Non-participating preferred stock is a type of Preferred Stock issued by startup companies to investors, providing them with preferential rights and privileges in certain circumstances. Unlike participating preferred stock, non-participating preferred stockholders have the option to be entitled solely to their liquidation preference and not the ability to participate in the distribution of any remaining proceeds.

In the event of a company sale or liquidation, non-participating preferred stockholders have the right to receive their initial investment amount (liquidation preference) before common shareholders. However, they do not have the opportunity to further participate in the distribution of remaining funds or assets beyond their liquidation preference. The other option, generally, gives investors the opportunity to either receive their liquidation preference multiple or convert their preferred shares to common stock on a 1:1 basis. By converting to common stock, non-participating preferred stockholders can participate in the distribution of proceeds as if their shares were common stock, sharing in the remaining funds alongside other common shareholders.

The choice between receiving the liquidation preference or converting to common stock allows non-participating preferred stockholders to adapt their investment strategy based on their preferences and the specific circumstances of the exit event.