California corporations can issue common stock and preferred stock, with multiple classes or series of each. Common stock is the baseline voting equity. Preferred stock carries negotiated rights — dividend priority, liquidation preference, anti-dilution protection, board seats, conversion rights, redemption rights, and voting protections. Most VC-backed companies layer Series Seed, A, B, etc. each with its own preferred terms. The structure is set in the Articles of Incorporation and any Certificate of Designation.
When establishing a corporation, choosing the right stock types is crucial, particularly in California, where state-specific regulations apply. Each variety affects financial performance, control, and what happens to investors in different scenarios.
The most frequently issued equity security. Common stockholders receive voting rights and participate in company profits through dividends. In bankruptcy, common holders rank last among equity claimants and are paid only after creditors and preferred shareholders. They face the highest risk and the highest potential upside. Common stockholders generally seek out corporations that are financially stable and have a record of profitability.
Preferred stock comes with distinct advantages: typically a fixed dividend payment and priority in liquidation. The tradeoff is reduced upside compared to common stock, preferred shareholders generally don't share in growth the way common holders do. Preferred stock attracts income-focused investors who value stability and predictability over capital appreciation.
A hybrid: preferred stock that can be converted into common stock at a predetermined price. Convertible preferred is often used by companies as a way to raise capital, since it lets them issue shares at a higher effective price than common stock would command. Conversion typically occurs after a triggering event, a change in control, an IPO, or a specific date.
Corporate bylaws establish how shareholder voting works. Voting power generally tracks share count, though different classes can carry different voting weights. Closely held corporations often concentrate voting authority among major shareholders. Some jurisdictions require unanimous or supermajority approval for charter modifications and bylaw amendments.
Shareholders typically vote on: charter amendments, board elections, mergers and acquisitions, significant investments, executive compensation, and major asset sales.
Dividends are profit distributions to shareholders, usually paid quarterly in cash, occasionally in stock or other assets. To receive a dividend, shareholders must own shares on the record date, typically two days before the payment date.
Single-shareholder corporations can pay dividends, with the sole owner controlling timing and amount. But insufficient retained earnings create tax issues, operating losses must be absorbed first, and some states require profit reinvestment before distribution. California has specific dividend tax requirements worth working through with a CPA.
A contractual provision granting preferred shareholders priority repayment of their original investment if the company is liquidated. The liquidation preference protects investors' downside by guaranteeing at least a return of their original investment. It also aligns investor and company interests by motivating the highest possible sale price, anything above the preference goes to common holders.
The nominal amount assigned to a stock at issuance. Par value has no direct correlation to market value but is used for accounting purposes, establishing capital measures, calculating dividends, and determining rights and privileges across share classes.
Structuring a corporation's stock requires balancing voting rights, dividend rates, liquidation preferences, and applicable regulations. Common stock provides voting power without dividend guarantees. Preferred stock offers higher and steadier dividends without voting authority. Convertible preferred bridges the two, delivering conversion rights alongside dividend and liquidation priorities.
If you're setting up a corporation or evaluating an investment offer that uses one of these instruments, we're happy to walk through your specific situation in a free consultation.
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