Preferred Stock
Definition
A class of stock with special rights that common stock does not have — typically including liquidation preference, anti-dilution protection, dividend rights, and sometimes board seats. Preferred stock is what investors receive when they invest in a startup. It sits above common stock in the payment hierarchy.
Real-World Example
A VC invests $20M in Series B preferred stock at $10/share. Their preferred shares come with a 1x liquidation preference, weighted-average anti-dilution, a board seat, and pro-rata rights to invest in future rounds. If the company is acquired, they get their $20M back before any common stockholder is paid.
Common Mistake
Using the preferred stock price from a fundraise to value your common shares. If the Series B price is $10/share, your common stock is NOT worth $10/share. Common stock lacks the protections of preferred stock and is typically valued at 60-80% less in a 409A valuation.
Why It Matters
The distinction between preferred and common stock is why the headline fundraising valuation is misleading for employees. Understanding preferred rights helps you realistically value your equity.
Related Terms
Want to learn one equity concept per week?
Read the Newsletter