Preferred stock is a type of equity ownership in a corporation. Typically, the holders of preferred stock have certain preferences over holders of common stock, including protective provisions, liquidation preference, and more. In a startup, investors typically own preferred stock, while founders and employees own common stock. The more common type of preferred stock is non-participating preferred stock, while the less common type is participating preferred stock.
Common stock does not sound exciting. Preferred stock does. First-time founders are looking for excitement—especially when it comes to their millions of initial shares—and so they’re often surprised to hear that they’ll be receiving common, rather than preferred stock when the startup is incorporated.