Preferred vs. Common Spread

In a VC-backed company, not all shares are equal. Preferred shareholders hold shares that carry liquidation preferences (they get paid first), anti-dilution rights, and other protections. Common shareholders — typically employees — hold shares that rank last in a liquidation waterfall. This structural difference produces a valuation gap: preferred shares are worth more per share than common.

The preferred vs. common spread is the ratio or dollar difference between the two. A company might have its last round priced at $20 per preferred share, while its 409A values common at $12 — a 40% spread. This spread narrows as the company approaches IPO (at which point both classes convert to common at a 1:1 ratio).

Illustrative example: a company has 100M preferred shares at a $20/share liquidation preference (last round) and 50M common shares. If the company sells for $1.5B ($10/share equivalent), preferred holders receive their $20 preference first ($2B total preference exceeds the sale price, so common receives nothing). This is "underwater" for common holders — the exact scenario the preferred-common spread tries to price.

The gotcha: at large late-stage companies, preference stacks can be enormous. Multiple rounds of participating preferred with full ratchets can mean that a sale for less than the total preference stack leaves common shareholders with zero. Secondary buyers of common shares should model the liquidation waterfall explicitly, not just divide total valuation by total share count.