In the startup context, the term “security” typically refers to a financial instrument or investment vehicle that represents an ownership stake, financial interest, or right to a claim within the startup company.
Various types of securities can be issued by a company to raise capital or allocate ownership. Here are some common types of securities:
- Common Stock
This represents ownership in a corporation and often comes with voting rights at shareholder meetings. Common stockholders may receive dividends if declared by the company’s board of directors but are subordinate to preferred stockholders in terms of dividends and assets in case of liquidation. - Preferred Stock
Preferred stockholders have priority over common stockholders in terms of dividends and assets in case of liquidation. They often do not have voting rights but might have other preferences, such as guaranteed dividends. - Convertible Preferred Stock
This type of preferred stock can be converted into a predetermined number of common shares at the holder’s discretion, typically at a specified conversion ratio. - Stock Options
Options give employees or certain individuals the right to buy or sell company stock at a predetermined price within a specific timeframe. They are often used as part of employee compensation packages. - Warrants
Similar to options, warrants are a type of security that gives the holder the right, but not the obligation, to buy company stock at a predetermined price within a specific timeframe. Warrants are often issued in conjunction with debt securities or as part of fundraising. - Convertible Notes
These are debt instruments that can be converted into equity or stock at a future date, typically during a subsequent funding round. They are a common form of financing for early-stage startups. - Restricted Stock Units (RSUs)
RSUs are a type of compensation given to employees in the form of company shares. They typically vest over time and are subject to certain restrictions until they vest. - Bonds and Debentures
While less common in startups, larger corporations may issue bonds or debentures as debt securities to raise capital. These instruments pay interest to bondholders and have a maturity date when the principal amount is repaid.
These securities serve different purposes in capital markets, offering investors varying levels of ownership, rights, and benefits within a company. The specific types of securities issued by a company depend on its capital structure, fundraising needs, and the agreements made with investors or employees.