Investor Perspective on Preferred Stock

Youโ€™re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.

Investors like preferred stock rounds for a number of reasons:

  • The price is set and the investor knows what percentage of the company they own.

  • If an investor has participated in non-priced rounds like convertible debt or convertible equity, they will finally know what they have bought for their money. This is the case as long as the preferred stock round is a qualified financing that converts the convertible notes into stock shares and any convertible equity into actual stock shares on the cap table.

  • The investors get specific preferences reflected in the definitive documents that can improve their outcomes in both good and bad scenarios, and sometimes give them a measure of control beyond what their specific share count would provide.

VCs almost universally insist on preferred stock, because they want to price the stock and have as much upside in good times and as much control in bad times as they can. You will start to get a feel for how this works as you read through the specific types of preferences below.

Terms of Preferred Stock

The term sheet for a preferred stock offering will contain the following key elements:

  • The type of security (for example, series A convertible preferred stock). (Note that the word โ€œconvertibleโ€ here refers to the fact that the preferred converts to common.)

  • The amount of money being raised in the round (referred to as an โ€œofferingโ€).

  • Youโ€™re reading a preview of an online book. Buy it now for lifetime access to expert knowledge, including future updates.
If you found this post worthwhile, please share!