Participating Convertible Preferred Share (PCP) Definition
A participating convertible preferred (PCP) share is a type of share that allows its holder to claim additional earnings aside from the preferred dividend. In most cases, PCP shares are used as a part of venture capital financing that allows venture capitalists to claim excess earnings in addition to their divided. When venture capitalists exercise this right, they have the option of converting their PCPs to common stock by the time they are exiting an investment. Private equity investors are another category of investors that use PCP shares as part of their financing.
A Little More on What is Participating Convertible Preferred Share (PCP)
A participating convertible preferred (PCP) share gives an investor (its holder) the rights to both preferred dividends and excess earnings which can be claimed through conversion in the future. Exercising PCPs give venture capitalists the right to convert their PCPs to common stock when exiting an investment. In the United States, venture capitalists play a major role in the creation of jobs and revenue. In 2006, the National Venture Capital Association accounted for $2.9 trillion as the revenue generated by companies backed by venture capitalists while in 2009, 12.1 million jobs were created by these companies.
How Participating Convertible Preferred Shares Are Applied
The PCP shares make venture-capital financing quite attractive because it offers a lot of benefits to venture capitalists. One of the benefits of PCP shares is that it confers on venture capitalists the right to convert the PCP shares to common stock when leaving an investment, it also gives these investors an assurance that they would get back the money they invested.
A PCP stock also offers investors a form of security, in which they have the right to receive preferred dividends ahead of other shareholders of common stock. When the company is also being liquated, venture capitalists or holders of PCP shares have the right to receive payments before other shareholders of common stock.
In a liquidation, investors with PCP shares are entitled to the face value of their investment and the return for participating in the investment first, before all other shareholders are paid. Holders of PCP shares have the right to convert PCP shares to common stock at their discretion. This means they do not need to wait before a company is liquated before the shares are converted.