Financing Terms & Structures

Common stock vs. preferred stock

Common stock is so named because it is just that—common. Common stock isn’t generally accompanied by any special rights, preferences or privileges; it lacks the bells and whistles that are usually attached to preferred stock that give it the “preferred” status. Shares of common stock typically give the holder the right to vote on matters presented to the shareholders of the company and the right to receive proceeds upon the dissolution or sale of the company after the holders of preferred stock are paid any “preferential” or senior amounts. Common stock is typically issued to the founders of the company and to other employees, consultants, advisors and directors who receive grants of common stock or options to purchase shares of common stock.

Preferred stock is stock that has special economic and control rights that are generally senior to the rights of the common stock. Determining exactly what those rights will be is determined by negotiation between the company and the investors. The most common of these rights include liquidation preferences, dividend rights, anti-dilution rights and special voting rights. The preferred shareholders will often negotiate additional contractual rights, such as registration rights, information rights and rights to participation in future financings. Learn more about liquidation preferences and preferred stock terms.