Share Classes Explained: Ordinary vs Preferred

What Are Share Classes?

Share classes definition and meaning

A share class is a category of stock with specific rights—voting power, dividends, asset claims. Think of it like different tiers of membership in the same company. Companies establish these through constitutional documents specifying rights and restrictions.

What are share classes in a company?

When examining what share classes in a company, the answer centers on ownership rights differentiation. One class might grant full voting authority and variable dividends. Another provides fixed income with limited governance participation.

Articles of association enumerate these characteristics, creating legally binding parameters. Founders often retain shares with enhanced voting rights. External investors might accept restricted voting but preferential financial treatment. Employees frequently receive grants tied to performance milestones.

Types of Share Classes

Below, different share classes explained in practical terms illustrate how companies allocate control, economic rights, and risk among shareholders. These distinctions enable flexible ownership structures while addressing the expectations of founders, investors, and employees.

Ordinary (Common) shares explained

Ordinary shares are the basic building blocks. One share = one vote on big decisions like hiring directors or approving mergers. Dividends? Only when the board feels generous.

Preferred shares explained

Preferred shares come with bodyguard features. You get fixed or cumulative dividends paid before common shareholders see a penny. Many let you convert to ordinary shares when the timing's right. Perfect for investors who want a safety cushion over boardroom influence.

Other equity share classes (Class A, B, C, non-voting, redeemable)

Beyond the ordinary vs preferred shares distinction, companies create additional subcategories. Class A shares might carry ten votes per share. Class B shares receive one vote. Class C shares could eliminate voting rights.

Non-voting shares attract investors focused solely on financial returns. Redeemable shares are equity instruments that may be repurchased by the company under predefined conditions, including specified dates or triggering events. The different types of share classes provide flexibility for sophisticated capital structuring across varying business contexts.

Ordinary Shares vs Preferred Shares

Voting rights comparison

In the ordinary shares vs preferred shares matchup, voting is where they split hardest.

Ordinary shareholders vote on everything, proportional to what they own.

Preferred shareholders? Usually sidelined unless something goes wrong—like missed dividend payments or changes to their class rights.

Dividend rights and priority

Ordinary shareholders get leftovers—dividends only happen if the board declares them and after preferred holders get theirs.

Preferred shareholders often lock in fixed percentages or cumulative dividends that stack up even when unpaid. They're first in line, always. 

Liquidation preference explained

When the company sells or shuts down, there's a pecking order. Creditors eat first. Then preferred shareholders grab their slice based on preference multiples. A 1.0x preference means they get their original investment back before ordinary shareholders touch anything.

Ordinary shareholders split what's left. In weak exits, they might get crumbs while preferred holders recover their cash. In home runs, preferred holders typically convert to ordinary shares to grab their full percentage.

Risk and return differences

Ordinary shareholders take maximum risk for maximum reward. Their returns mirror company value—up or down, no limits.

Preferred shareholders swap some upside for protection. Fixed dividends and liquidation preferences cushion bad scenarios. Conversion rights let them jump into the action when things boom.

Equity Share Classes in Practice

Share classes in startups and private companies

Startups usually launch with one ordinary share class for founders. Once fundraising kicks off, preferred shares enter for outside investors. Series A preferred shares arrive during the first serious funding round, followed by Series B, C, and beyond.

Share classes in public companies

Many public companies maintain a single common share class with equal voting and economic rights. Others implement dual-class structures where founders retain supervoting shares.

Why Companies Create Multiple Share Classes

Control and decision-making

Founders who built the business often want strategic control despite selling ownership chunks for funding. Enhanced-voting ordinary shares deliver exactly that.

Investment structuring and fundraising

Capital raising works better when share types match investor appetites. VCs expect preferred shares with standard protections—liquidation preferences, anti-dilution clauses, board seats.

Risk-averse investors want preferred shares with fixed dividends. Growth hunters take ordinary shares for full upside.

Tax and legal considerations

Jurisdictional frameworks influence share class design significantly. Some regimes offer tax advantages for specific share categories. Employee share schemes may qualify for favorable tax treatment. Companies operating internationally must navigate multiple regulatory frameworks. Professional guidance from Icon. partners helps ensure structures comply with applicable rules. 

Share Classes Examples

Ordinary vs preferred shares example

Consider a technology startup. Three founders establish a company, each receiving 1,000,000 ordinary shares at €0.01 par value. They collectively own 3,000,000 shares representing 100% equity.

A venture capital firm subsequently invests €5,000,000 for 2,000,000 preferred shares, resulting in a €20,000,000 post-money valuation. The preferred shares carry a 1.0x liquidation preference. After investment, founders own 60% economically but retain full voting control.

If the company sells for €10,000,000, the preferred investor receives €5,000,000, and ordinary shareholders split the remaining €5,000,000. Each founder receives approximately €1,667,000. If the company sells for €50,000,000, the investor converts to ordinary shares and receives 40% (€20,000,000).

FAQ on Share Classes

What is the difference between ordinary and preferred shares?

Ordinary shares grant full voting rights and variable dividends dependent on company performance. Holders participate proportionally in residual assets. Preferred shares provide fixed or cumulative dividends, priority claims during liquidation, and restricted voting rights.

Preferred shareholders accept limited governance participation for downside protection.

Can a company have multiple share classes?

Yes, companies can establish multiple share classes subject to jurisdictional requirements. 

Which share class is better for investors?

The optimal share class depends on investor objectives and risk tolerance. Ordinary shares suit investors seeking maximum upside participation and governance influence, accepting higher risk. Preferred shares appeal to investors prioritizing capital protection and predictable income, accepting limited voting rights.

Are share classes the same in every country?

No, share class frameworks vary significantly across jurisdictions. Legal requirements and permissible rights variations differ by country.

How does jurisdiction affect share class availability?

The availability and structure of share classes near me depend on the jurisdiction in which a company is incorporated. Local company law, regulatory practice, and market standards determine which share classes may be issued, how voting rights are allocated, and what economic protections are permitted.