Investors will have the right to be paid the dividends as part of the liquidation preference on exit proceeds.
Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I.
Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I.
If the venture is extremely successful, all shareholders will be substantially rewarded.
Investors also want to ensure participation of all shareholders in the proceeds if a reasonably good outcome is achieved.
Preferred shares will often have a dividend, usually from 5% to 10% per year.