dividends
Dividends represent cash or the accrued obligation to distribute cash to a series of shareholders at some declared date. Dividends can be either cumlative of non-cumulative. Cumlative dividends are dividends that have a feature that specifies that if they are not paid annually, they will accrue until they can be paid--either when the company has the cash flow to do so or the company has a liquidity event. Non-cumulative are either paid or not paid based on the vote of the company's board of directors during the year. If they are not paid, they do not "roll forward" and the company begins the next year with a clean slate.
Dividends are often expressed in terms of percentages of invested capital. If the Series A investors have invested $1M and have a 10% dividend, they have the right to obligate the company to return $100,000 to the Series A investors during the year.
Entrepreneurs should recognize that cumulative dividends on preferred stock investments can provide a significant additional return to investors that is paid before any returns to common shareholders. This can significantly decrease the ultimate returns due to common shareholders.
Company Favorable
Company favorable dividends might be non-cumulative dividends on the Common Stock at a rate of 8% of the original purchase price when, as, and if declared by the Board.
Middle of the Road
A middle of the road dividend provision might include non-cumulative dividends at a rate of 8% of the original purchase price paid in preference to any dividends on Common Stock when, as, and if declared by the Board. It might also include a provision that specifies that preferred shareholders will have the right to participate in any dividends granted to Common Stock shareholders on an as-converted basis.
Investor Favorable
An investor favorable dividend provision might include 15% cumulative dividends paid in preference to any dividend on Common Stock when and as declared by the Board.