Preferred Stock

Also called: Preferred shares, Preferred

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.

Pitch deck pillar pages

Long-form deep dives on the slides Preferred Stock most often shows up on.

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