Do private companies have common stock?

Yes — do private companies have common stock? Most private firms issue common stock: founders and employees typically hold common (ordinary) shares, while institutional investors usually take prefe...

2026-01-16 00:37:00

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Do private companies have common stock?

Asking "do private companies have common stock" is common for founders, employees, and early investors. Yes — most private companies do have common stock. Founders and early employees typically hold common shares, while venture and private equity investors generally receive preferred stock with special rights. This article walks through what common stock represents in a private company, how it is issued and taxed, how it compares with preferred stock, and what holders should expect about liquidity, governance, and risk.

As of 2026-01-22, according to practitioner resources such as Carta and the Corporate Finance Institute, the standard practice is that founders and employees receive common stock while outside investors negotiate preferred-stock terms that affect common holders' outcomes.

Definition of common stock

Common stock (also called common shares, ordinary shares, or voting shares in many jurisdictions) represents residual equity ownership in a corporation. The key conceptual points are:

Residual claim: Common shareholders own a claim on the company’s assets and profits after creditors and preferred shareholders are paid.
Voting rights: Common stock usually carries voting power (often one vote per share) to elect the board and approve major corporate actions, unless restricted by charter.
Economic participation: Common holders share in dividends if declared and in the upside at exit (sale, IPO), but only after preferred-stock preferences are satisfied.

In private-company practice, "common stock" generally denotes the class of shares intended for founders and employees. The exact label can vary (e.g., "Class A common," "Ordinary shares"), so the company’s charter and shareholder agreements define the practical rights.

Prevalence of common stock in private companies

Do private companies have common stock? Yes — issuance of common equity is widespread across private firms, especially startups. Typical allocation patterns are:

Founders: Receive the majority of initial common stock at incorporation or formation.
Employees: Receive common stock either directly (restricted stock awards) or via options/RSUs that convert to common on exercise/settlement.
Early angels: May hold common or convertible instruments that turn into common.
Institutional investors (VCs, PE): Typically receive preferred stock with negotiated terms.

Rationale: Common stock is simple and aligns founders and employees with long-term value creation. Preferred stock is used by investors to secure downside protections and governance rights, creating a two-tier capital structure common in private financings.

Who typically holds common stock in private companies

Common-stock holders in private companies usually include:

Founders: Initial recipients of founder common stock. Often subject to vesting and reverse-vesting to protect the company if a founder leaves.
Early employees: Granted restricted stock or cheap-option exercises, commonly held as common after issuance or exercise.
Employees with options: When an employee exercises stock options (ISOs/NSOs), they receive common stock.
Early angel investors: In some cases, angels take common shares in early rounds if preferred is not available or desired.

Exceptions exist. Some investors accept common in small seed deals, or convertible securities later convert to common, depending on terms in financing documents.

Forms of common-equity compensation and issuance

Private companies issue common-equity to align incentives. Common forms include:

Restricted Stock Awards (RSAs): Shares issued outright to founders or early employees, usually subject to vesting and transfer restrictions. RSAs create immediate ownership but often require an 83(b) election for favorable tax treatment in the U.S.
Stock Options (ISOs and NSOs): Options give the right to buy common shares at a set strike price. When exercised, the option holder receives common stock (ISOs offer potential tax benefits for employees; NSOs are taxable differently).
Restricted Stock Units (RSUs): Promise to deliver common stock (or cash tied to stock) upon vesting or a liquidity event. In private companies, RSUs often convert to common at liquidity or exercise.
Direct Share Purchases: Employees or early investors buy common stock directly through stock purchase agreements, sometimes with repurchase rights for the company.
Convertible Instruments: SAFEs, convertible notes, or other instruments convert into equity (often preferred, but sometimes into common for early-stage rounds) on triggering events.

Key mechanics used in startups:

Vesting and reverse-vesting: Founders and employees often vest over years (e.g., four-year schedule with one-year cliff). Reverse-vesting ensures shares issued early can be repurchased if service ends.
Exercise and issuance: Options typically must be exercised to receive common stock; companies then issue stock certificates or register ownership on the cap table.
83(b) election (U.S.): Early founders or employees with RSAs may file an 83(b) election to accelerate tax recognition at grant.

Rights and features of private-company common stock

Common stock rights depend on corporate documents, but typical features include:

Voting rights: Most common stock carries voting power on board elections and major corporate decisions. Voting can be limited or modified in the charter.
Dividend rights: Common is entitled to dividends if the board declares them. In private startups, dividends are rare; retained earnings and growth are prioritized.
Inspection rights: Shareholders often have limited inspection and information rights; founders and major holders usually have better access via shareholder agreements.
Transfer restrictions: Private-company common often carries restrictions—right of first refusal (ROFR), company consent, lockups, and transfer to affiliates only.
Preemptive rights: Not always present; when given, they allow current common holders to maintain ownership by participating in future financings.

