Insights·How-to

Preferred vs common stock: why investors and employees aren't equal at exit

VCs hold preferred shares with liquidation preferences. You hold common stock. In a down-round exit, this difference can mean VCs get paid while employees get nothing.

2025-02-28 · 7 min read

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Article from 2025-02-28 — valuations have moved since

This piece references valuations and round details as they stood at the time of writing. For the current 4-method estimate, see the company pages — refreshed monthly.

Key takeaways

→Investors get preferred stock. Employees get common stock. They have very different rights at exit.
→Liquidation preferences guarantee investors get their money back before common shareholders see anything.
→Participating preferred or multiple-X preferences can extract enormous value before common in down-exits.

When a company has a successful exit, everyone gets paid roughly pro rata. When a company has a mediocre exit, the preferred stockholders get paid first — sometimes leaving very little for common.

Liquidation preference

Standard 'non-participating 1x preferred' means: if the company sells, preferred holders can either take their money back (1× their investment) or convert to common and share pro rata. They choose whichever is higher. In a strong exit, they convert; in a weak exit, they take their money back.

Participating preferred

'Participating preferred' is worse for common: preferred holders take their money back AND share pro rata in what's left. Less common today than in the 2000s, but still appears in down rounds and bridges.

Multiple preferences

Some down rounds carry 2× or 3× preferences. Each $1 invested is guaranteed $2 or $3 back before common sees anything. Stack up several rounds at 2× preference, and a $500M exit can pay $0 to employees.

If your company has done a big down-round recently, check the preference stack. If the preferences total more than 50% of the current valuation, your common stock is effectively worthless unless the company grows significantly from here.

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Preferred vs common stock: why investors and employees aren't equal at exit

Liquidation preference

Participating preferred

Multiple preferences

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