Investors often ask for rights to be paid back first in exchange for their investment. The way these different rights are handled is by creating different classes of stock. (These are also sometimes called classes of shares, though that term has another meaning in the context of mutual funds.)
βDefinitionβ Two important classes of stock are common stock and preferred stock. In general, preferred stock has βrights, preferences, and privilegesβ that common stock does not have. Typically, investors get preferred stock, and founders and employees get common stock (or stock options).
The exact number of classes of stock and the differences between them can vary company to company, and, in a startup, these can vary at each round of funding.
βconfusionβ Another term youβre likely to hear is foundersβ stock, which is (usually) common stock allocated at a companyβs formation, but otherwise doesnβt have any different rights from other common stock.*