What are preferred shares in a startup?

How are preferred shares different from common?

Founders and employees usually hold common shares. Investors in a priced round usually buy preferred shares, which carry extra rights negotiated in the term sheet. The name only means they rank ahead in some way; the actual rights come from the articles.

Right	Common shares	Venture-style preferred shares
On a sale or wind-up	Paid after preferred	Paid first, up to the liquidation preference
Conversion	n/a	Convert into common, usually at the holder’s option and automatically on an IPO
Anti-dilution	None	Conversion price adjusts if shares are later sold cheaper
Votes	Usually one per share	Usually vote with common on an as-converted basis, plus class approvals
Dividends	If declared	Sometimes a preference, often non-cumulative

What rights do investors usually ask for?

• Liquidation preference. Investors get their money back, or a multiple of it, before common holders on a sale.
• Conversion. The right to switch into common when that pays more.
• Anti-dilution. Protection if a later round is priced lower. Weighted-average formulas are more founder-friendly than full ratchets.
• Protective provisions. Investor approval for decisions such as new share classes, selling the company, taking on debt or changing the articles.
• Board rights and information rights, usually set out in a shareholder agreement rather than the share terms.

How are they created in Canada?

Through the articles. Section 24 of the CBCA, and section 22 of Ontario’s Business Corporations Act, require the rights, privileges, restrictions and conditions of each class to be set out in the articles when there’s more than one class. Adding a class of preferred shares means filing articles of amendment, approved by the shareholders by special resolution under section 173 of the CBCA or section 168 of the OBCA.

The Ontario fee for articles of amendment is $150, and the federal online fee is $200; fees can change. Articles can also allow the board to issue preferred shares in series (Series Seed, Series A), each with its own terms, so later rounds need less shareholder approval.

Are startup preferred shares the same as “preferred shares” in tax planning?

Not usually. Canadian accountants also use fixed-value preferred shares for estate freezes and holding company structures. Those are designed for tax purposes and look very different from venture preferred shares. If your company already has tax-planning share classes, check how they interact with an investor’s preferred terms.

Do SAFEs convert into preferred shares?

Often. A SAFE usually converts into the same kind of preferred shares sold in the priced round, sometimes a shadow series with a liquidation preference based on the SAFE’s conversion price rather than the round price. See how do SAFEs work in Canada?

What should founders watch?

The headline valuation gets the attention, but preferred share terms decide who gets paid on a sale. A higher valuation with a multiple liquidation preference and a full-ratchet anti-dilution clause can leave founders with less than a lower valuation on standard terms. Read the share terms with the cap table open. See when do I need a priced round?

We review term sheets and priced round documents; that work is quoted before it starts. Our contract review starts at $400 and our investor due diligence prep at $1,480. Fees are in Canadian dollars and exclude HST; government filing fees and other disbursements are charged at cost. See fees.

This guide is general information about Ontario and Canadian law, not legal advice for your situation. To talk through a priced round, book a free 15-minute consult.