Deal Terms
Common Stock
Last updated
Quick Answer
The standard share class held by founders and employees. Common stock has lower priority than preferred stock in liquidation events but participates fully in the company's upside above the preferred stock liquidation stack.
Common stock is the foundational equity class in a corporation, held primarily by founders, employees, and early advisors. Unlike preferred stock (held by institutional investors), common stock typically has no special protective rights — no liquidation preference, no anti-dilution, and limited voting rights on certain matters.
Employee stock options (ISOs and NSOs) convert into common stock upon exercise. The 409A valuation, which determines the exercise price for options, is always a valuation of common stock — and is typically a significant discount to the preferred stock price (often 15–30% lower) because common stock lacks the protective rights of preferred.
In an exit, common shareholders receive proceeds only after preferred shareholders have been paid their liquidation preferences. In a successful exit at a high multiple, preferred often converts to common and everyone shares pro-rata.
In Practice
A company has 8M shares of common (founders and employees) and 2M shares of Series A Preferred. The company sells for $50M. Series A investors have a $5M 1x non-participating liquidation preference. After the $5M preference is paid, investors find that converting to common gives them 20% of $50M = $10M, which is better than $5M, so they convert. All 10M shares (8M common + 2M converted preferred) share $50M pro-rata: $5/share.
Why It Matters
Founders and employees hold common stock. Understanding how common stock ranks below preferred in liquidation — and how liquidation preferences can eliminate common stock value in modest exits — is essential for setting realistic expectations about exit proceeds. This is especially important when communicating option value to employees.
VC Beast Take
The gap between the preferred stock price and common stock (409A) price widens as companies raise more capital at higher valuations. An employee joining at Series B might receive options with an exercise price that's 30% of the preferred price — which sounds great until a down round reprices the preferred and the 409A follows. Always understand what your common stock is worth at realistic exit scenarios, not just theoretical maximum valuations.
Related Concepts
Further Reading
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The Founder's Guide to Understanding Your Cap Table
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What Happens During a Down Round: A Step-by-Step Breakdown
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Best Cap Table Management Software in 2026: Carta vs Pulley vs AngelList
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How to Write an LPA: The Limited Partnership Agreement Guide for Fund Managers
A practical 2026 guide for venture capital and private equity fund managers on drafting, negotiating, and operating under a Limited Partnership Agreement (LPA): key sections, ILPA standards, costs, lawyer selection, and common mistakes.
Comparisons
Frequently Asked Questions
What is Common Stock in venture capital?
Common stock is the foundational equity class in a corporation, held primarily by founders, employees, and early advisors. Unlike preferred stock (held by institutional investors), common stock typically has no special protective rights — no liquidation preference, no anti-dilution, and limited...
Why is Common Stock important for startups?
Understanding Common Stock is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Common Stock fall under in VC?
Common Stock falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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