Preferred Stock
Preferred Stock represents a class of stock equipped with a Liquidation Preference. This grants shareholders the right to receive priority distributions of money or assets in the event of a sale, merger, or liquidation
What it Means:
Preferred Stock ensures investors' protection by securing their entitlement to refunds, and sometimes a fixed return, before Common Stockholders receive any proceeds during a company's sale, merger, or liquidation.
How to Calculate:
The calculation involves determining the Liquidation Preference – the predetermined amount or return on investment that Preferred Stockholders receive before Common Stockholders. This shields investors from potential losses.
Why Measure:
Measuring Preferred Stock is crucial as it safeguards investors' interests, enhancing their confidence to invest in startups. It provides a structured hierarchy for distribution, adding security and attractiveness to the investment.
Examples:
Consider an Indian startup issuing Preferred Stock with a Liquidation Preference of INR 50 per share. In a merger, if the company's assets amount to INR 5 million, Preferred Stockholders receive their INR 50 per share before Common Stockholders receive any proceeds.
Understanding Preferred Stock is foundational for Indian founders, establishing a secure framework for investor relations and ensuring financial prudence in diverse business scenarios.