Participating Forward
Downside protection and upfront cash, with uncapped but fractionally shared upside.
- Floor protection
- Guaranteed minimum price on pledged shares
- Upside cap
- None (gains are uncapped)
- Upside sharing
- Lender takes fixed % of gains above floor (e.g., 40%)
- Your retention
- Remaining % of all gains (e.g., 60%), unlimited
- Advance vs. VPFC
- Lower upfront advance than a hard-capped VPFC
- Tax treatment
- Designed to defer capital gains to contract maturity (consult a tax professional)
How it differs from a VPFC
A standard VPFC (Variable Prepaid Forward Contract) puts a hard ceiling on your upside: you set a Cap Price, and any stock appreciation above that cap goes entirely to the lender. If the company IPOs at 5x the Cap, you get nothing above the Cap on the shares you deliver. A Participating Forward removes that ceiling. Instead, you agree to share a fixed percentage of all gains above the Floor with the lender. There is no cap. If the stock goes to 10x, you keep your percentage of every dollar of that gain.
A concrete example
You hold 10,000 shares worth $20 each ($200,000 total). You enter a Participating Forward with a Floor of $16 and a 40% participation rate for the lender (you keep 60%). You receive a cash advance of $120,000 (lower than a VPFC because there is no cap protecting the lender's upside). At settlement, the lender recovers their advance plus their share of any gains, paid in shares. Scenario 1 (stock drops to $10): you deliver all 10,000 shares. Non-recourse: you keep the $120,000 and owe nothing more. Scenario 2 (stock rises to $40): the gain above the Floor ($16) is $24 per share, or $240,000 total across 10,000 shares. The lender's 40% of that gain is $96,000 plus the $120,000 advance repayment, totaling $216,000. At $40/share, you deliver 5,400 shares. You keep 4,600 shares worth $184,000. Scenario 3 (stock rises to $100): the gain above the Floor is $84 per share, or $840,000 total. The lender's 40% is $336,000 plus the $120,000 advance, totaling $456,000. At $100/share, you deliver 4,560 shares. You keep 5,440 shares worth $544,000. Unlike a VPFC with a hard cap, you continue to keep a growing share count as the stock price rises.
The trade-off: less cash now, more upside later
Because the lender has no cap protecting their position, they take on more risk than in a standard VPFC. This means you receive a smaller upfront cash advance. The incentive alignment is different too: in a VPFC, once the stock passes the Cap, you and the lender have opposing interests (you want the stock higher, but the lender already captured their maximum). In a Participating Forward, both you and the lender benefit from a higher stock price at settlement. Participating Forwards are typically used by founders or executives with strong conviction that their company will achieve a very large valuation, who would rather accept less cash today than give up uncapped upside.
Common questions
Why would I choose a Participating Forward over a VPFC?
If you believe the company could be worth significantly more than a VPFC Cap at IPO, the hard ceiling in a VPFC becomes expensive: you forfeit all upside above it. A Participating Forward lets you keep 60% (or whatever your negotiated retention) of unlimited upside, at the cost of a lower upfront advance. Choose a VPFC when you want maximum cash now. Choose a Participating Forward when you want to preserve uncapped upside.
How is the sharing percentage determined?
The lender's participation percentage is negotiated based on three factors: the Floor level (a lower floor means more downside protection for you, so the lender demands a higher share of the upside), the perceived risk of the underlying stock (less established companies mean higher lender participation), and current market conditions. Typical lender participation rates range from 30-50%, meaning you retain 50-70% of all upside.
Is the tax treatment the same as a VPFC?
The structure is designed to defer capital gains taxation to the contract's maturity date, similar to a VPFC. You receive the advance today, but the taxable event occurs when the contract settles and shares are actually delivered. However, tax treatment depends on the specific contract terms and individual circumstances. The IRS has not issued a revenue ruling specifically addressing participating forwards the way Revenue Ruling 2003-7 addresses VPFCs, so there is less direct authority. Consult a tax professional before entering any forward contract.
Providers for this path
These providers operate in the Participating Forward space. StrikeRates does not endorse or recommend any provider. Review each independently.
Sources
This content is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws and regulations change frequently. Consult a qualified tax professional or attorney before making decisions about your equity compensation.
Use the scenario modeler to see how Participating Forward mechanics play out with your specific grant. The full app goes deeper: per-grant modeling, fund signals, and competing lender terms matched to your situation.