Preferred stock is the equity instrument VCs purchase in priced rounds—legally stock with preferences over common stock in dividends, liquidation, and often corporate governance.

How it works

Delaware C-corps authorize preferred series in charter amendments each round. Key terms: liquidation preference multiple (usually 1x), participating vs non-participating structure, anti-dilution (broad-based weighted average common), board composition, and registration rights. SAFEs and notes convert into preferred at qualified financings.

At exit, preferred holders choose conversion or preference recovery depending on price. IPOs typically convert all preferred to common for public float simplicity.

Why it matters

• Founders: Small term changes—participating caps, cumulative dividends— materially shift exit proceeds; counsel review is non-optional.
• Investors: Preferred stock encodes downside protection; enforcement matters most when company performance disappoints.

Common mistake

Assuming 1x non-participating preferred is “standard” without reading side letters—many rounds include nuanced M&A bonuses, seniority, or multiple tranches.

Related ideas

See preferred equity, liquidation preference, and priced round.