Preferred Stock

Preferred stock is a type of stock in a corporation that is issued out to investors in the corporation. The investors often require their stock to have certain preferential terms, rights, and privileges, and so their stock takes the label of preferred stock, as opposed to the common stock, which is taken by the founders of the corporation at the startup. Preferred shares can be issued out in separate tranches, which are sequentially lettered, such as Series A Preferred, Series B Preferred, and so on. Sometimes between the issuance of common stock and preferred stock, initial angel investors invest in a corporation by way of a convertible note, which automatically converts into preferred stock upon the issuance of such stock. The preferences, rights, and privileges of preferred shares typically will include preferences on liquidation, dividends, voting, and redemption, among other preferences. It is up to the corporation, its common stockholders and the investors seeking to purchase preferred shares to negotiate all of the specific terms of the preferred shares. Those terms are often initially set forth in a term sheet, which is provided by the corporation to the potential investors. None of the terms are mandatory; that is, it is up to the corporation, common stockholders and the potential investors to come to an agreement on what is the proper result for all concerned.