Types of Equity Securities

Understanding What You’re Offering to Investors

When you raise money through equity financing, you’re not just “selling ownership” — you’re offering a specific type of security that comes with its own rights, risks, and rewards.

Choosing the right kind of equity security is crucial. It impacts investor expectations, future funding rounds, company control, and your legal obligations.

This chapter explains the main types of equity securities businesses offer during financing and when to use each one.

Introduction to Types of Equity Securities

Equity securities represent ownership in a company, but they come in different forms based on:

• Investor risk appetite
• Company stage
• Growth strategy
• Legal and tax implications

Understanding the differences helps you match the right structure to the right investor at the right time.

Common Shares

Common shares (or ordinary shares) are the most basic form of equity.

Key features:

• Represent standard ownership in the company
• Carry voting rights (often one vote per share)
• Entitled to dividends (if issued)
• Get paid last in case of liquidation (after debts and preferred shareholders)

Common shares are often issued to founders, early employees, and sometimes to seed investors.

Pros:

• Simple to issue and manage
• Aligns interests between founders and investors

Cons:

• Offers less protection to investors compared to preferred shares
• Dilutes faster across future funding rounds

Preferred Shares

Preferred shares offer investors additional protections beyond what common shareholders get.

Key features:

• Priority over common shareholders for dividends and liquidation payouts
• Sometimes carry fixed dividend rates
• May include anti-dilution rights, liquidation preferences, or conversion rights
• Often used in venture capital rounds (Series A, Series B, etc.)

Pros:

• Attracts serious investors with lower perceived risk
• Allows negotiation of strategic terms beyond valuation

Cons:

• Adds complexity to your cap table and future funding rounds
• Dilution terms must be carefully structured to avoid founder loss of control

Convertible Notes

Convertible notes are hybrid instruments: they start as debt but convert into equity under certain conditions (like a future funding round).

Key features:

• Immediate cash infusion without setting a valuation
• Converts into equity at a discount or with a valuation cap
• Often used in early-stage bridge rounds

Pros:

• Quick and inexpensive to issue compared to priced equity rounds
• Defers valuation negotiation to a future round

Cons:

• Debt terms may include maturity dates and interest, creating future obligations
• Can complicate later-stage cap table structures if not handled carefully

SAFE Agreements (Simple Agreement for Future Equity)

SAFEs are a newer, more founder-friendly alternative to convertible notes.

Key features:

• No interest, no maturity date
• Converts into equity during the next priced round
• Designed to be simple, fast, and cost-effective

Pros:

• Founder-friendly terms
• No risk of repayment pressure if no follow-up round occurs

Cons:

• Investors carry more risk (may demand stronger terms later)
• Still dilutive when conversion happens, even if simpler than debt

Warrants

Warrants give investors the option to purchase equity at a set price in the future.

Key features:

• Do not represent immediate ownership
• Used as incentives alongside loans or investments
• Adds flexibility to investment terms

Pros:

• Useful as bonus incentives for lenders or investors
• Can be structured to align future growth with funding costs

Cons:

• Adds complexity to cap table management over time

Choosing the Right Equity Instrument

The right choice depends on:

• Business stage (early vs growth vs mature)
• Speed of fundraising needed
• Type of investors you’re approaching
• Tolerance for complexity or dilution
• Future fundraising plans

Early-stage startups often favor SAFEs and convertible notes for simplicity. Growth-stage companies may move toward preferred shares to attract VCs or institutional investors.

Final Thoughts

Not all equity is created equal. The type of security you offer shapes investor expectations, risk-sharing, and your company’s future fundraising journey.

Choosing carefully — and structuring clearly — can mean the difference between a supportive investor relationship and major challenges down the line.

In the next chapter, we’ll walk through The Equity Financing Process — from preparation to deal closing.