Dividends on Preferred Stock
written by David A. Broadwin
All venture preferred stock provisions have something to say about dividends. The question is what... Generally there are three choices: (1) dividends will be paid on an as converted basis when, as, and if paid on the Common Stock; (2) non-cumulative dividends will be paid on the Preferred in a stated amount when, and if declared by the Board; and (3) the Preferred will carry a stated annual cumulative dividend [which may be compounded annually], payable upon a liquidation or redemption. These provisions are negotiated at the terms sheet stage. When negotiating the term sheet, consider carefully the economic effect of a dividend, particularly a compounding one. It does not sound like much, but an 8% compounding dividend can add up over three or four years. Furthermore, once such a dividend is embedded in your series A Preferred Stock, the series A holders will not want to give it up, and you should assume the series B will want it too. Such dividends will be very hard to remove in future rounds.