Common stock represents the fundamental unit of equity ownership in a corporation, giving shareholders a proportional claim on the company's assets and earnings along with voting rights on major corporate decisions. When founders start a company or employees receive equity compensation, they typically receive common stock, which sits at the bottom of the capital structure hierarchy in terms of liquidation preference and dividend rights.
Why It Matters
Understanding common stock is essential for angel investors because it defines the baseline equity layer upon which preferred stock structures are built. When investors negotiate preferred stock terms, they're essentially creating a superior class of equity that ranks above common stock in liquidation scenarios and often includes additional protections like anti-dilution provisions. The relationship between common and preferred stock directly impacts founder motivation, employee equity value, and ultimate investment returns—if preferred stockholders receive 1x liquidation preference on $2 million invested and the company sells for $3 million, common stockholders split only $1 million regardless of their ownership percentage.
Example
Consider a startup where founders own 8 million shares of common stock when an angel investor invests $500,000 for 2 million shares of Series Seed Preferred Stock with a 1x liquidation preference. The company is now valued at $2 million post-money (10 million total shares), with founders owning 80% and the investor 20%. If the company sells for $1.5 million, the investor receives their full $500,000 back first, leaving $1 million for common stockholders—the founders receive $1 million instead of the $1.2 million they would have received with straight 80% ownership. This subordination risk is why common stockholders (founders and employees) are highly motivated to achieve valuations well above the total preferred stock invested, where the liquidation preference becomes less significant and percentage ownership drives returns.