What Is Preferred Stock?
When a company is looking to raise money through investors, it can issue one of two types of stock: preferred stock and common stock. Preferred stock is typically sold to venture investors at a much higher price than what founders and employees pay for common stock.
The higher price of preferred stock is justified by the various preferences it receives over common stock. Preferred stock, at a minimum, gives the investors a liquidation preference in the event the company is acquired or otherwise liquidated. Other preferences can include things such as anti-dilution protection, dividend preferences and registration rights.