Full Definition
Common stock represents basic ownership in a company and is typically held by founders, employees, and sometimes early angel investors. Unlike preferred stock held by institutional investors, common stock has standard voting rights but no special protections.
Common Stock vs Preferred Stock
- Common stock ranks below preferred in liquidation events
- Typically has basic voting rights (one share, one vote)
- No liquidation preferences or anti-dilution protections
- Lower price per share (important for employee stock options)
- Common stock value is determined by 409A valuation
Why the Distinction Matters
In an exit scenario, preferred stockholders get paid first. If a company sells for less than total invested capital, common stockholders (founders and employees) may receive nothing while preferred stockholders recover their investment through liquidation preferences.
Real-World Example
Founders hold 5 million shares of common stock at $0.001/share, while Series A investors hold 1 million shares of preferred stock at $5/share.
Related Terms
A class of shares with special rights and preferences over common stock, typically held by investors.
Ownership interest in a company, represented by shares of stock.
The right to buy company shares at a predetermined price, commonly used as employee compensation in startups.
An independent appraisal of a private company's fair market value, required for setting stock option exercise prices.
The right of preferred shareholders to be paid before common shareholders in a liquidation event.
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