A key issue that comes up when going out to raise money is preferred stock versus common stock. When you first form your company, you’re showing common stock to the founders. Eventually, you will issue preferred stock to sophisticated investors. You want to try not to have to issue this kind of stock until it is absolutely necessary. The reason for that is preferred shareholders have rights that common shareholders don’t have. In a preferred class of stock, investors typically have the right to control some level of where the company is going. This means they may have control over things like future money to be raised and how to raise it at the minimum prices. Sometimes when you put in anti-dilution rights, you prevent the people who have invested in you from losing the percentage of ownership they have. Anti-dilution rights should be avoided at almost all costs. A preferred class of stock has roughly 30 plus pieces to the puzzle that can be drawn into that class of stock. Some of these pieces are innocuous, and some of them can really impact your future ability to raise capital for your company. This needs to be handled very carefully.
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