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Classes of Common Stock

ommon stock, also referred to as voting shares or ordinary shares, are the most basic form of ownership in a C-Corporation. Publicly traded shares, for example, are common stock, and unless other special rights are associated with certain shares of a privately held company, there will only be one class of shares (common stock).

However, in some cases a company will decide to have two classes (or more) of common stock, usually denoted “Class A”, “Class B” etc. Classes of common stock will [usually] carry equal ownership in the company, and equal right to dividends. playstation site down . However, to retain a stronger control, a company may provide founders and other key individuals with super voting rights. phone book . Class A shares could have 10 times the voting power, or even 100 times the voting power, of Class B shares. domain name wildcard search . A company which is going public can issue Class B shares so that they can trade the majority of the ownership of the company on public markets without losing control of the company. This mechanism is also used in private companies to allow founders to retain control while having their ownership diluted in rounds of venture capital investment.

A note on naming

It is worth noting that the designation “Class A” vs “Class B” does not in and of itself tell you which class may have special voting rights. Some companies elect to give special voting rights to Class B shares, so it is important to clearly identify what rights are associated with each class of shares.

Multiple classes of common stock are not to be confused with preference shares, which are an entirely different class of shares. Preference shares are usually issued to investors and carry special rights to dividends, or first claim on cash generated from the liquidation of the company.

How do share classes affect a 409A valuation?

One of the important steps in determining a strike price for stock options is figuring out how much to discount a minority holding of common stock. The two main reasons to discount a minority holding is for marketability (liquidity) and control. Marketability means the harder it is to buy or sell your shares, the less valuable they are. And control means the less control the shares entitle you to the more risky they are and therefore the less valuable. ask me questions If there is an issuance of shares with super voting rights, then that clearly affects the control factor, but it is also worth noting that it affects liquidity as well. In some cases a group of minority share holders who together form a majority could force the sale of the company. If the founders or other people of interest in the company hold super voting rights, ones ability to force a liquidity event is restricted.

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