Common Stock

When a company is founded and the shares are split up, nobody thinks about types. Three people take 40, 30 and 30, and what they hold is the same piece of paper. There is no reason to give that paper a name.

The distinction only becomes necessary once outside money arrives, because a founder and an investor have very different things at stake. If the company shuts down, the founder loses a few years while the investor loses the cash they put in. Handing identical shares to two parties carrying different kinds of risk makes the negotiation stall: when things go well everyone is fine, but in the mediocre outcomes the party that loses is always the one who wrote the check.

So companies began issuing a separate class for investors, one with rights that come ahead of everyone else's — recovering money first if the company is wound up, collecting dividends before other holders. That created a need for a name for the shares that already existed, and common stock became the term for the ones with nothing special attached.

Three rights attach to these shares, and all three come as standard with no conditions.

1. Voting. One vote per share at the shareholder meeting, cast on things like electing directors or changing the company's basic rules. Votes track share count, so someone holding 40 percent casts 40 percent of the votes.
2. Dividends. A share of profits when the company distributes them — but only after any class with priority has taken its portion. Startups plow earnings back into product and hiring, so dividends rarely actually go out.
3. Residual proceeds. A payout when the company is sold or wound down. Being last in line is the defining detail here. Debts get repaid, the priority class takes its cut, and whatever remains is divided pro rata.

Putting numbers on that third right shows what these shares really are. Suppose an investor puts in $7.5 million on the condition that they recover their investment before anyone else, a term called a liquidation preference. If the company sells for $23 million, the investor takes $7.5 million off the top and the remaining $15.5 million is split by ownership. But if it sells for $9 million, only $1.5 million is left, and a founder holding 60 percent of the common stock receives $900,000. The ownership stake reads 60 percent while the share of proceeds works out to 10 percent.

The upside follows from the same structure. Sell for $230 million and the $7.5 million taken off the top barely registers; the other $222.5 million splits by ownership. Priority rights do their heavy work in bad outcomes and go almost unnoticed in good ones. Common stock is the mirror image: first to reach zero at the bottom, with no ceiling on top.

The place you see these shares most often is a row on the capitalization table. The three founders sit on the common stock row and each investor round occupies its own. Rows are broken out by class because one percent with different rights attached pays out a different amount when the company is sold.

It is also what employees actually receive when they are paid in equity. A stock option is the right to buy shares at a fixed price, and exercising that right produces common stock. Companies set aside the shares that will go out this way in advance, in what's called an option pool. So when a hiring conversation mentions "0.3 percent," that means 0.3 percent in common stock coming out of the pool.

This class is also the first to feel ownership shrink when new money comes in. Issuing new shares raises the total share count and lowers everyone's existing percentage, which is dilution. Investors frequently negotiate contract terms that shield them from part of it, and whatever they are shielded from lands on the common holders instead.

Once a company goes public, the distinction between classes mostly disappears. At the initial public offering (IPO), priority shares convert into common stock, and what trades on the market is a single class.

"What you get when you exercise options is common stock. It's on different terms from what the investors hold."

Same company, same cap table, but a different position in line when the company is sold.

"This round goes out as preferred and founder equity stays as common stock."

The new investment terms attach only to newly issued shares, leaving existing holdings untouched.

"At that sale price there's almost nothing left for common after the preference comes off."

Once the priority holders recover their money, the remainder available to everyone else is small.

After Pagedeck closed its Series A, Grace ran a session to walk the team through equity. Partway through the option materials, Theo asked whether the shares investors received were the same as the ones the team would get. Grace said they weren't, then worked through three possible sale prices on the whiteboard and wrote out what each one returned. At the low price almost nothing came back; at the high price everyone collected their full ownership percentage.

From then on the session materials carried a table of payouts by sale price instead of a single ownership figure. A document that lists only a percentage invites readers to multiply that percentage by the sale price and assume the result is theirs.

The most common reading is that common stock is simply the worse class. The one with priority attached sounds better by name alone, so the assumption is understandable. But the two classes differ in direction rather than quality. Priority limits the damage in bad outcomes; in good ones, the holder is better off giving that priority up and converting to common to collect pro rata, which is exactly what investors choose to do. Missing this leads employees either to write off what they hold or to be far too optimistic about a modest exit.

The other frequent mistake is expecting the vote to translate into a voice in company decisions. "One vote per share" certainly reads that way. In practice 0.3 percent of the votes never changes an outcome, and most decisions that matter are made by the board or gated by consent provisions written into the investment agreement. Treating the vote as a channel for participation distracts from the thing worth checking, which is not how many votes the shares carry but where they sit in line when the company is sold.