Preferred stock

A class of shares ranking ahead of common stock for dividends and in a wind-up, usually paying a fixed or formula-based dividend and usually carrying no vote.

Example

In a liquidation, preferred holders are paid their stated amount in full before ordinary shareholders receive anything.

Important

Preferred stock sits between debt and common stock in ranking, but it is not debt - its dividend can normally be suspended without triggering a default.

Related terms

  • Common stock — An ownership share in a company that carries a residual claim on its assets and earnings - whatever is left after every creditor and preferred holder has been paid - usually together with a vote on certain corporate matters.
  • Residual claim — A right to what is left over after all other claimants have been satisfied. Ordinary shareholders hold a residual claim, which is why they are paid last in a wind-up and why nothing is guaranteed to them.
  • Shareholder — Someone who owns shares, equity, in a company.
  • Dividend — A distribution of cash (occasionally shares) from a company to its shareholders, declared at the discretion of the board out of the company's available profits.

Lessons that explain it

  • A cap table is a list of who owns what, and it only ever gets longer — A capitalisation table records every share, option and convertible claim in a company. Ownership percentages depend on whether you count only issued shares or everything that could become shares. (9 min)
  • A director appointed by an investor owes duties to the company, not to that investor — Board directors generally owe fiduciary duties to the company and its shareholders as a whole. An investor-appointed director who puts their fund's interests first can breach those duties, which is the central tension in startup governance. (12 min)
  • Two shareholders can own the same percentage and receive very different amounts — Common and preferred shares can represent the same ownership percentage, but preferred shares usually come with rights - especially liquidation preferences - that decide who gets paid first when a company is sold. (10 min)
  • What a share actually is: last in line, and why that is the point — A share of common stock is a residual claim - everything that is left after every other claimant has been paid. That single fact explains most of what equities do. (9 min)
  • Run the waterfall at three exit values, and the preference type becomes obvious — A 1x non-participating preference returns the investment or the investor's share, whichever is higher. A participating preference returns the investment and then a share of the rest. The difference is largest at modest exits. (13 min)

All 578 terms in the Investing glossary