Gigaom’s FoundRead has today’s great post up titled F|R Crib Sheet: The Term Sheet Glossary guest written by Jay Parkhill. While you can always entertain yourself for hours with the Term Sheet Series that Jason and I wrote several years ago, sometimes a crib sheet will suffice.

May 25th, 2008 by Brad Categories: Term Sheets

Bozo the Clown

This is a pretty amateurish crib sheet. To say preferred stock should be non-participating simply does not tie to the reality of the hundreds of financings I've seen over the years. Participating with a cap of some kind would seem to be more realistic and would show some knowledge.
- http://www.feld.com Brad Feld
  
  I don't think Jay said “preferred stock should be non-participating” – rather he said “Bottom line: You want non-participating preferreds if you’re a founder!” There's a huge distinction between the two and Jay's statement is right on the money for founders.
  
  That said – participating vs. non-participating is simply part of the negotiation between investor and entrepreneur.
  
  For the interested in the audience, here's a much longer and detailed post on liquidation preferences and participating vs. non-participating preferred.
  
  http://www.feld.com/blog/archives/2005/01/term_sh…
  - Bozo the Clown
    
    Fair enough. Maybe I read too quickly. But it seemed to be setting expectations in the wrong place since the vast majority of deals have participating preferreds and it did not mention the concept of a cap on participation, which is the most common negotiation point and one with massive economic impact. Even in a two sentence summary that should show up. I also thought the concept that the size of the option pool included in the pre-money valuation can be negotiated would show up.

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