Introduction
As a Delaware C corporation, your company has at least one class of stock, Common. Your company charter may provide for other classes of stock as well (this is likely if you have undergone an equity financing). Multiple stock classes can accommodate different voting rights and priorities for a payout of assets or dividends, among other things.
- Preferred Stock versus Common Stock
- Adding stock classes
- Multiple classes of Preferred Stock
- Multiple classes of Common Stock
Preferred Stock versus Common Stock
There are two categories of stock classes: Common and Preferred. Preferred Stock is usually given to investors, and holders of this class of stock have the opportunity of getting paid out first if a liquidation event occurs. Common Stock is often given to founders and employees, and in a liquidation event, they get paid out last (which can mean not at all if the funds are not sufficient).
A company can have multiple classes of each type. Multiple classes of common stock are rare (as noted below), but multiple classes of Preferred Stock are expected, e.g., Series Seed Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, and so on.
Adding stock classes: a typical path
A company will usually start with just one class of Common Stock.
When the company takes on its first round of investment, it will typically create its first class of Preferred Stock, for example, Series Seed Preferred Stock. The company now has two classes of stock. There is one class of Common and one class of Preferred Stock.
After a few years when the company has undergone Series A and Series B rounds of investment, they will create two more classes of Preferred Stock: Series A Preferred Stock and Series B Preferred Stock. Now the company has four classes of stock. There's one class of Common and three classes of Preferred Stock (Series Seed, Series A, and Series B).
Multiple classes of Preferred Stock
Why have multiple classes of Preferred Stock? In other words, why do some investors get Series A stock, and some get Series B stock? And still others, Series C? In a standard seniority structure, the different classes of stock each receive different preferences.
Not only does the Preferred Stock get paid out first in relation to Common Stock, but different preferred classes may have different preferences based on their seniority. For example, the Series B stock gets paid out first, then Series A, then Common in a typical seniority structure.
Multiple classes of Common Stock
Although it can be typical to have multiple classes of Preferred Stock, it is less typical to have multiple classes of Common Stock.
Why do some companies have multiple classes of Common Stock? Typically, it's done to maintain control. Let's say you have two Common classes: Common A and Common B. Common B is the stock for the employees of the company and grants one vote per share. Common A is the stock for the founders and may have ten votes per share, as an example. When the founders vote, they have ten times the influence over what happens, even if they have the same number of shares as the average employee.
Not all companies may choose to do this. While this structure gives founders significantly more control than the traditional structure of just one class of common stock with one vote per share, more founder control can mean less investor control. Because of this, investors may avoid investing in companies with this structure or require founders to get rid of it before they invest.
How do I know if I have multiple classes of stock?
Your current company Charter should outline the established classes of stock. In this example, the company only has authorized one class of Common Stock.
In this example, the company has authorized both Common and Preferred Stock.
A complete cap table will also illustrate the designated share classes and equity structure of the company. You can consult with your legal counsel if you are unsure of your company's equity structure.
Sample scenarios and screenshots are for illustrative purposes only.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
Fidelity Private Shares LLC provides cap table management and other administrative services to private companies and their equity compensation plans.
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