Common Stock vs. Preferred Stock

Stock represents the equity ownership of a company. In the startup world, there are two types of stock broadly: common stock and preferred stock. Common stock is usually something is given in exchange for your effort (sweat stock) whereas preferred stock is something that is given in exchange of the money that you invest in the company. So, usually founders initially have common stock and investors have preferred stock.CommonandPreferredStock.pngInitially, both these stocks have different values. The usual norm is to start with a common stock of $0.01 or $0.001 per share. As the company spends more time and it starts to build some assets or market performance, then the common stock will be slowly gaining in value. Common stock is usually priced at 10% of the preferred stock. The initial common stock is typically issued for some past work that the founders might have done, technology and any other assets.

If the company goes to IPO, all the stock is converted into common stock. Therefore, before going to an IPO the common stock and preferred stock converge. Following are some charts showing the various ways of converging common and preferred stock.

CommonandPreferredStock-1.png

A very aggressive common stock pricing strategy looks like the below

CommonandPreferredStock-2.png

A conservative common pricing strategy looks like the below

CommonandPreferredStock-3.png

 

 

 

 

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  1. Pingback: How start-up equity dilution works for Founders and Early Investors ? – Brandalyzer

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