Definition
Preferred Shares (Startup)
Preferred shares are the class of equity VCs typically receive, carrying special rights such as liquidation preference and anti-dilution over common shares.
Founders and employees usually hold common (ordinary) shares, while investors hold preferred shares (in India, often Compulsorily Convertible Preference Shares, or CCPS) that come with economic and control rights: a liquidation preference, anti-dilution protection, protective provisions and sometimes a dividend.
Preferred shares convert into common shares at an exit or IPO. The differences between preferred and common — especially the preference stack — determine how proceeds are split if the company is sold for less than its last valuation.
Related terms
- Liquidation PreferenceA liquidation preference gives preferred investors the right to get their money back (or a multiple of it) before common shareholders in an exit or wind-up.
- Anti-Dilution ProvisionAn anti-dilution provision protects an investor from value erosion if the company later raises money at a price lower than what the investor paid.
- Compulsorily Convertible Preference Shares (CCPS)CCPS are preference shares that must convert into equity by a fixed date or event, the standard instrument through which VCs invest in Indian startups.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.