Deal Terms
Preferred Stock
The class of stock issued to venture investors, carrying special rights including liquidation preferences, anti-dilution protection, and governance provisions not available to common stockholders.
Preferred stock is the standard equity instrument for VC investments. Each series (Series A Preferred, Series B Preferred) carries specific rights negotiated at that round:
1. Liquidation preference — paid before common in any exit 2. Anti-dilution protection — shields against down rounds 3. Pro-rata rights — maintain ownership in future rounds 4. Protective provisions — veto rights on major decisions 5. Board seats — governance representation 6. Information rights — access to financial statements
Preferred converts to common at IPO or optionally when advantageous.
In Practice
Series A investor buys $5M of Series A Preferred at $2/share with 1x non-participating liquidation preference. In an acquisition at $50M, investor receives the greater of $5M (preference) or their pro-rata share after conversion — whichever is higher.
Why It Matters
The specific terms of preferred stock — especially liquidation preferences and participation rights — determine how acquisition proceeds are split between investors and founders. These terms are negotiable and materially affect founder outcomes in non-unicorn exits.