Glossary - Common Stock
Common stock represents ownership interests in corporations, granting holders the right to vote on corporate matters, including the election of the board of directors, and to receive dividends. It is the basic equity security that a corporation issues. In the event of liquidation, common stockholders have rights to a company's assets only after bondholders, preferred shareholders, and other debt holders are paid in full.
Also known as
- Ordinary Shares
- Equity Shares
Use cases examples
- IPO Prospectus: The company issued 10 million shares of common stock to the public as detailed in the prospectus, outlining voting rights, dividend policies, and liquidation preferences.
- Shareholder Agreement: Under the shareholder agreement, holders of common stock are required to vote on the appointment of board members and other significant corporate decisions.
Considerations for investors
- Investors should analyze the rights, preferences, and restrictions of common stock in relation to other classes of stock, particularly preferred stock, to understand their position in the event of a liquidity event.
- The voting power that comes with common stock can be a double-edged sword; while it offers a say in corporate governance, it may also introduce risks if the direction of the company shifts unfavorably.
Considerations for founders
- Founders should consider the dilution of ownership and control that occurs when issuing common stock, especially during funding rounds.
- Understanding the rights and privileges attached to common stock, including how dividends are decided and paid, is crucial for founders.
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