The festive season is here! And in the spirit of giving, we've wrapped up a little something for you as well: another nugget of legal knowledge! Let's dive into the difference between common shares and preferred shares together. Don’t worry, we’ll keep it brief - you'll be back to your holiday cheer in no time. 🎶
What are preferred shares and common shares?
Startups can issue different types of shares connected with a wide array of rights and obligations. Common and preferred shares are the most generally used.
Preferred shares are typically owned by VC investors to protect their investment and ensure liquidity. They give their owners higher priority for any dividend payouts before other shareholders. They also carry other preferential rights in relation to exit or future fundraising rounds.
Common shares are typically owned by founders and sometimes also by employees or early investors. They carry voting rights. In terms of any liquidity event, they fall behind preferred shares holders.
Why does this matter?
It’s important to understand what kind of shares are issued and what rights come with them. The biggest takeaway should be that preferred shares are typically created for investors. Preferred shares safeguard their liquidity position and give them the option to cash out their shares in expected scenarios. This is important for any kind of liquidity event where common shareholders have to wait in line to get their payout after preferred shareholders do.
Dos and don'ts
When dealing with common and preferred shares, keep these tips in mind:
In a nutshell
Understanding common and preferred shares is key to navigating the startup investment terrain. While common shares often appeal to those looking for voting power and potential for significant returns, preferred shares attract those seeking stability and consistent dividends.
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