Cumulative Dividends

Term Main definition
Cumulative Dividends

The right of a holder of capital stock (typically a holder of shares of preferred stock) to receive dividends that accrue at a specified rate, usually from and after the original issuance date of the preferred stock. These cumulative dividends usually must be paid in full before any dividends can be declared or paid to the holders of any other, junior class or series of capital stock (including common stock). Thus, dividends may accrue and "accumulate" at a fixed rate (e.g., 2% or 5% per annum).  The dividends may be due and payable on a fixed schedule, whether annual, bi-annually  or quarterly, or at a fixed date, or only upon the happening of specified events, such as a liquidation or deemed liquidation.  Non-cumulative dividends are the opposite kind of dividends, non-cumulative dividends are simply paid "when, as, and if" declared by a company's board of directors and do not accrue absent such board declaring such non-cumulative dividend. Because angel-backed companies and venture-backed companies typically need to conserve cash (and thus do not pay dividends), employing a cumulative dividend feature means the liquidation preference of the underlying preferred stock is increased by an amount equal to the cumulative accrued dividend.  An an addition to the liquidation preference, the accrued and unpaid dividends also are payable to the holder of preferred stock upon any specified "deemed liquidation" event.  Cumulative dividends that have accrued and are unpaid may sometimes be convertible into common stock but are sometimes waived (or inapplicable) if the preferred stock converts to common stock immediately prior to an IPO.

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