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What is Preferred Stock?

Picture of a large tomato and a small tomato, symbolizing preferred stock and common stock

Preferred stock typically is issued to venture capitalists or other institutional investors. Its name is derived from the fact that it has significant “preferences” relative to common stock, which is the basic equity security that is issued when a corporation is formed.

Common stockholders’ principal right is to vote on the election of directors and on other fundamental corporate matters. In addition, common stock has the potential to increase in value if the corporation performs well financially.

Preferred stock, in contrast, has rights, privileges, preferences and restrictions superior to those of common stock. These might include, for example:

  • A prior claim on earnings, assets and dividends
  • Convertibility to common stock (to take advantage of the corporation’s increased value)
  • Superior voting rights
  • The right to veto certain types of corporate transactions
  • The right to elect a specified number of directors on the corporation’s board
  • The right to have shares redeemed (repurchased) by the corporation under certain circumstances

Specific preferences are negotiated between the investor and the existing stockholders at the time the investment is made.

Photo credit: Chrissy Nerantzi via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

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