Common Stock

The class of shares held by employees and founders — with voting rights but subordinate to preferred stock in liquidation, meaning common holders are paid last when a company is sold.

Common stock is the equity class issued to founders and employees — through direct grants, restricted stock awards (RSAs), or stock option exercises. Unlike preferred stock held by investors, common stock sits at the bottom of the capital structure: in a sale, merger, or liquidation, all preferred stockholders are paid their liquidation preferences before a single dollar flows to common. This subordinate position is why the number of shares or options you hold matters far less than the price at which the company is sold and how much preferred capital is stacked above you in the waterfall.

Employees typically receive common stock through stock options rather than direct grants. An option grants the right to purchase a share of common stock at a fixed price — the exercise price or strike price — set at the fair market value of common stock on the grant date, as determined by a 409A valuation. If the company grows and is eventually sold or goes public at a price above the strike price, the option holder profits from the spread. If the company is sold below the strike price — or below the total preferred liquidation preference — the options are worthless regardless of how many were granted.

One of the most important facts about common stock at startups is that it is systematically valued lower than preferred stock — often 10–30% of the preferred price in early stages. This is not an accounting error; it reflects the genuine economic differences between the two classes. Common stockholders take more risk (subordinate in liquidation, no anti-dilution protection, no veto rights) and accordingly receive shares with lower fair market value per share. The 409A valuation process formally establishes this discount for tax and accounting purposes. When a company says its latest round was at a $500M valuation, that is typically based on the preferred price — the implied common stock value is lower.

At IPO, the distinction between common and preferred largely collapses: all preferred typically converts to common automatically, and all shares participate equally in the public market. This is the moment when employees' accumulated equity value becomes most concrete and liquid — though lockup periods (typically 180 days post-IPO) prevent immediate sale of all shares. In an acquisition, the treatment of employee common stock varies: if the deal is structured as a stock merger, employees may receive acquirer stock; if it's an all-cash deal, common stockholders receive cash for their shares after the preferred liquidation stack is satisfied.

Common vs Preferred: What Employees Are Actually Holding

  • Voting rights: both common and preferred typically carry voting rights, but preferred often has additional veto powers (protective provisions) beyond what votes alone provide.
  • Liquidation: preferred gets paid first (their liquidation preference); common gets whatever remains — which can be nothing in a low-exit scenario.
  • Anti-dilution: preferred has it; common does not — when new shares are issued in a down round, common stockholders are diluted with no protection.
  • Conversion: preferred can convert to common (investors choose to do so if it results in more proceeds); common cannot convert to preferred.
  • Dividend: preferred often has priority dividend rights; common dividends (rare at startups) are paid after preferred.
  • IPO conversion: at IPO, preferred converts to common — the two classes merge and all shareholders participate equally going forward.

How Employees Acquire Common Stock

  • Stock options (ISOs or NSOs): the most common mechanism — right to buy common stock at the 409A-determined strike price during or after employment (subject to vesting and the post-termination exercise window).
  • Restricted Stock Awards (RSAs): direct grants of common stock that vest over time; common for early employees and founders; taxed differently from options (83(b) election is critical).
  • RSUs (Restricted Stock Units): promise to receive common shares upon vesting; common at later-stage and public companies; taxed as ordinary income at vesting.
  • ESPP: allows employees to purchase common stock (often at a discount) through payroll deductions; more common at public companies.
  • Direct purchase: founders and very early employees may buy common shares directly at very low prices set before investor financing.

Evaluating Your Common Stock Position

  • Request the cap table or a summary: understand how many total shares are outstanding, how many are authorized but unissued, and what your percentage ownership actually is.
  • Understand the liquidation stack: ask the total invested capital and whether preferred is participating or non-participating — this determines what exit price you need for your options to be worth anything.
  • Calculate your realistic percentage: options are typically expressed as a number of shares, not a percentage — divide your option count by total fully diluted shares to get your actual ownership percentage.
  • Model exit scenarios: use the strike price, total preferred stack, and ownership percentage to calculate what you'd receive at various exit prices (0.5x last round, 1x, 2x, 5x).
  • Check the exercise window: how long you have to exercise after leaving the company (standard is 90 days; some companies offer 5–10 years) determines whether you can actually afford to realize your equity.
  • Check for 409A valuation history: a declining 409A (common stock value falling) is a warning sign about company health.

Example

An engineer joins a Series B startup and receives options on 100,000 shares of common stock at a $1.50 strike price. The Series B preferred was priced at $10/share; the 409A set common at $1.50 (15% of preferred). Total preferred liquidation stack: $40M. Three years later, the company sells for $80M. After satisfying $40M in preferred (assuming 1x non-participating), $40M flows to common. With 20M common shares outstanding, each common share is worth $2. Her 100,000 vested options yield $2.00 - $1.50 = $0.50/share × 100,000 = $50,000 — a modest return on equity that represents a meaningful portion of the total exit.