Share Classes

Different categories of stock with different rights. Most startups have common stock (founders/employees) and one or more classes of preferred stock (investors). Dual-class structures give some shares extra voting power (e.g., 10 votes per share for founders).

Why it matters

Share classes determine the hierarchy of rights, payouts, and control within your company. Each class of stock carries different economic rights (who gets paid first in an exit) and governance rights (who gets to vote on what). As a startup raises multiple rounds, it accumulates layers of share classes, each with its own terms.

Understanding how these classes interact is critical for calculating what your equity is actually worth and who has decision-making power at any given moment. A founder who owns 40% of common stock may have far less economic value than that percentage suggests if multiple layers of preferred stock have large liquidation preferences sitting above them.

Investors scrutinize share class structure closely during due diligence. A cap table with complex or unusual share class arrangements can slow or complicate fundraising. Maintaining clean, standard share classes from the start — using NVCA-standard documents — makes future fundraising significantly smoother.

How it works

At incorporation, a startup typically authorizes one class of common stock. Founders receive common shares, and the option pool is carved out from authorized common shares. When the company raises a Series A, it creates Series A Preferred Stock with specific rights negotiated in the term sheet. Series B creates Series B Preferred Stock with its own terms, and so on.

Each class is defined in the certificate of incorporation and has distinct liquidation preferences, conversion ratios, voting rights, and protective provisions. In a standard 1x non-participating liquidation preference, preferred investors get their money back first in an exit — then convert to common stock if the remaining proceeds would give them more. In a participating preferred structure, investors get their money back first and then share proportionally in remaining proceeds — a more investor-favorable term.

Some companies create dual-class common stock structures, where Class A shares carry one vote per share and Class B shares carry ten votes per share. This lets founders maintain voting control even as they sell economic ownership to investors. Google, Meta, and Snap all went public with dual-class structures.

In a typical startup with three rounds of funding, the cap table might include: Common Stock (founders and employees), Series Seed Preferred, Series A Preferred, and Series B Preferred, each with slightly different terms. The interaction between these classes — especially their liquidation preferences — determines the payout order in any exit scenario.

Common vs. preferred stock compared

History and origin

The distinction between common and preferred stock dates to early 20th-century corporate law. Preferred stock was originally used by railroads and utilities to attract conservative investors who wanted fixed dividend payments before common stockholders received anything. The structure migrated to venture capital in the 1970s and 1980s as VC firms sought protections commensurate with the risk of investing in early-stage companies.

The modern preferred stock term set — liquidation preferences, anti-dilution, protective provisions — was largely codified in Silicon Valley practice during the dot-com era. Fenwick and West, Cooley, and Wilson Sonsini developed standard term sheets that became templates for the industry. The NVCA Model Legal Documents, introduced in the mid-2000s, further standardized the language, reducing legal costs and negotiation time.

Dual-class structures have a longer history in public markets — Berkshire Hathaway and Dow Jones both had dual-class structures for decades — but became common in tech IPOs after Google's 2004 offering, which used a three-class structure to preserve founder control. The practice accelerated through the 2010s as founders became more sophisticated about protecting their voting rights even as they raised large institutional rounds.

Frequently asked questions

What is the difference between common stock and preferred stock?

Common stock is typically held by founders and employees. It has voting rights but stands last in line for payouts in a liquidation. Preferred stock is held by investors and comes with additional protections: liquidation preferences, anti-dilution rights, and often enhanced voting rights on specific matters.

What is a dual-class share structure?

A dual-class share structure creates two categories of common stock with different voting weights. Class A shares carry one vote per share (typically sold to public investors). Class B shares carry more votes — often 10 per share — and are retained by founders. Google, Meta, Snap, and Lyft all went public with dual-class structures to let founders maintain control.

How many share classes does a typical startup have?

At incorporation, most startups have one class: common stock. After a seed round with preferred stock, they have two. After Series A, three. A company that has raised through Series C might have five or more classes, each with its own rights and liquidation priority.

What are protective provisions and which share class has them?

Protective provisions are veto rights held by preferred stockholders over certain major company decisions — things like selling the company, raising additional debt, or issuing new equity. These rights are tied to the preferred share class and apply even if preferred holders own a minority of total shares.

Can share classes affect how much founders get paid in an exit?

Yes, significantly. In an exit, preferred stockholders receive their liquidation preferences before common stockholders receive anything. If a company sells for less than the total invested in preferred rounds, common stockholders (founders, employees) may receive nothing. A waterfall analysis models exactly who gets paid and how much at different exit prices.

Do employees receive common or preferred stock?

Employees receive options to purchase common stock, not preferred stock. This is an important distinction because common stock is junior to preferred stock in a liquidation. The 409A valuation, which sets option strike prices, appraises common stock at a discount to preferred stock precisely because of this lower priority.

What happens to share classes if the company goes public?

In an IPO, all preferred stock classes typically convert to common stock at a 1:1 ratio (unless a dual-class structure is maintained). The liquidation preferences and other special rights disappear. This is why IPOs can be beneficial for common stockholders — the preferred stack that had priority converts to the same class.

Learn more

• Types of startup equity: common stock, options, SAFEs, and more
• What is a cap table and why does it matter?
• What investors look for in cap tables
• How to build a startup cap table from scratch

Related terms

• Common Stock
• Preferred Stock
• Voting Rights
• Cap Table
• Liquidation Preference
• Waterfall Analysis