Common Stocks vs Preferred Stocks

[Sanj Modha]

Hi FLFers,

I've recently been approached by a company to help them with their ecommerce ambitions. They're proposing a $0.50 per unit sale fee as well as 10,000 in Common Stock options. I've been digging around and it's my understanding that Common Stocks are the first to be diluted during financing. The more secure option is Preferred Stocks. Should I go back and renegotiate 10,000 in Preferred Stocks or accept the Common Stocks settlement?

This company is a startup with healthy revenues but they have taken on financing in the past so I want to protect my position.

Any advice would be great.

Thanks.

 

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[Pyromaniac]

Preferred stocks recieve money when bankruptcy is declared but that is after all of the bonds, loans, secured loans have been paid off. Therefore it does not make a big difference in the instance that the company goes bankrupt.

Preferred stock is more of a cross over between a bond and a stock. Generally preferred stockholders have no voting rights. If you negotiate for preferred stock it would be beneficial to recieve a percentage in dividends every year. These dividends will accumulate every year and must be paid before common stock dividends are paid out.

The language in your preferred stock contract is key to a wide range of options and risks that you expose yourself to.

I hope this helps.

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[G-Man]

Services for equity = common stock (usually, and in my limited experience)

Preferred and convertibles typically go to the first outsiders that provide major capital for growth or restructuring, but not always. You can always ask.

 

[Sanj Modha]

Preferred stocks recieve money when bankruptcy is declared but that is after all of the bonds, loans, secured loans have been paid off. Therefore it does not make a big difference in the instance that the company goes bankrupt.

Preferred stock is more of a cross over between a bond and a stock. Generally preferred stockholders have no voting rights. If you negotiate for preferred stock it would be beneficial to recieve a percentage in dividends every year. These dividends will accumulate every year and must be paid before common stock dividends are paid out.

The language in your preferred stock contract is key to a wide range of options and risks that you expose yourself to.

I hope this helps.

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Some great advice! What would you do in my position? The other thing I don't like is a 48 month lock in period for the Common Stocks. The more I read it the less I care.

 

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[Sanj Modha]

Services for equity = common stock (usually, and in my limited experience)

Preferred and convertibles typically go to the first outsiders that provide major capital for growth or restructuring, but not always. You can always ask.

I'm not confident that they will say yes to Preferred Stock since I'm not a founder or an investor. But they can only say no and I'm cool with that.

 

[Pyromaniac]

Some great advice! What would you do in my position? The other thing I don't like is a 48 month lock in period for the Common Stocks. The more I read it the less I care.

In my opinion if I was in your position I would take common stock for the reasons I stated earlier.

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[Sanj Modha]

In my opinion if I was in your position I would take common stock for the reasons I stated earlier.

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There are no common stocks. The contract states that I have an OPTION to buy 10,000 stocks in the future. I've gone back with a counter offer. Let's see what happens.

 

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[Alexo]

It just depends on what you think the shares will be worth in the future. Common stocks give you an opportunity for a large upside but also with more risk. With preferred stock you have limited upside and downside but also less risk (unless they go bankrupt). If you believe in what they are doing and you think they will be successful, I would take the common shares.

 

[Sanj Modha]

It just depends on what you think the shares will be worth in the future. Common stocks give you an opportunity for a large upside but also with more risk. With preferred stock you have limited upside and downside but also less risk (unless they go bankrupt). If you believe in what they are doing and you think they will be successful, I would take the common shares.

I rejected the deal in the end. As Tim Ferris says, "If it's not a HELL YEAH! It's a no".

 

[100k]

Hell YEAHHHHHH.

Good stuff. Good luck. Do keep us updated.

 

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[GuitarManDan]

There's a famous story about a massage therapist Google brought in during their early days. They didn't want to pay her so they gave her stock options instead. This is obviously an extreme example, but she's now a multimillionaire and it just shows the potential upside stock options can have.

I think that's a good call if it's your gut decision. As some others have said, stock options (especially with such a long holding period that they specified) can either turn into a goldmine or toilet paper.