investment
Preferred shares are equity with contractual privileges — typically a liquidation preference, sometimes a dividend, conversion rights and vetoes — that sit economically between debt and common stock.
Preferred shares are the default instrument of venture capital and many growth equity deals. NVCA models catalogue the usual privileges: non-participating or participating liquidation preference, anti-dilution, conversion to common equity, board rights, and protective provisions.
IAS 32 can still classify some prefs as liabilities if cash redemption is mandatory. IPEV fair value of a preferred instrument is not always the last round price.
A 1× non-participating preference means the investor takes the greater of their money back (plus accrued dividend, if any) or converting to common. Participating prefs take money back and share in the residual — a very different capital structure. Multiple rounds stack.
Two series: Seed 1× non-participating €2m; Series A 1× participating €8m. Exit at €12m enterprise / no net debt. Depending on participation and seniority, common can be left with little. Founders who tracked only fully diluted percent missed the waterfall.
Founders care about the waterfall on a modest exit, not only on a home run. Later private equity buyers care because they must recap or roll that stack.
Headline valuation with a participating preference that makes the round expensive. Uncapped anti-dilution. Prefs that block a sale the common wants.
Preferred shares will not save a company that needs cash. They also complicate SPA mechanics on a full exit (drag, preference payoff).
A living cap table with a waterfall is part of company intelligence. Without it, pre-money valuation is theatre.