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How does Preferred Stock work?

Only a few years ago, legal fees cost upwards of $50,000 to properly set up a stock financing. It was uneconomical to pay this amount unless venture capitalists were investing millions in a Series A. Nowadays, some startups can use open-sourced "priced round" documents to reduce the costs of a stock financing at the seed stage.

There are a host of terms that can be negotiated in a stock financing, but this is done by the "lead" investor, who typically invests upwards of $200,000.

As a non-lead investor investing a small amount, the most important terms to pay attention to are the Post-Money Valuation or the Pre-Money Valuation. This is effectively what the company is considered to be worth, and with it, you can calculate your percentage ownership. Comparatively, the price of the stock is relatively meaningless.

One of the most popular open-sourced priced round agreements is the Series Seed, developed by Fenwick lawyer Ted Wang.

Read more about Series Seed.
Learn more about terms.

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