Preferred Stock

What is Preferred Stock?

Preferred stock is a class of ownership with special rights not available to common stockholders. Venture investors receive preferred stock with liquidation preferences, anti-dilution protection, and often board representation.

The "preferred" in preferred stock refers to payment priority: preferred shareholders get paid before common shareholders in a sale or liquidation.

Key Preferred Stock Rights

• Liquidation preference: Get investment back first (1x), or more (2x).
• Anti-dilution: Protection if future rounds are at lower valuations.
• Voting rights: Often includes board seats and veto power on major decisions.
• Conversion rights: Can convert to common at any time.

Why Investors Want Preferred

Preferred stock provides downside protection. If the company sells for less than expected, preferred shareholders recover some or all of their investment before common shareholders get anything. This reduces investor risk.

Formula

• Preferred Stock Value = Shares × Original Issue Price
• Liquidation Value = Shares × Price × Preference Multiple

Example

Series A preferred terms:

• Investment: $3M for 2M shares
• Price per share: $1.50
• Liquidation preference: 1x non-participating
• Anti-dilution: Broad-based weighted average
• Board seat: 1 of 5

These shares have rights that common stock doesn't have.

Related Terms

Common Stock

Basic ownership shares with voting rights but no special preferences, typically held by founders and employees.
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Liquidation Preference

The right of preferred shareholders to receive their investment back before common shareholders in a sale or liquidation.
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Fully Diluted Shares

The total number of shares that would exist if every option, warrant, and convertible instrument were exercised.
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