When a company decides to raise capital by offering stock, it can choose to offer different classes of stock. These classes of stock can have different rights, privileges, and restrictions. As a lawyer, it’s important to understand the different classes of stock a company can offer, especially if you’re helping clients navigate the complex world of corporate finance.
At Turley Law PLLC, we have helped clients understand the different classes of stock and determine which option is right for their business. In this article, we’ll provide an overview of the different classes of stock a company can offer, as well as the differences between preferred and common stock.
Classes of Stock
When a company decides to issue stock, it can choose to offer different classes of stock. The most common classes of stock are common stock and preferred stock. However, some companies may also choose to offer multiple classes of common stock, each with different voting rights.
Common Stock
Common stock is the most basic type of stock that a company can issue. When you buy common stock, you become a shareholder in the company, which means you own a portion of the business. Common stockholders have the right to vote on important matters such as electing the board of directors, approving mergers and acquisitions, and issuing additional shares of stock.
In addition to voting rights, common stockholders also have the right to receive dividends. Dividends are payments made to shareholders from the company’s profits. However, companies are not required to pay dividends to their common stockholders.
Preferred Stock
Preferred stock is a type of stock that has preferential treatment over common stock. Preferred stockholders have priority when it comes to receiving dividends and getting paid in the event of a company’s liquidation. This means that if a company is struggling financially, preferred stockholders will receive their dividends and payments before common stockholders.
Unlike common stock, preferred stock does not usually come with voting rights. However, some companies may offer non-voting preferred stock that still provides preferential treatment over common stock.
Multiple Classes of Common Stock
Some companies may choose to offer multiple classes of common stock, each with different voting rights. For example, one class of common stock may have one vote per share, while another class of common stock may have ten votes per share. This allows the company’s founders and early investors to retain control of the company even if they own a minority of the shares.
Differences Between Preferred and Common Stock
There are several key differences between preferred and common stock. The main differences are in the voting rights, dividends, and priority in the event of liquidation.
Voting Rights
Common stockholders have the right to vote on important matters such as electing the board of directors, approving mergers and acquisitions, and issuing additional shares of stock. Preferred stockholders, on the other hand, usually do not have voting rights. However, some companies may offer non-voting preferred stock that still provides preferential treatment over common stock.
Dividends
Dividends are payments made to shareholders from the company’s profits. Common stockholders have the right to receive dividends, but companies are not required to pay dividends to their common stockholders. Preferred stockholders, on the other hand, have priority when it comes to receiving dividends. This means that if a company is struggling financially, preferred stockholders will receive their dividends before common stockholders.
Priority in the Event of Liquidation
In the event that a company goes bankrupt or is liquidated, the company’s assets are sold off and the proceeds are used to pay off creditors and shareholders. Preferred stockholders have priority over common stockholders when it comes to getting paid in the event of liquidation. This means that if a company is struggling financially, preferred stockholders will receive their payments before common stockholders.