Common stock / common shares

What common stock represents

Common stock is the residual claim on the corporation. After creditors are paid, after preferred stockholders receive their liquidation preferences, what is left belongs to common stockholders. In the upside, common stockholders capture every dollar of value above the preferred stack. In the downside, they are first in line to absorb losses.

This positioning is by design. Founders, employees, and early common-stock investors take the most risk; they also receive the largest share of any upside above the preferred preferences.

Standard rights

Most common stock carries:

• One vote per share on matters submitted to shareholders (election of directors, fundamental changes, ratification of major decisions)
• Dividend rights, but only after preferred dividends have been paid and only when the board declares a dividend
• Residual claim on assets in liquidation, after creditors and preferred
• Pre-emptive rights in some jurisdictions, allowing common holders to participate in new issuances pro rata (often waived in startup corporations)
• Inspection rights under statute

When common is restricted

Common stock issued to founders is almost always subject to vesting and to transfer restrictions. The corporation typically has a right of first refusal on transfers, and founder shares typically reverse-vest over 4 years with a 1-year cliff. Common stock issued under an option plan vests on a similar schedule. In each case, the underlying instrument is still common, but contractual restrictions narrow the holder's ability to sell or transfer until vesting is complete.