Glossary · Funding instruments · Updated
Preferred shares carry special rights that ordinary shares do not: liquidation preference, veto rights, enhanced information, sometimes a priority dividend. They are the class of shares professional investors subscribe to.
The word preferred refers to specific rights, not to a higher nominal value. A preferred share and an ordinary share represent the same fraction of the company; what separates them is the bundle of economic and governance rights attached, set out in the articles.
In practice the split is easy to remember: founders and employees hold ordinary shares, investors hold preferred. That asymmetry is why one sale can produce very different returns depending on which class you hold.
Each round generally creates its own class with a ranking. Series A preferred for the first round, Series B for the next, and so on. On a liquidation, ranking determines the order of payment, and the most recent investors are usually served first.
Example: what the share class changes at exit
A company sells for €12M. Investors contributed €5M for 35%, in preferred shares carrying a 1x non-participating preference.
| Sale price | €12,000,000 |
|---|---|
| Investment by the funds | €5,000,000 for 35% |
| Scenario 1: everyone holds ordinary shares | investors take 35% × €12M |
| Scenario 1: investors receive | €4,200,000 |
| Scenario 1: founders and employees receive | €7,800,000 |
| Scenario 2: investors hold preferred shares | they exercise the 1x preference |
| Scenario 2: investors receive | €5,000,000 |
| Scenario 2: founders and employees receive | €7,000,000 |
| Difference created by share class alone | €800,000 |
Same headline percentage, same sale price, €800,000 of difference. It shows that the number on the cap table is never enough to know what you will actually receive.
Ordinary or preferred shares: the comparison
Both classes represent the same fraction of the company. What separates them is the bundle of rights attached, set out in the articles and the shareholders' agreement.
| Criterion | Ordinary shares | Preferred shares |
|---|---|---|
| Usual holders | Founders and employees | Investors in the round |
| Liquidation preference | No | Yes, usually 1x non-participating |
| Veto rights over structural decisions | No | Yes, a list negotiated in the agreement |
| Periodic reporting as of right | No | Yes, monthly or quarterly |
| Anti-dilution protection | No | Yes |
| Voting rights | One share, one vote | One share, one vote in principle |
| Ranking on a liquidation | Paid last | Paid first, by round seniority |
| Conversion to ordinary | Not applicable | Automatic on a stock market listing |
The heaviest line at exit is the liquidation preference, but the one that bites day to day is the veto right: it decides which choices you can no longer make alone, years before any sale appears.
The common mistake
Focusing on percentage owned while ignoring share class. Holding 60% in ordinary shares against 40% in preferred with extensive vetoes does not mean you control the company.
Frequently asked questions
What is the difference between ordinary and preferred shares?+
Ordinary shares carry no special rights beyond voting and dividends. Preferred shares add negotiated rights: liquidation preference, vetoes over certain decisions, enhanced information and anti-dilution protection.
Do preferred shares ever convert?+
Yes. On a stock market listing, conversion to ordinary shares is generally automatic, because a regulated market cannot operate with multiple classes holding asymmetric rights. Conversion may also be triggered above a defined valuation threshold.
Related terms
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