Financial Glossary
Common stock
Common stock represents a fractional ownership interest in a corporation, conferring on holders the right to vote on corporate matters (typically one vote per share), a residual claim on assets and earnings after all creditors and preferred stockholders are satisfied, and a share in dividends declared at the board's discretion. Common stockholders bear the highest risk in the capital structure -- they are last paid in bankruptcy -- but also have uncapped upside through price appreciation. In private companies, common stock is typically held by founders and employees (via options), while investors generally receive preferred stock with superior liquidation rights. In public companies, common stock is the primary publicly traded equity security.
Problem & Application
In a startup's liquidation waterfall, understanding common stock's position matters enormously. Suppose a startup raised $5M in Series A Preferred with a 1x liquidation preference and then sold for $4M. The entire $4M goes to the Series A investors to satisfy their liquidation preference; common stockholders (founders and employees with vested options) receive nothing. If the company had sold for $12M instead, the Series A investors receive $5M first, and the remaining $7M is distributed pro rata among all shares on an as-converted basis (assuming non-participating preferred). Common stockholders share in $7M proportional to their ownership. This waterfall dynamic explains why startup employees holding common stock or options can have equity technically worth something at a modest exit while the payout is zero -- and why founders and advisors are motivated to push for higher exit valuations rather than accepting early acquihire offers. A fractional CFO or startup attorney would model these scenarios in a liquidation analysis tool when evaluating term sheets, making sure the team understands at what exit price common shareholders actually participate.
In Short
Common stock is a fundamental part of equity markets. Investors should evaluate company performance and market conditions before investing.