Preferred vs Common Stock: The Real Power Play
When an investor writes you a cheque, they don't buy the same shares you hold as a founder. They buy preferred stock — a fundamentally different class of equity.
Common stock is what founders and employees typically hold. It is the residual — after all other claims are settled, common shareholders get what's left.
Preferred stock is what institutional investors receive. It comes with a bundle of special rights:
- Liquidation preference — paid before common in any exit
- Anti-dilution protection — conversion price adjusts in a down round
- Voting rights — often including veto rights on specific decisions
- Information rights — contractual access to financial and operational data
- Pro-rata rights — right to invest in future rounds to maintain ownership
Why It Matters
In a high-value exit, preferred vs common may be minimal — investors convert to common and everyone shares proportionally. In a modest exit, the preference stack pays investors in full before common shareholders see anything. Founders can walk away with very little even from a technically successful exit.
Key Rights That Come With Preferred
- Protective provisions: Certain actions require preferred shareholder approval — sometimes even a minority can block. Understand exactly what actions need this consent.
- Board representation: Preferred investors typically receive one or more board seats. Board control matters as much as cap table.
- Drag-along rights: Preferred investors may compel all shareholders to sell, subject to thresholds.
Evolv's Recommendations
- Every right granted to preferred stock is a constraint on your freedom as a founder.
- Negotiate protective provisions narrowly — routine ESOP grants and standard financing rounds should be carve-outs.
- Pay as much attention to board composition as to economic terms.
- Model the cap table fully diluted — all preferred, ESOP, and convertible instruments — before and after.
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