Practical limitations in private companies:

Illiquidity: No public market; selling common is typically restricted and subject to company approval.
Weak payout priority: In liquidity events, common is last to be paid after creditors and preferred shareholders.
Limited governance influence: Smaller common holders may have little influence if preferred terms give investors board seats and protective provisions.

Relationship between common stock and preferred stock

Preferred stock sits above common in the payout waterfall and typically includes economic and protective rights. Important interactions:

Liquidation preferences: Preferred receives payment before common in a sale or liquidation. Preferences can be 1x, multiples, participating/non-participating—each affects how much common holders receive.
Convertibility: Preferred often converts into common on an IPO or at investor option in certain exits. Conversion mechanics determine whether preferred holders take their preference or convert to capture upside.
Protective provisions: Preferred terms may grant investor vetoes over key corporate actions (issuing new equity, selling the company, changing charter), which can limit common holders’ strategic control.
Dilution effects: New financings increase total shares; common holders may be diluted unless they have preemptive rights or an anti-dilution protection (usually for preferred holders).

Example effect on common holders: If a company is sold for a price that satisfies preferred liquidation preferences but leaves little for residual equity, common shareholders may receive little or nothing. Understanding financing term sheets is essential to predict outcomes for common holders.

Valuation and pricing in private companies

Valuing private-company common stock differs from public shares due to lack of market pricing and investor protections:

409A valuations (U.S.): Independent appraisals establish fair market value for common stock and set exercise prices for options. Companies typically obtain these valuations at least annually or after material events.
Negotiated round pricing: In a priced financing, investors negotiate the price for preferred shares. Common often does not trade at that same per-share price because preferred includes extra rights.
Secondary sales and bids: Private secondaries and tender offers provide occasional price discovery but are limited by transfer restrictions and sample bias.
Strike price implications: Option strike prices are generally set near the latest 409A FMV. If the company’s value rises, exercising options early at a low strike can create large unrealized gains but also tax consequences.

Because public market price discovery is absent, private common valuations rely on independent appraisals, comparables, and negotiation dynamics.

Tax and accounting considerations for holders

Tax rules vary by jurisdiction. Below are key U.S.-centric considerations common to private-company common stock and option holders:

83(b) election: For recipients of restricted stock (including founder RSAs), filing an 83(b) election within 30 days of grant can fix taxable income at grant-date FMV. This is often beneficial if the share price is low and expected to rise.
ISOs vs NSOs: Incentive Stock Options (ISOs) may provide favorable capital gains tax treatment if holding-period requirements are met, while Non-Qualified Stock Options (NSOs) create ordinary income at exercise.
Exercise tax events: Exercising options can create taxable events—including alternative minimum tax implications for ISOs—so holders should understand timing and tax exposure.
Capital gains: After holding common shares through required holding periods, gains on sale may qualify for long-term capital gains treatment.
Employer reporting and withholding: Companies must track option grants, exercises, and apply payroll withholding where required (usually for NSOs and RSUs upon vesting or settlement).

Tax planning is often essential for founders and early employees because early exercise and 83(b) elections can materially reduce lifetime tax costs. Always consult a tax advisor—this article provides education, not tax advice.

Liquidity, transferability, and secondary markets

Common stock in private companies is typically illiquid. Key items to know:

Transfer restrictions: Stockholder agreements frequently impose ROFRs, company consent requirements, and/or lockups to control transfers.
Secondary markets: There are private secondary channels where accredited investors can buy common or options, but trades often need company approval.
Liquidity events: Common holders usually monetize via a company sale, IPO, tender offer, or targeted secondary arranged by the company. These events determine real cash outcomes for common shareholders.
Sponsored transactions: Occasionally companies sponsor secondaries to allow employees to sell partial holdings; these are controlled and rare.

Because liquidity is limited, common holders should plan around likely exit timelines and understand contractual transfer limits before expecting resale.

Corporate governance and documentation

Issuance and management of common stock involves several documents and approvals. Typical items include:

Certificate of incorporation / charter: Establishes classes of stock and rights. The charter specifies authorized shares and classes (common vs preferred).
Bylaws: Operational rules for board meetings, officer authority, and corporate processes.
Stock purchase agreements: Define terms for direct purchases of common shares.
Stockholder agreements: Cover transfer restrictions, ROFRs, voting agreements, and information rights.
Equity incentive plan and grant documentation: Authorize option pools, RSAs, RSUs, and contain vesting and exercise provisions.
Board resolutions: Board approval is required for equity issuances, option grants, and amendments to capital structure.
Cap table and equity ledger: Accurate record-keeping of outstanding common, preferred, options, and warrants is essential for governance and fundraising.

