Preferred stock and common stock may sound quite similar, but they’re actually quite different.
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What is preferred stock?
Preferred stock is typically sold to investors.
This type is called “preferred” because it has additional rights attached to it, like voting on certain corporate governance matters and selecting board members. Preferred stock is also first in line for payout, which is known as a liquidation preference. This means upon an exit, those who own preferred stock are typically paid out first (before those who own common stock).
What is common stock?
Common stock is for employees, though some investors buy common stock too.
Since common stock doesn’t have additional rights or liquidation preference, it’s seen as less valuable (while the company is still private) and it’s priced at a discount to the preferred stock. When a company goes public, preferred stock is typically converted into common stock. The result is one type of stock, with one price, that anyone can buy or sell on a public stock exchange.