Should I offer common or preferred shares to investors?

Typically, founders' shares are common. In most companies, subsequent investment rounds sell preferred shares to investors, but some companies sell common shares to investors. The reason for offering preferred shares to investors is that insiders (like founders and officers) have a huge amount of control over the success or failure of the company whereas outside investors have so little control.

The preferences that come with preferred shares lessen their almost intolerable level of risk. Preferences reduce risk to their owners, and generally fall into two categories: downside insurance and upside insurance.

  • Downside insurance preferences provide shareholders with protections in case the company does not do particularly well; one example is liquidation rights, in which preferred shareholders get a multiple of their initial investment back before a general distribution of the proceeds of a liquidity event.
  • Upside insurance preferences provide shareholders with some additional benefits in case the company does extremely well; one example is registration rights, in which preferred shareholders get the ability to sell their shares at the time of the initial public offering.

For additional details, see blog post, Should You Sell Investors Common or Preferred?

Related Question:

How do I create or edit an investment round?


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