Why a company ends up with five kinds of share, and what each one changes.

A class is a bundle of rights

Delaware section 151(a) is the provision that makes share classes possible, and it is worth reading closely. It provides that every corporation may issue one or more classes of stock, or one or more series of stock within any class, "any or all of which classes may be of stock with par value or stock without par value and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation" or in a board resolution the charter authorises.

Three things follow from that sentence. Classes may differ in voting power all the way down to none at all. They may differ in economic preference. And — the part people skip — the rights only exist if they are stated in the charter or in a properly authorised board resolution. A right that everyone remembers agreeing to, but which appears in no filed document, is not a right. This is why charter review is the first thing a diligence lawyer does and the last thing a founder thinks about.

The distinction between a class and a series is narrower than it sounds. A class is the top-level grouping — common stock, preferred stock. A series is a subdivision within a class with its own terms: Series A Preferred and Series B Preferred are two series of the preferred class. In practice people say "class" for both, and it rarely causes confusion because the mechanics are the same.

How a startup accumulates classes

Nobody designs a five-class capital structure on day one. It accretes, one financing at a time, and each layer is the residue of a negotiation that made sense at the time.

What actually differs between classes

Seniority is the term with the money in it

Of all the differences between classes, the one that most reliably surprises people is seniority — the order in which preferred series get paid relative to each other. There are two common arrangements. In a stacked structure, the most recent series is senior: Series B is paid in full before Series A receives anything. In a pari passu structure, the preferred series rank equally and share the available proceeds in proportion to their preferences.

In a large exit the distinction is academic, because everyone is paid and the residual goes to common. In a modest exit it decides who is made whole and who is not. Consider a company that raised $5,000,000 in Series A and $10,000,000 in Series B, each at a 1× non-participating preference, and that sells for $12,000,000.

The Series A holder receives $2,000,000 or $4,000,000 for the same investment on the same exit, and the only thing that changed is a clause in the charter agreed years earlier. Common holders receive nothing either way, which is the more important lesson: in an exit below the total preference stack, the people who built the company are paid last and frequently paid nothing.

Voting: as-converted, and then separately

Preferred stock usually votes together with common on an as-converted basis, meaning each preferred share carries the number of votes it would have if converted into common. That is the proportional part. The part that carries real power is the separate class vote: protective provisions requiring the consent of a specified percentage of a class before the company may take particular actions — amending the charter, creating a senior series, selling the company, changing the board size.

A class vote is a veto held by a minority. An investor with 15% of the company can hold a genuine block over a sale if the charter gives their series that consent right. This is not a defect; it is the bargain that persuaded them to fund a company they do not control. But founders routinely discover the full shape of it at the worst moment, during a transaction, rather than when they signed.