Preferred Equity

Preferred equity is a class of shares carrying rights that common shares do not — priority in a liquidation, protective vetoes over certain company actions, and often board representation. It is the standard instrument for priced venture rounds.

Issuing preferred requires agreeing a valuation, which is why it takes longer and costs more to close than convertible instruments. In exchange, everyone knows exactly what they own.

A lead investor negotiates terms, sets the price per share, and other investors follow on the same terms. Each round typically creates a new series with its own preferences, stacking on top of earlier series.

The instrument is used wherever the investment is large enough to justify the legal cost and the company is mature enough to be priced with confidence.

• Liquidation preference — how much comes back before common shareholders see anything
• Participation — whether preferred also shares in the remainder after its preference
• Anti-dilution protection — adjusts conversion price if a later round prices lower
• Protective provisions — actions requiring preferred consent
• Board composition and pro rata rights

• Stacked preferences across multiple series can leave common holders with little in a modest exit
• Participating preferred is materially more expensive to founders than it first appears
• Anti-dilution provisions bite hardest in exactly the rounds where the company is weakest
• Protective provisions can block decisions the board otherwise supports