Private Market Glossary

What are preferred shares?

Preferred shares are shares of a company that typically receive priority for dividends or liquidations before common shareholders and may also carry other rights that holders of the company’s common stock lack. In many cases, preferred shares, also known as preferred stock, have bond-like characteristics, especially at public companies. Still, preferred shares are equity stakes. However, the terms of preferred shares can differ from company to company.

Preferred shares definition - Forge

A better understanding of preferred shares

Preferred shares can mean different things in different situations, but the general reason why they’re called preferred is that these shareholders would typically receive dividends or liquidation payouts before common shareholders, which could come in handy in the event a company faces financial difficulties and needs to liquidate. Preferred shares also often carry other rights that holders of the company’s common stock lack.

Private market investors, such as venture capital funds, often receive preferred shares of private companies, while employees generally receive common stock. In contrast, preferred shares might be available for purchase on a more general basis at public companies. Depending on the terms that a company offers, preferred shares might have reduced or nonexistent voting rights. However, this tends to be more common at public companies, while private company preferred shareholders might retain or have increased voting rights, as well as potentially have benefits like anti-dilution protection.

What role do preferred shares play in the private market?

Preferred shares are a class of shares that give private market investors the opportunity to potentially reduce risk.

By having a priority claim to dividends or liquidations, preferred shareholders can potentially still get at least some of their money back in the event that a startup does not succeed. Plus, potential benefits like anti-dilution measures, which can limit the extent to which existing preferred shareholders have their stakes diluted when a company takes new funding (which generally requires issuing new shares to the new investors), can help protect the value of preferred shares. So, private market shareholders likely want to clarify if they have common stock or preferred stock, as that can influence the shares’ value. A private market investor might be more willing to take a chance on a high-risk/high-reward startup, for example, if they can receive preferred shares.

What are some examples of preferred shares?

Preferred shares can come in different forms, such as:

  • Convertible: Convertible preferred shares have the option to convert to common shares, which could be beneficial if a startup eventually has an initial public offering (IPO), for example.
  • Non-Convertible: In contrast to convertible preferred shares, non-convertible preferred stock does not convert to common stock.
  • Cumulative: Cumulative preferred shareholders retain the right to receive past dividends owed if a company suspends dividends, before the company can then start paying out dividends again to common shareholders.
  • Non-Cumulative: Non-cumulative preferred shares do not receive back pay for missed dividends, unlike cumulative shares.

Frequently asked questions about preferred shares

How do preferred shares work?

Preferred shares often give dividend or liquidation priority to preferred shareholders before common shareholders, as well as often giving other rights to their holders that common shareholders lack.

How to buy preferred shares ?

Buying preferred shares depends on the company. For private market investors, a company might offer preferred shares to external investors like venture capital funds, whereas public company preferred shares could potentially be purchased through a broker.

What is the difference between preferred shares and common shares?

Preferred shares and common shares can have several differences, depending on the terms set by the company. The main difference is usually that preferred shareholders have first priority when it comes to dividends or liquidations. But sometimes, especially at public companies, common shares come with additional benefits, like full voting rights, whereas preferred shares at private companies often carry rights that common shares do not.

About the Author

Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets. Mr. Safane has received compensation from Forge Global, Inc. for authoring this article. Read more from Jake.

Learn more about preferred shares with these related articles:

Please Read These Important Legal Notices & Disclosures

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.

To the extent information about or defining specific terms is provided herein, Forge makes no representations as to its accuracy and has no duty to update such information. Such information is based on Forge’s experience and the meanings and connotations of terms as Forge typically uses and interprets them. Others may construe such terms differently, and you should do your own research and consult with financial, legal and tax professionals regarding any such concepts included herein.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.

Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. Past performance Is not indicative of future results.