Common Stock vs Preferred Stock
Disclaimer: This video discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
Preferred stock and common stock are the two main types of stock that a corporation can issue to shareholders. While they both represent ownership in the corporation and give shareholders certain rights, there are some key differences between the two types of stock.
Preferred stock is usually sold to investors, while common stock is usually issued to founders when a company is founded. Preferred stock is called preferred stock because it has certain rights that common stock does not have. For example, preferred stock often gives investors a liquidation preference, which is an economic right that entitles them to get a return of money or a distribution of money before any of the founders or other holders of common stock get an economic return.
In addition, preferred stock often carries with it certain voting rights and other contractual rights. These rights may include the ability to elect certain directors and the requirement to approve certain key decisions, such as debt, new financings, or exits.
Common stock, on the other hand, represents the base level of stock and gives shareholders the right to vote on corporate matters and the right to receive distributions. Most of the time, founders own a larger number of shares of common stock than preferred stock investors will ever own. For example, a venture capitalist may own 20-30% of a company, while the founders own the remainder as common stockholders.
When a company is getting started, founder will want to be strategic about the number of common shares they reserve before their pre-seed investment. Check out Cara Stone’s Cap Table Tool to explore how to see the impact future fundraises will have on the founders equity in the company.
In summary, preferred stock is a type of stock that carries with it special economic and voting rights, while common stock is the base level of stock and gives shareholders the right to vote on corporate matters and the right to receive distributions.
Disclaimer: This video discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
Preferred stock and common stock are the two main types of stock that a corporation can issue to shareholders. While they both represent ownership in the corporation and give shareholders certain rights, there are some key differences between the two types of stock.
Preferred stock is usually sold to investors, while common stock is usually issued to founders when a company is founded. Preferred stock is called preferred stock because it has certain rights that common stock does not have. For example, preferred stock often gives investors a liquidation preference, which is an economic right that entitles them to get a return of money or a distribution of money before any of the founders or other holders of common stock get an economic return.
In addition, preferred stock often carries with it certain voting rights and other contractual rights. These rights may include the ability to elect certain directors and the requirement to approve certain key decisions, such as debt, new financings, or exits.
Common stock, on the other hand, represents the base level of stock and gives shareholders the right to vote on corporate matters and the right to receive distributions. Most of the time, founders own a larger number of shares of common stock than preferred stock investors will ever own. For example, a venture capitalist may own 20-30% of a company, while the founders own the remainder as common stockholders.
When a company is getting started, founder will want to be strategic about the number of common shares they reserve before their pre-seed investment. Check out Cara Stone’s Cap Table Tool to explore how to see the impact future fundraises will have on the founders equity in the company.
In summary, preferred stock is a type of stock that carries with it special economic and voting rights, while common stock is the base level of stock and gives shareholders the right to vote on corporate matters and the right to receive distributions.
