GLOSSARY L - P

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Stock

Ownership of a corporation which is represented by shares. Each share represents a piece of the corporation's assets and earnings.

Shares

This term refers to certificates or book entries representing ownership in a corporation or similar entity. There are generally two classes of shares; common shares and preferred shares.

Common Stock

The term refers to securities representing equity ownership in an entity. Common shares often have voting rights and/or give the holder a share in a company's profits via dividend payments or the capital appreciation of the security.

Stock Dividend

This term refers to payment of a dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold.

Liquidition Preference

Liquidation preference determines the payout order in case of a company or asset liquidation. Liquidation preference is frequently used in financing contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event.

Liquidition Preference for Preferred Shares

There are three types of liquidation preferences for preferred shares:
Non-paricipating (or straight) preferred stock will not share in the liquidation proceeds on a pro rata basis with common stock after payment of the liquidation preference. Normally, if the proceeds are sufficient, then the holdersof the preferred stock will voluntarily convert their preferred stock to common stock to maximize their share of the proceeds. This liquidation preference is most favorable to the company. Upon the sale of the company (or any other liquidation), the preferred stockholders would be entitled to the return of their entire investment (plus any accrued dividends) prior to the distribution of any proceeds to the common stockholders.Alternatively, the preferred stockholders could choose to convert their preferred stock to common stock and simply be treated the same as the common stockholders (letting them share ratably in the proceeds).

Participating preferred – This liquidation preference is most favorable to the investor (and is sometimes referred to as “double-dip preferred”). Similar to straight preferred, the preferred stockholders would be entitled to the return of their entire investment (plus any accrued dividends) prior to the distribution of any proceeds to the common stockholders.However, the preferred stockholders would then also be treated like common stockholders and would share ratably in the remaining proceeds –in effect, being paid twice (or “double”). Issuing participating preferred has the same economic effect as issuing a promissory note and shares of common stock (or a warrant) to the investor.

Capped (or partially) participating preferred – This liquidation preference is often viewed as an intermediate approach. The preferred stockholders have the same rights as participating preferred (i.e., return of investment, plus share ratably in the reminder), but their aggregate return is capped. Once they have received the capped amount, they no longer have the right to share in the remaining proceeds with the other common stockholders.

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