Common Stock

Summary: How Common Stock Works

Common stock is the basic ownership in a company. Founders and employees typically hold common (or options to buy common). It represents the residual value after all debts and preferred shareholder obligations are paid.

Key implication: Common stock is last in line. If a company sells for less than the total invested capital (the liquidation preference stack), common stockholders get nothing.

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Liquidation Preference & the Stack

• Preferred shareholders (investors) usually have a 1x liquidation preference.
• On an exit, they get their money back before common receives anything.
• Only after preferred is made whole does any remaining value flow to common.

This is why founders and employees must watch the gap between:

• The company’s valuation, and
• The total liquidation preference (total money raised with preferences).

Example: A company valued at $50M with $40M in liquidation preferences has only $10M of real value for common. On a $30M exit, common gets $0 because preferred takes the full $30M (up to its $40M preference) and there’s nothing left.