Ownership basics
Common stock and preferred stock compared
Understand what separates common stock from preferred stock: liquidation preference, seniority, participation, anti-dilution, and conversion to common.
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A share class is a bundle of rights
A share class groups shares that carry the same rights. Most private companies issue common stock to founders and employees and a separate series of preferred stock to each priced financing. The certificates in a class are individual holdings; the class is where the terms live.
Two shares can have identical quantities and a very different value because their classes differ. That is why an ownership percentage alone never settles what a holder receives in a sale. The SEC’s introduction to stocks describes the basic distinction between common and preferred stock.
What usually differs
The specific rights come from the charter, not from the label. These are the ones a cap table normally has to represent.
| Right | Common stock | Preferred stock |
|---|---|---|
| Liquidation preference | None. Common shares divide what is left. | A stated multiple of the money invested, paid before common. |
| Seniority | Last in line. | A rank among the preferred classes; higher ranks are paid first, equal ranks share proportionally in a shortfall. |
| Participation | Not applicable. | Participating classes take the preference and then share the remainder; non-participating classes take one or the other. |
| Anti-dilution protection | None. | A conversion-price adjustment when a later round prices below the class, commonly broad-based weighted average or full ratchet. |
| Dividends | Usually discretionary, if any. | Often a stated rate, cumulative or not, that accrues until it is paid or forfeited. |
| Conversion to common | Not applicable. | The right to convert, which is what makes an as-converted ownership percentage meaningful. |
Voting, protective provisions, board seats, information rights, and transfer restrictions also differ between classes. They matter to control rather than to the share counts, and a cap table records them only insofar as the governing documents are attached to the class.
Authorization is a limit, not a holding
Each class is authorized for a number of shares in the charter. Authorization caps what may be issued; it is not ownership and it is not an ownership denominator. A class authorized for 15,000,000 shares with 8,000,000 issued has 8,000,000 outstanding shares, and the difference is simply room to issue more.
Raising an authorized count is a charter amendment, which is a company action rather than a bookkeeping change. See Authorized, outstanding, and fully diluted shares for how each count enters a percentage.
Record the class before the certificates
In Cap Table, a class carries its name, type, authorized shares, and original issue price, and a preferred class adds its liquidation multiple, seniority, participating flag, and anti-dilution method. Dated participation caps and dividend terms are appended as amendments with the charter they come from.
Create the class first, then issue certificates into it, so each certificate can be reconciled to the terms that priced it. A class referenced by existing records is protected from deletion, including by closed certificates that explain earlier history. See Configure common and preferred share classes.