One series on its own is a simple choice. A stack of series is a small game, and the junior rounds convert later than their price suggests.
A 1x non-participating preference converts to common when its as-converted share of the exit exceeds the money it put in. For the last and most senior round that point is exactly the round's own post-money: an investor who paid 80 for 20 per cent at a 400 post-money converts only above an exit of 400, and receives a flat 1.00× at every exit from 80 to 400. Junior series convert later than their own price suggests.
Worked in full in The Growth Equity Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Growth equity is mostly written as convertible preferred with a 1x non-participating preference. The holder chooses, at exit, between its money back and its percentage of the proceeds. That choice is simple for one series on its own. With a stack of series it becomes a small game, because each conversion changes what is left for everyone else.
| Holder | Fully diluted ownership | Invested | Preference |
|---|---|---|---|
| Series C (last round, senior) | 20% | 80 | 1x non-participating |
| Series B (junior to C) | 25% | 50 | 1x non-participating |
| Common (founders, management, options) | 55% | none | |
| Total preference ahead of common | 130 |
Convert if ownership × residual available to converters > preference
=MAX(MIN(pref, proceeds_left), own/(own_of_converters)*(V-prefs_taken)), solved
senior to junior and checked until no holder wants to switch.| Exit value | Series C | Series B | Common | Series C multiple | Who converts |
|---|---|---|---|---|---|
| 60 | 60.00 | 0.00 | 0.00 | 0.75× | nobody gains from it |
| 100 | 80.00 | 20.00 | 0.00 | 1.00× | neither |
| 200 | 80.00 | 50.00 | 70.00 | 1.00× | neither |
| 300 | 80.00 | 68.75 | 151.25 | 1.00× | B |
| 400 | 80.00 | 100.00 | 220.00 | 1.00× | B; C indifferent |
| 600 | 120.00 | 150.00 | 330.00 | 1.50× | both |
| 1,000 | 200.00 | 250.00 | 550.00 | 2.50× | both |
Series C's payout is flat at 80 across the whole range from 80 to 400. It has bought a bond with an equity option struck at its own entry price. Every sale below the last round's valuation is decided by the stack, not by ownership: at 300 the common holds 55 per cent of the shares and receives 151.25, about half of the proceeds, because 80 has come off the top.
The series B row is the one people misread. With 25 per cent it looks as if B should convert above 200. It does not: as long as series C sits ahead with its 80, B is sharing a smaller pot and converts only above 240. Between 200 and 240 the B holder is better off taking 50 than converting, and a model that converts it at 200 overstates its proceeds.
Why exactly at the post-money? Because the round's price per share is its post-money divided by the fully diluted share count. At an exit equal to the post-money, every share is worth what series C paid for it, so converting and taking the preference give the same 80. Above it each share is worth more than the entry price and conversion wins; below it the preference does. A junior series has no such symmetry, because a senior claim sits between its shares and the exit value.
A participating preference takes its 80 and its share of what is left. Same cap table, same exits:
| Exit value | Series C, participating | Series C, non-participating | Extra to C | Taken from common |
|---|---|---|---|---|
| 200 | 98.67 | 80.00 | 18.67 | 18.67 |
| 300 | 124.00 | 80.00 | 44.00 | 30.25 |
| 400 | 144.00 | 80.00 | 64.00 | 44.00 |
| 600 | 184.00 | 120.00 | 64.00 | 44.00 |
| 1,000 | 264.00 | 200.00 | 64.00 | 44.00 |
Above 400 participation is worth a constant 64 to series C, that is 80 less the 20 per cent of 80 it would otherwise have shared, at every exit however large. Below 400 it is worth less, but it is never worth nothing. Common bears most of it; the rest comes out of series B, which at 300 now receives 55.00 instead of 68.75.
The free workbook for this book at the companion page works a sale below the last round as one of its three cases. For the follow-on side of the same position, see what a pro rata cheque actually costs.
Non-participating preferred takes the greater of its money back or its as-converted share. Participating preferred takes its money back and then its share of the remainder. On an illustrative 80 series C owning 20 per cent, participation is worth a constant 64 extra at every exit above the 400 post-money, paid mostly by common shareholders.
Because the senior preference is deducted before the junior series shares the residual. An illustrative series B owning 25 per cent with a 50 preference would convert above 200 if everyone converted, but while a senior 80 preference sits ahead it shares only with common and converts above 240.
With a senior 1x non-participating preference, its money back, as long as proceeds cover it. An investor that paid 80 at a 400 post-money receives 80, or 1.00x, at any exit between 80 and 400. Junior series and common absorb the shortfall: at a 300 exit common holding 55 per cent receives 151.25.
This article is one calculation from The Growth Equity Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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