Preference and Common Shares
- 01:46
Detailing the types of shares that are used to invest.
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Preferred shares come with no inherent voting rights. This is so that their issuance won't dilute the voting power of the existing shareholders. Often the founders who don't want to give up any control of the company to compensate for this, they often come with a greater claim to a company's assets in a liquidity event, e.g. The company goes bankrupt and sometimes they also have an annual dividend income. Common shares, on the other hand, have voting rights, but have less claim to financial returns compared to preferred stockholders. If the company were to become bankrupt. Common shareholders are the last to be paid out to preferred stock usually has certain rights or preferences that rank higher than common stock or ordinary shareholders. Preferred stock has senior rights compared to common stock in the event of a liquidation bankruptcy. Also, it may have such things as the ability to exercise options at a significant discount to the preferred stock price. For example, if a company issues preferred stock to investors at $1 per share, the preferred stock could be converted into common stock just prior to an IPO on a one-to-one basis.
This may allow preferred stockholders to get common shares at a super cheap price.