Cumulative vs. Non-Cumulative Dividends in Preferred Stock Fundraising Rounds
When you’re raising a venture round using NVCA-style preferred stock documents, one term you’ll likely come across—but may gloss over—is dividends. After all, most early-stage startups don’t generate profits, and the last thing on your mind is issuing dividends like a public company. But not all dividend provisions are created equal, and the difference between cumulative and non-cumulative dividends can significantly affect how investor economics work at exit.
Here’s what you need to know as a founder so you don’t accidentally agree to investor-friendly terms that you don’t fully understand—or that don't reflect standard market expectations.
What Are Dividends in This Context?
In the corporate world, dividends are typically a way for companies to return profits to shareholders. But in venture-backed startups, dividends usually serve a different purpose: they’re not about profit-sharing, they’re about giving preferred stockholders economic protections—especially when a company exits for less than a blockbuster return.
Venture investors almost never expect early-stage companies to pay cash dividends during the company’s growth years. That said, they may still negotiate for dividend rights as part of the preferred stock they’re buying. This shows up in the term sheet and the certificate of incorporation that governs your company’s capital structure.
The Two Main Types: Cumulative vs. Non-Cumulative
Let’s break them down:
Non-Cumulative Dividends (The Standard)
Non-cumulative dividends are the most common form in NVCA-style fundraising documents. Under this structure, the company is not obligated to pay dividends unless the board specifically declares them.
Here’s the key: if your board never declares a dividend (which is typical for high-growth startups), no dividend accrues. Preferred stockholders don’t “miss out” on any payments—they just don’t get a dividend.
However, there’s often a protective provision included: if the company does declare dividends to the common stockholders (for example, in a profitable exit or acquisition scenario), the preferred stock must receive a dividend at least equal to what common receives, often calculated as if the preferred had already converted into common stock.
This kind of clause ensures parity, not preference. It’s a fairness mechanism that says: “If common stock is getting cash, preferred shouldn’t be left out.”
✅ Why it’s founder-friendly:
No dividends are ever owed unless the board decides to declare them. This is the default in most VC deals and aligns with how startups operate in reality.
Cumulative Dividends (Less Common, More Investor-Friendly)
Cumulative dividends are a different beast. They guarantee that dividends accrue over time, even if the board never declares them. They typically accrue at a fixed percentage of the original investment amount—often around 6–8% annually.
In practice, that means:
If you raise $5 million in Series A at an 8% cumulative dividend, and you sell the company five years later, the Series A preferred stockholder is entitled to $5 million + $2 million in accrued dividends, before common stockholders receive anything.
These dividends can be paid in cash or added to the investor’s liquidation preference (i.e., paid out at exit).
This can significantly affect founder and common stockholder returns—especially in low-to-moderate exit scenarios. In some cases, cumulative dividends can act like a minimum guaranteed return for investors.
❌ Why it’s less founder-friendly:
Even if your company never pays out profits, these dividends still accrue in the background. When you finally exit, investors may take more than their original investment due to the built-up dividends, reducing what’s left for common.
Which One Should You Agree To?
For early-stage startups raising institutional capital, non-cumulative dividends are the market standard. Most reputable venture funds—especially those using NVCA templates—will not push for cumulative dividends unless:
The company is later-stage with meaningful revenue or profits;
The investment is structured more like a debt-equity hybrid (e.g., preferred equity in a growth equity round); or
The investors are non-traditional and want to guarantee a certain return.
As a founder, if you see cumulative dividends in a term sheet, it’s worth asking why. It might be a sign that the investor is being overly conservative—or that they don’t understand what’s market. Either way, don’t accept it without understanding the long-term impact on your cap table and your potential payout in different exit scenarios.
Final Thoughts
Dividends may seem like a throwaway clause in your financing documents, but the difference between cumulative and non-cumulative dividends can materially affect who gets what when your company sells. Non-cumulative dividends are the standard—and they’re designed to be fair without adding hidden financial overhang.
As you negotiate your next round, take the time to understand the dividend provision. If it's cumulative, ask why. If it's non-cumulative, confirm that there’s no accrual mechanism hiding elsewhere in the document. And if in doubt, ask your lawyer to walk you through some exit modeling to show how dividends might play out.
Remember: you can’t negotiate the terms you don’t understand. Make sure dividends aren’t the one that surprises you later.
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