Preferred vs common stock

A priced round sells newly issued shares at a negotiated price. Unlike a SAFE or convertible note, which postpone the valuation fight, a priced round settles it now. Series A and every round after it are almost always priced. Many seed rounds are priced too, especially when a lead fund wants a board seat and preferred stock.

Founders incorporate and issue themselves common stock (see incorporation and founder equity). Employees get options on common. Investors buy Series Preferred — Series Seed, Series A, Series B — each with charter amendments spelling out rights.

The big idea

Common is a claim on whatever is left. Preferred is a claim that stands in line first, plus extra levers. Headline ownership percentages can mislead if you ignore those levers.

Think of preferred as a mezzanine between debt and common: some of the protection of a lender, some of the upside of an owner. The analogy breaks on a qualifying IPO, where preferred usually converts into common and the extra rights expire.

Why preferred? Venture investors take asymmetric risk. Most portfolio companies return nothing; the ones that work must return the fund (power law). Preferred gives them:

• Economic seniority — a claim on exit proceeds before common (usually 1× non-participating).
• Anti-dilution — protection if a later round prices lower (anti-dilution).
• Control — board seats and protective provisions (control terms).

For employees joining after a priced round, the 409A common-stock FMV is typically a fraction of the preferred price (often ~25–40% early on, converging later). That gap exists partly because preferred has rights common lacks. See employee equity.

Walking through who holds what

Once you have preferred outstanding, every later round stacks another series on top (or pari passu with prior preferred — a negotiation). Convertible instruments from seed should already be cleaned up at the first priced close; if any linger, fix them before you raise again.

Common mistakes

• Reading "I own 2%" as 2% of the headline sale. Common is residual after prefs.
• Treating preferred price as the 409A. Common is usually cheaper because it lacks those rights.
• Ignoring that later series can be senior. Stacking changes common's leftover.

Check yourself

Who typically holds preferred, and who holds common?

VCs buy preferred in priced rounds; founders and employees hold common (or options on it).

Why is 409A common often well below the last preferred price early on?

Preferred has liquidation, anti-dilution and control rights that common does not.

Key takeaways

• Priced rounds sell preferred; founders and employees hold common.
• Preferred's job is seniority, anti-dilution and control — because of power-law risk.
• Common owns the residual, which is huge in a big exit and small in a mediocre one.
• 409A common trades at a discount to preferred for that reason.

Further learning

Next: pre-money and post-money.