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What Founders Need to Understand About Preference Shares

An article we liked from Thought Leader Alexander Jarvis:

Why do Venture Capitalists want preference shares?

Tl;dr: We are going to learn what preference shares are and that they are different from what you, the founders and your staff get.

Preference SharesI was emailed by a founder who asked the naïve question “Can we just give common shares to investors? Why do we need to give preference shares?”

I’m pretty sure a lot of people don’t have a clue about preference shares, so let’s clear this up for you now. Don’t worry, no one was born knowing everything. You need to learn.

What are preference shares

When an investor invests in your startup they are given a share certificate in return. They, therefore, own a share of your company legally. There are two types of shares (AKA “stock”):

  • Common shares: This is what founders have and start with. You issue your staff options and they turn into common. You have no real special rights (If you negotiate super-voting rights like you read Mark and Evan had, these are a special kind of share class and not normal). One share is the same as all others. Also, there is no such thing as ‘founder shares’, btw.
  • Preference shares or stock: This is a different ‘class’ of shares to common shares. This is what investors get. They’re special, sort of why they are also called ‘preferred stock’. One way to think about preferred shares is like debt with no interest, but repayment happens on exit since there are features you might understand from getting a mortgage. When you create this new class of shares, certain rights and privileges are afforded to them. There is a list of potential rights which we will discuss later.

It is worth understanding that in every new round of investment there will most likely be a new ‘class’ of preferred or preference share which will be issued. Like going up a waterfall, each new class is ranked higher than the other and the money water splashes on them first. When you exit your startup and the water gushes out with cash, the water flows down with the latest class of investor stock getting first dibs on it. You, the founders with common stock are at the...

Read the rest of this article at alexanderjarvis.com...

Thanks for this article excerpt to Alexander Jarvis. 

Image by Pabitra Kaity from Pixabay 

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