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Why 20% ownership is not 20% of the sale

A common surprise at an exit: an investor who owns 20% of the company walks away with far more, or occasionally far less, than 20% of the price. The percentage describes ownership. The terms decide the money.

The setup

Series A invested $10,000,000 for 20% of a company. The founders hold the other 80%. Only one thing changes in the table below: the terms of the Series A shares and the sale price. Each cell is the money Series A receives, and its share of the total sale in brackets.

What is going on

• 1x non-participating takes its $10M back first, or converts when 20% of the price is worth more. That is why it receives exactly 20% from $50M upward, but a bigger share below it.
• 1x participating takes its $10M and then also 20% of what is left. At $100M that is $10M plus 20% of $90M, or $28M. It receives more than its ownership at every price, and the gap never closes. Capped participation limits that gain; see liquidation preference explained.
• 2x non-participating is owed $20M before founders receive anything. In a $12M sale the investor takes the whole price; in a $30M sale it takes two thirds.

What founders should do with this

1. Ask what each term is worth in dollars at the sale prices you think are realistic, not only the headline valuation. A 1x participating preference costs the founders $8M more than 1x non-participating at a $100M sale, in the example above.
2. Find the price where common starts to be paid. Until the preferences are covered, founders and employees receive nothing, whatever their percentage.
3. Check the breakpoints. The prices where an investor converts or hits a cap are where the split of each extra dollar changes. They tell you where your negotiating leverage sits.

Worked figures assume no debt or costs, no dividends, and a single preferred class, to keep the arithmetic checkable. Real structures add more classes, ranks and terms. This guide is general education, not legal, tax or investment advice.