Preferred Stock

TL;DR

The equity class issued to investors, carrying special rights such as liquidation preference, anti-dilution protection, and protective covenants.

Preferred stock is what investors typically buy in priced rounds. It carries economic rights (liquidation preference, dividend rights, anti-dilution) and control rights (board seats, protective provisions, consent rights on certain corporate actions). Each round typically issues a new series of preferred (Series A Preferred, Series B Preferred, etc.) with its own terms.

Preferred stockholders convert to common on IPO. In M&A, preferred holders elect either to receive their preference amount or to convert to common and share pro rata, depending on which yields more.

Worked example

Series A holds 2M preferred shares with 1× non-participating preference at $10/share ($20M total preference). At a $50M sale, preferred receives max($20M preference, 2M ÷ 10M total × $50M = $10M as-converted) = $20M; common splits remaining $30M.

Common pitfalls

• Stacking preferred series with conflicting protective provisions.
• Granting too many consent rights and slowing down corporate actions.
• Ignoring how participating preferred changes exit math.

When this shows up in a pitch deck

Term-sheet content; not directly on the deck.

Related terms

• Common Stock — The base equity class held by founders and employees, with voting rights but no preference rights or dividends.
• Liquidation Preference — The right of preferred shareholders to be paid a defined amount before common shareholders receive any proceeds in a liquidation event.
• Participating Preferred — A liquidation preference structure where preferred holders receive their preference and also share pro rata in the remaining proceeds — a 'double dip'.
• Anti-Dilution (Weighted Average) — A standard anti-dilution provision that adjusts a prior preferred holder's conversion price using a formula weighted by the size of the down round.
• Term Sheet — A non-binding document outlining the principal terms of a proposed financing, used to align investor and founder before legal documents are drafted.

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