Glossary - Preferred Stock
Preferred stock refers to a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have dividends that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The specific features of preferred stock can vary greatly depending on the issue.
Also known as
- Preferred Shares
- Preference Shares
Use cases examples
- Certificate of Incorporation: The Corporation is authorized to issue 10,000,000 shares of Preferred Stock, par value $0.01 per share, which may be issued in series with rights and preferences as may be determined by the Board of Directors.
- Investment Agreement: According to the terms of the Investment Agreement, the Investor shall subscribe to 1,000,000 shares of Series A Preferred Stock at a price per share determined pursuant to the Pre-Money Valuation of the Company.
Considerations for investors
- Liquidation preferences - Investors should understand the rank and terms of liquidation preferences of the preferred stock to assess risk and potential returns.
- Conversion rights - The ability to convert preferred shares into common stock can significantly affect an investor's return on investment, particularly in the event of an IPO or acquisition.
- Protective provisions - Investors might seek protective provisions in the terms of preferred stock, such as anti-dilution rights, to protect their investment.
Considerations for founders
- Dilution of ownership - Issuing preferred stock can dilute the ownership percentage of the founder's common stock.
- Control and voting rights - Preferred stock typically does not carry voting rights, but certain rights and protective provisions could limit the founders' control over company decisions.
- Dividend obligations - Preferred dividends may put a strain on cash flow, especially for early-stage companies with limited revenues.
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