Common Stock vs Preferred Stock

In a startup, there are two main classes of stock: common and preferred. Founders and employees receive common stock (or options to buy common stock). Investors in priced rounds receive preferred stock. The distinction is important because preferred stock comes with rights and protections that common stock doesn't have.

Preferred stock holders typically get: liquidation preference (they get paid first in a sale), anti-dilution protection (their ownership is protected if the company raises at a lower valuation), board representation, information rights (regular financial updates), and sometimes dividend rights. Common stock holders get basic ownership and voting rights, but they're last in line when money is distributed.

This difference is why a 409A valuation (for common stock) is typically 20-40% of the preferred stock price — the extra rights make preferred stock more valuable. When a startup IPOs or gets acquired, preferred stock usually converts to common stock (because the special rights are no longer needed), and everyone shares in the proceeds. But in a down exit or liquidation, the preference stack can mean preferred holders get most or all of the proceeds while common holders get little or nothing. Understanding this two-class structure is essential for evaluating what your equity is actually worth in different exit scenarios.

If you're a founder or employee with common stock, you need to understand that your shares sit behind preferred shares in the payout order. In a massive exit, this doesn't matter — everyone does well. But in a modest exit, the liquidation preferences attached to preferred stock can eat up most of the proceeds. Knowing the total amount of preferred stock outstanding and the preference terms helps you calculate the "breakeven" exit price — the point at which common shareholders actually start making money.