Not all shares are created equal.
Remember those ESOPs you got? What you receive after exercising them are common shares or common stock, as opposed to preference shares.
As the name suggests, this class of shares is issued to external investors when a company raises funds so as to protect their interests through a certain few privileges.
Privileges?
Pref shares give the holders many affirmative rights, an example of which is “liq pref” or liquidation preference, which translates to the benefit of cashing out first in case of a liquidity event.
Even if the company has an unfavourable exit or a distress sale, those with preferred shares will need to be paid first. Investors negotiate such privileges as protection in cases when an investment may not pan out the way they hoped.
So what does this mean for you?
Like we discussed above, if things don’t go right for the company and gets sold for significantly lower than the valuation it raised at during the last few rounds, the investors will need to be paid out first.
Holders of common shares will therefore only get proportionate share of the remaining amount, which could be pennies on the dollar if anything at all.