Preferred stock is a class of ownership in a company that combines features of both equity and debt. It provides shareholders with priority over common stockholders in receiving dividends and liquidation proceeds. While preferred shareholders typically lack voting rights, they enjoy other benefits, such as fixed dividend payouts and preferential treatment in the event of company liquidation.
Key Features of Preferred Stock
When Is Preferred Stock Issued?
Preferred stock is often issued during later funding rounds, such as Series A or beyond, as it offers institutional investors more security compared to common stock.
How is preferred stock different from common stock?
Preferred stockholders get priority in dividends and liquidation payouts, but they usually don’t have voting rights, unlike common shareholders.
Can preferred stock be converted to common stock?
Yes, convertible preferred stock can be converted to common stock, typically at a predetermined ratio, allowing holders to participate in future growth.
What happens to preferred stock during a liquidation?
Preferred shareholders are paid before common shareholders, often at a specific liquidation preference, but after debt holders.
Do startups always issue preferred stock to investors?
Not always. Early-stage startups may only offer common stock, but preferred stock becomes more common in later funding rounds to meet investor demands.
Or want to know more about pre-seed funding?
