Deal Terms
Common Stock
The basic ownership shares in a company held by founders and employees — ranking behind preferred stock in liquidation and carrying fewer special rights.
Common stock is the fundamental unit of equity ownership. Founders receive common stock at incorporation. Employees receive common stock options through equity compensation plans. Common stockholders vote on major corporate matters but have fewer economic protections than preferred stockholders.
In a liquidation waterfall, preferred stockholders (investors) get paid before common stockholders. In modest exits, preferred liquidation preferences can consume all proceeds, leaving common stockholders with nothing.
In Practice
A founder holds 60% in common stock. Investors hold preferred with a 1x liquidation preference on $10M invested. If the company sells for $12M, investors receive $10M first, leaving $2M for common shareholders — the founder nets $1.2M despite 'owning' 60%.
Why It Matters
Understanding how common stock ranks relative to preferred is essential for founders evaluating term sheets. Participating preferred, stacked liquidation preferences, and high preference multiples can dramatically reduce common stockholder proceeds in non-unicorn exits.