For Entrepreneurs and members contemplating start-ups, a discussion of the characteristics (and potential pitfalls) of preferred stock. Preferred stock is the primary type investors are granted and if you aren’t careful when negotiating it, you can give away much more equity in your company than you may intend.

Preferred stock is one of the primary vehicles by which early stage companies acquire funding. Often, the risk profile of a start-up leaves sale of preferred stock to angel investors or venture capitalists as the only avenue to acquire significant capital. While there are a handful of statutory requirements applicable to preferred stock, it is predominantly a creature of contract. This leaves the parties, the start-up firm and the investors, free to negotiate a broad array of terms for the preferred stock that meet the needs of each side, taking into account multiple factors like the stage of the venture, the amount of money at issue and an assessment of the risk. Sale of preferred stock offers a valuable opportunity to start-ups, inasmuch as it provides access to capital which may otherwise be unavailable through traditional lending channels due to high risk in the early stages of a business venture. At the same time, the diverse menu of characteristics available for preferred stock can put the unwary entrepreneur at risk of selling far more equity in her company than she intends. This is particularly true in light of the sophistication of most early stage investors and can become especially painful for business owners in the face of an exit event like an IPO, merger or sale of the company. This presentation will provide an introduction to preferred stock and will address some of its most common characteristics. Following the presentation, attendees should have a working knowledge of the basics of preferred stock and a preliminary understanding of some of the intricacies to consider during funding negotiations.