Fundraising
Preferred dividends: cumulative, compound, and paid
Understand accruing preferred dividends, the difference between cumulative and non-cumulative terms, simple and compound accrual, and what happens on conversion.
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A stated rate on the money invested
A preferred dividend is a stated annual rate applied to what the holder paid for its shares. In venture financings it is usually not paid in cash while the company is private: it accrues, and it is settled when the company is sold or the preferred converts. That makes it a claim that grows with time rather than a periodic payment.
Two clauses decide whether it grows at all. A cumulative dividend accrues whether or not the board declares it. A non-cumulative dividend accrues nothing on its own: only a declared dividend creates a claim, and an undeclared year is simply gone.
Simple and compound accrual, with numbers
Assume $1,000,000 invested on January 1, 2024, with an 8% cumulative dividend accruing from that day. Elapsed days are divided by 365 to obtain years, the day count Cap Table uses for dividends and for note interest alike.
| Convention | Formula | Balance after 365 days | Balance after two 365-day years |
|---|---|---|---|
| Simple, on the original investment | principal × rate × years | $80,000 | $160,000 |
| Compound, on the investment plus unpaid dividends | (principal + unpaid balance) × ((1 + rate)years − 1) | $80,000 | $166,400 |
The compound figure is $1,000,000 × 1.08² − $1,000,000 = $166,400. The two conventions are identical over the first year and separate after it, so the convention matters most on old money.
A cash payment reduces the balance on its date, and under compound accrual it also resets what compounds afterwards. Paying $30,000 against the $80,000 accrued in the first year leaves $50,000 owed.
Decide what happens at conversion and at a sale
Two further clauses decide where an accrued balance lands. At a liquidation, unpaid dividends are either added after the preference multiple or included in the amount the multiple applies to. A 2x preference on $1,000,000 with $160,000 accrued is $2,160,000 under the first reading and $2,320,000 under the second.
On conversion to common, unpaid dividends are either forfeited or kept as a cash claim ranking at the class’s seniority. Forfeiture is the common default in US venture charters, and it is why a converting class can be worth less than the arithmetic of its preference plus accrued dividends suggests.
Whichever the charter says, dividends share the class’s seniority and its proportional treatment in a shortfall, and they never mint new shares.
Record the terms and reconcile the claim
Record the rate, the accrual window, the cumulative choice, the convention, and the conversion and liquidation treatment as a dated amendment on the class, then record declarations and payments on the certificate. Record preferred dividends covers the fields and the refusals.
In an exit scenario, each class with dividend terms shows its claim beside its preference and a card explaining how the figure was built, certificate by certificate and segment by segment. Reconcile that to the charter before using it. A cap table model is not a determination that a dividend was validly declared or lawfully payable.