“Preferred Stock” is an Equity Security of a Corporation, the shares of which represent the Stockholders’ corresponding ownership of the Corporation and entitle these Stockholders to certain enhanced privileges, protections, and preferences as Preferred Stock relative to Common Stock.
These privileges, protections, and preferences of Preferred Stock can be summarized generally as follows:
- Information Rights: delivery of monthly/quarterly/annual Financial Statements; delivery of Budget information; inspection of Books and Records; Board appointment and Board Observer Rights; ability to consult with and advise management;
- Economic Rights: Liquidation Preference; Dividends; Anti-Dilution Protections; Demand Registration Rights; Piggyback Registration Rights; Co-Sale Rights (also known as Tag-Along Rights); Rights of First Refusal; Drag-Along Rights; and
- Control Rights: Board appointment rights; Board Protective Provisions (which require the Directors appointed by the Preferred Stock to approve various corporate and operational matters); Stockholder Protective Provisions (which require the holders of Preferred Stock to approve various significant corporate matters); and Drag Along-Rights.
Because of these enhanced privileges, protections and preferences, Preferred Stock is considered to be more valuable than Common Stock. Not surprisingly, Venture Capitalists, Private Equity Investors, and many Angel Investors structure their investments in Startups using Preferred Stock, including Series Seed Preferred Stock and Series A Preferred Stock Financings.
Successive Preferred Stock financings typically are designated as series, e.g., Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, etc. Our record for successive Preferred Stock Financings was up to Series M Preferred Stock for a biotech company that eventually was acquired.