Cap table & dilution
Share classes
Also called Ordinary vs preferred, Common vs preferred stock
The different types of share a company issues — ordinary shares for founders and employees, preferred shares for investors — carrying different rights on payout, voting and protection.
In plain English
Ordinary shares — common stock in American usage — are the base layer. They vote, they own the residual value of the company, and they are paid last in any distribution. Founders and employees hold them.
Preferred shares sit above. They carry a liquidation preference that pays them out first, usually anti-dilution protection, often protective provisions giving veto rights over specified decisions, and sometimes a board seat. Each priced round typically creates its own class — Series Seed Preferred, Series A Preferred and so on — with its own terms, stacked in an order set by the documents.
The gap between the classes is invisible in a great exit and decisive in a mediocre one. A company sold for ten times what investors paid pays everyone handsomely and the preference is a rounding error. A company sold for less than the total preferred money raised may pay ordinary shareholders nothing at all, while preferred holders recover their capital. Since most exits are modest, this scenario is far more common than the pitch deck contemplates.
The valuation implication is often missed. A headline price of "$500m" is a price for preferred shares with downside protection. Ordinary shares in the same company are worth measurably less, which is why option strike prices — set by an independent valuation — are a fraction of the last preferred price.
What it means for your cheque
Find out which class you are being offered and get the same class as the lead if you possibly can. Small cheques are sometimes issued ordinary shares at the preferred price, which means paying for protection you do not receive. In a good outcome it makes no difference; in the far more likely modest outcome it decides whether you get anything.
If ordinary shares are genuinely the only option — common in friends-and-family rounds and in some crowdfunding structures — then adjust the price you are willing to pay, or the cap you are willing to accept, to reflect what you are actually buying. The instrument is worse, so it should be cheaper.
Do the arithmetic
A $30m exit split between ordinary and preferred
Investors have put in $20m across two rounds, all with a 1× non-participating preference. Preferred holders own 45% of the company on an as-converted basis. The company sells for $30m.
| Total preference owed | $20,000,000 |
|---|---|
| Preferred holders take their preference | $20,000,000 |
| Remaining for ordinary shareholders | $10,000,000 |
| Preferred as-converted alternative | 45% of $30m = $13.5m — less than the preference, so they take the preference |
| Founders and employees share | $10m across 55% of the company |
| An angel holding ordinary shares at 1% | about $182,000 rather than the $300,000 that 1% of $30m implies |
The exit was worth $30m and ordinary shareholders divided $10m of it. The share class, not the sale price, determined the outcome.
At the table
What to negotiate
- Ask directly which class you are being issued and whether it is the same as the lead's.
- If you are offered ordinary shares at the preferred price, ask for the preferred class or a lower price. Both are reasonable requests.
- Ask for the full preference stack — how much preferred money sits ahead of ordinary shares in total.
- Check whether the preference is participating or non-participating; the difference is large.
- For UK investors, note that SEIS and EIS relief requires shares with no preferential rights to assets on a winding up — so relief-eligible shares are, by design, ordinary.
Around the world
How this differs by market
Delaware preferred stock with a 1× non-participating preference is the seed default and is genuinely standard.
LATAMClass structures usually follow the Delaware or Cayman parent; the local operating entity often has a single class.
EUUK rounds often use "A ordinary" shares carrying preferences. Note the SEIS/EIS tension: relief-qualifying shares cannot carry preferential asset rights.
APACSingapore follows US-style preferred structures closely. Japanese and Korean rounds use their own class-share regimes with different mechanics.
Share classes: common questions
Are preferred shares always better?
Why are employee option strike prices so much lower than the last round price?
Can share classes be simplified later?
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