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 read · Level 3
The distinction between common and preferred is where many angels first discover that a percentage is not an outcome. I think anyone holding common stock in a venture-backed company should build a simple payout table early, because the answer at a modest exit is often zero, and knowing that changes how you think about the investment.
Most startups issue two broad kinds of equity:
Type Usually held by Typical rights Common founders, employees, some angels basic ownership and voting Preferred investors in priced rounds common rights plus preferences and protections
The most important preference is the liquidation preference: when the company is sold or wound up, preferred holders receive a set amount back before common holders receive anything.
Suppose investors put 4,000,000 into preferred shares with a 1x non-participating liquidation preference, owning 25% of the company. On a sale, they take the greater of their 4,000,000 back or their 25% share of proceeds.
Sale price Preferred gets Common gets 3,000,000 3,000,000 (all of it) 0 12,000,000 4,000,000 (preference beats 25%) 8,000,000 40,000,000 10,000,000 (25% beats preference) 30,000,000
At a low sale price, common holders can receive nothing even though they own 75% of the company. Preferred shares often carry other rights too: protective provisions giving veto over certain decisions, information rights, anti-dilution protection and board seats.
Because ownership percentage alone does not tell you what you will receive. An angel holding common shares in a company with heavy preferences may see little from a modest exit.
It also explains why later investors can seem to accept high valuations: the preference protects much of their downside, while common holders bear it.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
An angel with common shares. The angel owns 2% as common. The company has raised 20,000,000 in preferred rounds with 1x non-participating preferences, and investors own 50%.
The company sells for 18,000,000. Preferred holders take the greater of 20,000,000 or 50% of 18,000,000 (9,000,000), so they take all 18,000,000. Common holders, including the angel, receive nothing.
If the sale were 60,000,000, preferred holders would take 50% of 60,000,000 = 30,000,000, above their 20,000,000 preference. The remaining 30,000,000 goes to common holders; the angel's 2% of the company is 4% of the common pool, so the angel receives 1,200,000.
Assuming your percentage ownership translates directly into your share of a sale price, without checking the preferences ranked ahead of you.
Confirm whether you hold common or preferred, and which series.
Add up liquidation preferences for every preferred series and note whether any are participating or above 1x.
Calculate what you would receive at a low, middle and high sale price.
When investing in a private company or evaluating what an existing stake might be worth at exit.
Do not assume all preferred shares have the same rights; terms differ by round and must be read in the documents.
Reporting on startup acquisitions has described cases where companies sold for sums below the total capital raised, with investors' liquidation preferences absorbing most or all proceeds, and founders and employees holding common stock receiving little or nothing despite a headline sale.
A reported acquisition price tells you little about what common holders receive until preferences are subtracted.
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