The base class of equity typically held by founders and employees, standing last in the distribution waterfall behind creditors and preferred stockholders.

Definition

Common stock is the residual equity ownership class in a corporation, typically held by founders, employees (through stock options or restricted stock), and sometimes early angel investors. Common stockholders generally have voting rights on major corporate matters and the right to elect a portion of the board, but they rank last in priority for both dividends and liquidation proceeds, behind creditors and any outstanding preferred stock. Common stock has no fixed liquidation preference, no guaranteed dividend, and no special anti-dilution or protective-provision rights, which is why venture investors almost always require preferred stock rather than common stock when financing a company.

Why it matters

MedTech founders and early employees typically hold common stock, so their eventual outcome depends heavily on how much preferred stock has been layered on top through Series A, B, and later rounds, since each layer sits ahead of common stock in the distribution waterfall. Common stock valuation for 409A purposes is also lower than the price paid by preferred investors, reflecting its subordinate rights, which is why option strike prices for MedTech employees are typically well below the last preferred round's price per share.

Common pitfalls

•Assuming common stock and preferred stock of the same company are worth the same per share; they almost never are because of differing rights and preferences.
•Believing common stockholders can block a sale that preferred stockholders and the board approve; common stockholders typically have limited blocking rights compared with preferred protective provisions.
•Exercising options without understanding that common stock's actual value depends on the size of the preferred stack ahead of it, not just the headline company valuation.

Sources

Cornell LII: Common Stock · Cornell Law LII
IRS, Equity (Stock)-Based Compensation Audit Technique Guide (Publication 5992) · IRS
SEC Investor.gov: Common Stock · SEC Investor.gov

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