Preferred stock is a class of shares with special rights and protections that investors receive in venture capital financing rounds. Key rights include liquidation preference (getting paid first in an exit), anti-dilution protection (price adjustment in down rounds), voting rights on protective provisions, board representation, and information rights. Founders and employees hold common stock, while investors hold preferred stock that converts to common in an IPO or favorable exit.
When investors put money into a startup, they almost always receive preferred stock, not common stock. Preferred shares come with protections that common shares do not have.
Understanding the difference matters because these protections affect how exit proceeds are distributed and who gets paid first.
Liquidation preference: investors get paid back before common shareholders in an exit.
Anti-dilution protection: conversion price adjusts if a down round occurs.
Voting rights: protective provisions on major decisions (selling the company, raising more capital, changing the charter).
Board representation: right to appoint board members.
Information rights: access to financial statements and company updates.
Founders and employees hold common stock (or options to purchase common). Investors hold preferred.
In a successful exit, preferred stock converts to common (1:1 usually) when common payout exceeds the liquidation preference.
In a modest or down exit, preferred shareholders get paid first. Common shareholders may get little or nothing.
Not understanding that preferred rights compound across rounds. Each round adds another layer of preferences above common.
Ignoring participating preferred terms. These let investors double-dip: get their money back AND share in remaining proceeds.
Looking for investors?
Browse 950+ European investors filtered by stage, sector, country, and check size.
Explore the investor directory