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Common and preferred stock differences

On Behalf of | Oct 13, 2021 | Business Formation And Planning |

If you are considering creating a startup and deciding whether to issue common stock, preferred stock, or both, then it is important that you understand the difference between the two, and why one may be better than the other. In Texas, there is a lot of commercial activity, so it is crucial that you know what makes these stocks different from each other.

Common vs. preferred stock

Both common and preferred stock are pieces of ownership of the company. As a startup, if you want to raise money during business formation and planning, selling stock is a common choice. The decision about the mix of stock you offer between common and preferred is crucial, however.

If the company goes fails or goes bankrupt, common stock and preferred stock differ in who gets priority in the sales of the remaining assets. The company will need to sell off whatever it has left. After secured and unsecured creditors are paid, the remaining money first goes to preferred stockholders to match the amount of ownership that they hold, and then any leftover money goes to common stockholders. You generally won’t be expecting the company to go under, but because of this priority afforded to preferred stockholders, preferred stock tends to have a higher price on the market than common stock.

If you are selling stock to raise money, then you can charge more for preferred stock than common stock, knowing that investors will value this priority system. Think about whether issuing both kinds of stock is right for you and your plans and if you want to reward early investors by giving them preferred stock instead of common. It’s just one more tool to use to raise money as a startup.