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Back to basics: what is preferred equity?

Paul Clark
Paul Clark
Last updated: June 10, 2024
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What is preferred equity?

Angels invest in “convertible preferred equity” rounds.

What does this mean?

1)      Equity: equity simply means a share in the company. Angels buy a piece of a company; they don't lend money to them

2)      Preferred: A preference means that this kind of equity has some special rights, the most important being that it has first claim on the proceeds from a liquidation event (i.e. when the business is sold or the assets are disposed)

3)      Convertible: convertible means the owners of preferred shares can “convert” them, when they want to, into common shares at a predetermined ratio (initially 1 preferred share becomes 1 common share, though this can change over time)

How is it different from founder stock or common equity?

Founders (management teams, employees, and others (but not investors) who get equity in the company) own common equity. It has most of the same rights, but doesn’t have the liquidation preference.