Startup Lingo: What is Common Stock?
Inspired by some of the courses I have been taking whilst in Silicon Valley, in Venture Financing, I thought i'd start sharing some of my academic knowledge on the matter, through a series of articles. First up, an understanding of what is Common Stock.
Working for a startup, one of the simplest form of financial issuing as a founder, is Common Stock. I will talk about Preferred Stock and Convertibles in later articles.
So Common Stock in it's simplest terms is the equitable ownership of the company, and is generally issued to founders of the company, as well as employees as a way of enticing them to join your company. Common Stock can also usually be bartered with consultants in lieu of their consultation services, such as when working with lawyers or accountants in return for little to no cash-payments.
"Common stock represents an equity ownership in the company and entitles shareholders the right to vote on management issues at the annual shareholder's meeting."
Common Stock is the easiest form of equity to issue, providing all stock holders with the same rights and power as the founders. Each share buys a shareholder one vote on corporate matters such as electing board of directors.
A downside is that the value of Common Stock diminishes when Preferred Stock is issued, and is also not convertible into other securities, unlike other ones.
Dividends are paid when declared by the board of directors, with common stock holders receiving dividends, but not before preferred stock holders receive their share first. That is, common stock plays second-class citizens to preferred stock.
Initial authorized Common Stock is set at incorporation of your startup, along with vesting schedules, but it is important that the founders ascertain enough shares to be able to incentivize future employees to join your company in the future. That is why it is important to anticipate the next two-to-three years from the start, as it is a lot easier at the start to budget for that anticipation.
Vesting Schedules are commonly set at four years (that means to vest the whole amount of shares you are required to be with the company for 4 years), with the first full year being a 25% cliff (25% vested) then commonly switching to a month-to-month proportionality.
As the simplest form of equity issuing, common stock does play a second-class citizen position to preferred stock and other securities, however this form of stock does provide the same privileges awarded to founders. One share of common stock buys you one vote which allows you to vote on various corporate matters, such as stock-splitting and electing board of directors. However in the case of where a company to go bust, common stock holders would be one of the last to receive their shares.