0) Desperate 3-man startup needs capital to survival. (gone 4 years w/o salary)
1) After pitching only thing they get is an offer with 'participation'. This means a preset amount is guaranteed back to the investors in an exit event if the % gain doesn't match a specific minimum. I.e. Investors are guaranteed 1,000,000 if their equity doesn't exceed that value.
2) A partner sees the company is weak, knows the founders are rockstars and rolls them up for 1.2 million.
3) Founders get jobs at company X and 200,000 split among 3 of them before taxes.
The term for first-money-out is "preference". Preference terms are almost ubiquitous in preferred stock (the similarity in names isn't entirely coincidental).
Participation means that after the investors get their preference out, they continue to share in proceeds ratably. It is also common, but less so.
The short version is: preference WITH participation means "Your money back plus your share". Preference WITHOUT participation means "Your money back OR your share, whichever is bigger".
Brad Feld's term sheet series explains this well, in depth.
1) After pitching only thing they get is an offer with 'participation'. This means a preset amount is guaranteed back to the investors in an exit event if the % gain doesn't match a specific minimum. I.e. Investors are guaranteed 1,000,000 if their equity doesn't exceed that value.
2) A partner sees the company is weak, knows the founders are rockstars and rolls them up for 1.2 million.
3) Founders get jobs at company X and 200,000 split among 3 of them before taxes.