Common Stock

Common stock is the basic ownership share class of a corporation, held by founders, employees, and option-holders after exercise. It represents residual ownership in the company after all preferred-share rights are satisfied. In a venture-backed startup, common stock is junior to every series of preferred stock in liquidation waterfalls and typically carries fewer rights than preferred, though it carries the upside in exit scenarios above the preferred preference amounts.

The structural position of common stock in a venture-backed cap table: founders hold common from day one, employees receive options that exercise into common, advisors hold common (often via restricted stock or options), and early non-priced investors (SAFE and convertible note holders) eventually convert into preferred when the round closes (not common). The economic implications: in a $50M acquisition where investors hold $40M of 1x non-participating preferred, common holders share the remaining $10M; in a $200M acquisition with the same cap table, common holders share roughly $160M after preferences (and may share more if preferred converts to common to capture upside). The 409A valuation prices common stock at a meaningful discount to preferred (typically 20-30% below the most recent preferred price) because common lacks the preferred rights and is therefore less valuable on a per-share basis. Voting: common stock typically gets one vote per share; preferred often gets vote-as-converted (one vote per common-equivalent share). Dividends: rare in startups, but if paid, common is junior to any preferred dividend rights.

What founders get wrong: Treating common stock ownership percentages as economic ownership percentages. The cap-table percentage tells you voting and dilution but not exit economics. Exit economics depend on the preference stack, participation rights, and conversion behavior. A founder holding 30% common in a company with $50M of preferred preferences gets nothing from a $50M exit; the same founder gets ~30% of a $500M exit. The percentage is identical; the outcome is not.

Related: Preferred Stock · Preferred vs Common Stock · Cap Table · Liquidation Preference · Stock Option

FAQ

What is common stock?
The basic ownership share class of a corporation, held by founders, employees, option-holders (after exercise), and any other parties who own equity that is not preferred. Represents residual ownership in the company after all preferred-share rights are satisfied.

How does common stock differ from preferred stock?
Common is junior to preferred in liquidation (preferred gets paid first), typically has fewer voting and consent rights, and is priced at a discount to preferred via 409A valuation. Preferred is the share class venture investors require; common is what founders and employees hold.

Why is common stock priced lower than preferred?
Because common lacks the rights preferred carries (liquidation preference, anti-dilution protection, protective provisions, registration rights). A 409A valuation reflects this by pricing common at typically 20-30% below the most recent preferred price, which is why employee option strike prices are lower than the headline round price.