Preferred vs Common Stock

Common stock is the basic ownership share class issued to founders and employees, while preferred stock is the separate class issued to investors. Preferred carries additional economic and control rights, most notably a liquidation preference, anti-dilution protection, and specific voting and consent rights. In a startup, both share classes represent ownership in the same company, but they pay out differently in an exit and vote differently on key decisions.

Founders and employees hold common stock from day one (or options that exercise into common). Investors in priced rounds receive Series Seed Preferred, Series A Preferred, Series B Preferred, and so on, each typically with its own terms. The standard preferred rights include a 1x non-participating liquidation preference (the investor gets their money back before common in a sale), broad-based weighted-average anti-dilution (the investor's price adjusts down if a future round prices lower), protective provisions (specific decisions require preferred approval), and pro-rata rights (the investor can maintain their percentage in future rounds). The 409A valuation typically prices common stock at a meaningful discount to the preferred price set in the most recent priced round, often around 20 to 30 percent below, which is why employee strike prices are lower than the headline round price.

What founders get wrong: Treating preferred as just "investor shares." It is a different class with different cash flows in an exit and different voting power on board, financing, and sale decisions. The structure determines who actually gets paid and who actually decides.

Related: Liquidation Preference · Cap Table · Term Sheet · Dilution

FAQ

Why do investors require preferred stock instead of common?
Preferred carries economic protection (liquidation preference, anti-dilution) and control rights (protective provisions, board seats) that common does not. Investors require it to manage downside risk and influence key decisions.

Do founders ever hold preferred stock?
Almost never. Founders hold common stock, and investors hold preferred. In rare secondary transactions, founders may convert some common into preferred to participate in a tender offer, but it is uncommon.

What is the difference between common stock and an option?
Common stock is an issued ownership share. An option is the right to purchase common stock at a fixed strike price (set by a 409A valuation) and only becomes stock when exercised, usually after vesting.