Cumulative dividends on preferred stock keep adding up when they are not paid, and the unpaid total is owed before common shareholders get anything. Non-cumulative dividends do not carry over: if a year's dividend is not declared, it is gone.
Most venture-backed startups never pay dividends, so the difference shows up at a sale or liquidation. That is when any built-up cumulative amount is added on top of the liquidation preference.
So a cumulative clause can raise what preferred holders get at exit, year after year, without one dollar ever being paid in cash. It belongs in your exit waterfall model, next to the preference multiple.
A term sheet offers $2 million of Series A preferred with an 8% dividend. The question to ask is one word: cumulative?
If it is non-cumulative, an unpaid year is gone. Most startups never declare a dividend, so in practice nothing builds up.
If it is cumulative, the unpaid dividend keeps adding up each year. At a sale, that amount is usually paid to the preferred holders before common stock gets anything, on top of the liquidation preference.
Illustrative math only. Simple (not compounding) interest, a 1x non-participating preference, and no other preferred series. Real terms are in your charter.
They are less common in US venture rounds than non-cumulative dividends, but they do show up. Read the clause each time.
No. It is usually an amount owed later, at a sale or liquidation. Many companies never pay a dividend in cash at all.
For a Delaware corporation, dividends can only be paid out of surplus, or out of net profits for the current or prior fiscal year. A company with losses and no surplus generally cannot pay one.
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