Good governance practice is to maintain clear records, run regular cap table updates, and ensure shareholder consents are properly documented when issuing or transferring common stock.

Risks and considerations for common-stock holders in private companies

Common stock holders face distinct risks compared with preferred investors. Major risks include:

Last-in-line in liquidation: Common shareholders are paid after creditors and preferred holders; in many exits common can receive little or zero proceeds.
Dilution risk: Future financings, option pools, and conversion features reduce the percentage ownership of existing common holders.
Valuation uncertainty: Without public markets, valuations are estimates and can fluctuate widely between funding rounds.
Limited investor protections: Common holders often lack the veto rights, anti-dilution protection, and information rights that preferred shareholders negotiate.
Tax traps: Exercising options or holding restricted stock without correct elections can lead to sizable tax bills.
Transfer constraints and illiquidity: Selling common can be difficult or require company approval.

Understanding charter provisions, recent financing terms, and cap table mechanics helps common holders assess exposure and make better decisions about joining, exercising, or selling equity.

How individuals typically acquire common stock

Common pathways to acquire common stock in private companies include:

Founder allocation: At formation, founders receive an allocation of common stock subject to vesting arrangements and repurchase rights.
Employee grants: Employers grant options or restricted shares as part of compensation packages; exercised options convert to common.
Early-stage purchases: Early contributors or angel investors may buy common directly if agreed at formation or seed stage.
Secondary purchases: Employees or early shareholders can sometimes buy additional common on secondaries sponsored by the company.
Equity crowdfunding and regulated offerings: Certain platforms and exemptions allow wider retail purchases of common in private companies subject to securities rules.

Each pathway comes with documentation (purchase agreements, option grant letters, equity plans) and compliance steps the company must follow.

Practical examples and typical cap table dynamics

Example 1 — Founder vs. VC allocation:

At formation: Two founders split 80% of common stock 40/40, an early option pool reserves 10% for employees, and 10% remains for advisors and early supporters.
Seed round: Angel investors buy convertible notes that later convert into preferred in a priced Series A.
Series A: A venture investor injects capital for 20% of the company as preferred stock with a 1x liquidation preference. After the round, founders’ combined common ownership percentage declines due to dilution from the option pool expansion and the investor’s ownership.

How common is affected:

If a sale occurs soon after Series A at a price that covers the investor’s liquidation preference but leaves less residual value, common holders (founders and employees) receive the remainder after preferred is paid.
If the company succeeds and the preferred converts at IPO, common and converted preferred share in the upside proportionally.

Example 2 — Options and exercise timing:

An early employee receives options for 1% of the company with a strike price set by a 409A valuation. Exercising early (if allowed and with 83(b) when applicable) can minimize tax but requires upfront cash.

These examples highlight how financing terms, option pools, and liquidation preferences materially influence the economic outcomes of common holders.

Regulatory and legal considerations

Issuing and transferring common stock in private companies must comply with corporate law and securities regulations:

State corporate law: Company formation, authorized shares, and director duties are governed by the company’s state of incorporation (e.g., Delaware in many U.S. startups).
Securities law exemptions: Most private equity issuances rely on exemptions from public registration (e.g., Regulation D or accredited investor exemptions) and require proper disclosures and investor suitability checks.
Transfer compliance: Transfers must respect ROFRs, lockups, and securities exemptions; secondary transactions often require legal counsel and permit filings.
Tax and employment law compliance: Proper reporting of option grants, exercises, and withholding obligations is required.

Companies should work with counsel to document equity issuances and to ensure compliance with applicable securities rules when selling common to investors or employees.

References and further reading

Sources for deeper, practitioner-level reading include materials from Carta, Corporate Finance Institute, Cornell Law School, LTSE, StartEngine, Kruze Consulting, MicroVentures, Ramp, and standard legal guides on private equity and securities exemptions. As of 2026-01-22, these practitioner resources continue to document that founders and employees typically hold common stock while institutional investors negotiate preferred-stock protections.

Further exploration: Learn how private-company equity affects your financial planning and how Bitget resources can help you understand tokenized equity and digital-asset custody. Explore Bitget Wallet to manage crypto-native assets and visit Bitget Wiki for more educational guides on equity concepts.

The content above has been sourced from the internet and generated using AI. For high-quality content, please visit Bitget Academy.