Common Stock vs. Preferred Stock: Key Differences

One-sentence takeaway: Common stock represents basic ownership in a company, while preferred stock offers specific privileges but typically lacks voting rights. Think of common stock as a general admission ticket and preferred stock as a VIP pass—different perks, different access.

It’s common to wonder about the differences between common and preferred stock, especially in the private markets. Both represent ownership in a company, but they come with distinct rights and privileges. This page breaks down the key distinctions.

Common Stock:

• Voting Rights: Common stockholders typically have voting rights on company matters, such as electing board members or approving major decisions. Think of it as having a say in the company’s direction.
• Dividends: May receive dividends, but these are not guaranteed and are paid after preferred stockholders. Consider dividends a potential bonus, not a guaranteed income stream.
• Liquidation Preference: In a liquidation event (e.g., sale or bankruptcy), common stockholders are last in line to receive proceeds, after creditors and preferred stockholders. They receive what’s left, if anything.
• Higher Growth Potential: Because common stockholders bear more risk, they also have the potential for higher returns if the company performs well. Their ownership stake grows in value along with the company.

Preferred Stock:

• No Voting Rights (Usually): Preferred stockholders typically do not have voting rights, giving up influence for other benefits.
• Dividend Preference: Generally receive a fixed dividend payment, paid before any dividends are issued to common stockholders. This makes preferred stock more like a bond in terms of predictable income.
• Liquidation Preference: In a liquidation event, preferred stockholders have a priority claim on assets, meaning they get paid before common stockholders. This preference cushions their investment in downside scenarios.
• Lower Growth Potential (Typically): While preferred stock offers greater downside protection, its upside potential is usually more limited than common stock. Think of it as a safer but potentially less lucrative investment.

Example: Imagine a company is sold for $10 million. It owes $2 million to creditors and has issued $3 million worth of preferred stock with a 1x liquidation preference. Preferred stockholders would receive their $3 million back first. The remaining $5 million would then be distributed to common stockholders.

Which is Right for You?

The best choice depends on your individual investment goals and risk tolerance. If you’re seeking long-term growth potential and want a voice in company decisions, common stock might be a better fit. If you prioritize income and downside protection, preferred stock might be more suitable.

Learn More:

• Understanding Your Shareholder Agreement
• Liquidation Preference: What Investors Get First
• The Importance of Planning for Liquidity

So here’s what we covered:

• The core difference between common and preferred stock.
• Voting rights, dividend payments, and liquidation preference for each stock type.
• An example of how liquidation preferences work in practice.
• Guidance on choosing between common and preferred stock.
• Links to further resources on shareholder agreements, liquidation preferences, and liquidity planning.