertible preferred shares are issued by venture capitalists looking to fund fledgling young startup companies. For this reason, there is no shortage of PCP opportunities to choose from, which is good news for investors who favor these vehicles. Consider the following statistics regarding venture capital activity in the United States for 2019:

  • There were more than 10,700 venture-backed companies that collectively raised $136 billion in funding. On a daily basis, this translates to 29 startups, raising $347 million across the country.
  • Approximately 50% of all IPOs were backed by venture capital deals, while 50% were non-VC backed.
  • Venture capital dollars fueled sectors with the following cash amounts: software ($43.5 billion), IT hardware ($30.8 billion), healthcare ($28.9 billion), media ($2.7 billion), energy ($1.5 billion).