What is Preferred Stock and can it raise capital for a company?
Preferred stock is structured to attract angel investors, venture capitalists or other accredited investors. Separate classes and/or series are created to fit particular investor needs and/or to effect separate financings over time at different prices and is most often seen in the financing of private companies.
Preferred stock, like common stock, must be authorized before it can be issued and unless “blank check” preferred stock is used, the special rights and preferences of preferred stock must be stated in the articles when it is created.
“Blank check” preferred stock, permits the company to authorize a class of preferred stock via a stockholder resolution, but leaves the rights and preferences of the class to be fixed later by the board of directors. The advantage of blank check preferred stock is that once it has been authorized, a stockholder resolution is not needed at the time the company finishes negotiating the terms of the preferred stock and is ready to close a financing.
Rights and preferences of preferred stock include liquidation preference, voting rights, dividend and anti-dilution protection. “Full ratchet” typically provides that if the corporation issues any stock in the future at a price lower than that paid by the investors which will receive a change in the conversion price of their preferred stock so that they will be treated as having paid the same price as the new investors. “Weighted average” protection adjusts the conversion price of the investors’ preferred stock by a lesser amount, depending on the amount of lower-priced securities issued in the new financing.
Preferred stockholders often receive an enhanced right to receive dividends if dividends are declared, preferred stockholders must receive a stated amount of dividends before any dividends are paid to common stockholders.
These are only some of the examples that preferred stock is used to attract capital for new or existing companies.
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