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    Common Stock

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

    Reviewed by Christian Espinosa, Founder, Blue Goat CyberLast reviewed September 19, 2026

    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.
    What the regulation says
    Common stock is governed by corporate, securities and tax law, not MedTech product regulations. SEC investor education describes it as ownership generally carrying voting rights, with claims on assets subordinate to creditors and preferred shareholders. Specific rights depend on applicable state corporate law and the company’s charter; common stock does not universally lack special protections. Under Section 5 of the Securities Act of 1933, enacted May 27, 1933, offers and sales generally require SEC registration unless an exemption applies. This framework applies to MedTech companies issuing equity, including common shares. Internal Revenue Code Section 409A, added by the American Jobs Creation Act of 2004 on October 22, 2004, generally applies to amounts deferred after December 31, 2004. Treasury Regulation § 1.409A-1(b)(5)(i)(A) generally excludes qualifying stock options from deferred-compensation treatment when the exercise price is at least the underlying stock’s fair market value at grant and other conditions are met. For private-company stock, § 1.409A-1(b)(5)(iv)(B) addresses reasonable valuation methods. Common shares may be worth less than preferred shares because their economic rights differ. That does not mean common stock has a lower risk profile; its residual claim generally exposes holders to greater downside risk.

    What this means in practice

    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.

    Examples

    • A company's last preferred round priced shares at $4.00 each, but an independent 409A valuation sets common stock fair market value at $0.60 per share (roughly 15 percent of the preferred price) because common stock lacks the preferred round's liquidation preference and other rights. Employee stock options are granted with a $0.60 strike price.
    • In a $10,000,000 acquisition where $9,000,000 in preferred liquidation preferences must be paid first, common stockholders (founders and employees) split only the remaining $1,000,000 across, for example, 8,000,000 fully diluted common shares, or about $0.125 per share, far below the last preferred round's $4.00 price.
    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.

    Frequently asked questions

    Common stock lacks the liquidation preference, anti-dilution protection, and control rights that preferred stock has, so standard valuation methodologies (such as an option pricing model) allocate it a smaller share of the company's total equity value.

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    Sources

    3 sources

    Every citation below opens the original document. Each is graded against our source-tier hierarchy so you can see what rests on binding law versus commentary.

    Tier 1Binding law and standards· 2Tier 2Regulator guidance and consensus· 1
    Link health: 3 unchecked· last checked 2026-06-20
    Cornell Law LII·1IRS·1SEC Investor.gov·1
    1. 1
      Cornell LII: Common Stock
      Tier 1 Unchecked
      Cornell Law LIIlaw.cornell.edu
    2. 2
      IRS: Section 409A Guidance
      Tier 1 Unchecked
      IRSirs.gov
    3. 3
      SEC Investor.gov: Common Stock
      Tier 2 Unchecked
      SEC Investor.govinvestor.gov

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