when there is a liquidation event whether an investor s preferred stock is participating or nonparticipating will determine if that investor receives additional consideration over the liquidation value of the preferred stock and any dividends owed to the investor if an investor s preferred stock is participating that investor is entitled to any value leftover post liquidation as if that stock had been common stock nonparticipating preferred shareholders on the other hand receive their liquidation value and any dividends in arrears if applicable but they are not entitled to any other consideration 
participating preferred stock is rarely issued but one way in which it is used is as a poison pill in this case current shareholders are issued stock that gives them the right to new common shares at a bargain price in the event of an unwanted takeover bid example of participating preferred stocksuppose company a issues participating preferred shares with a dividend rate of 1 per share the preferred shares also carry a clause on extra dividends for participating preferred stock which is triggered whenever the dividend for common shares exceeds that of the preferred shares if during its current quarter company a announces that it will release a dividend of 1 05 per share for its common shares the participating preferred shareholders will receive a total dividend of 1 05 per share 1 00 0 05 as well now consider a liquidation event company a has 10 million of preferred participating stock outstanding representing 20 of the company s capital structure with the other 80 or 40 million made up of common stock company a liquidates and the proceeds are 60 million the participating preferred shareholders would receive 10 million but also would be entitled to 20 of the remaining proceeds that amount would be 10 million calculated as 20 x 60 million 10 million nonparticipating preferred shareholders would not receive additional consideration correction nov 4 2022 a previous version of this article misstated the calculation in an example for the additional amount to be received by participating preferred shareholders from a liquidation 