"Preferred stockholders" refers to individuals or entities who own a specific type of stock in a company called "preferred stock." This type of stock grants these stockholders certain privileges or rights, such as the preference to receive dividends before common stockholders and a higher claim to company assets in case of bankruptcy.
Full definition
To be clear though,
preferred stockholders generally don't have a preference over traditional debt or convertible notes (another form of short - term debt), so don't forget to check whether a company has outstanding debt obligations.
A voting agreement among the common and
preferred stockholders forces the stockholders to vote in favor of director nominees selected in a certain manner (i.e. all of the Series A stockholders agree to vote in favor of the nominee from VC Fund X for the Series A seat).
Those with weak positions,
like preferred stockholders, unsecured and junior debtholders must be compensated for the weak position with extra yield or covenant protections.
The other important thing to note about the bonds is that bondholders are paid before stockholders (
even preferred stockholders), and they get first call on assets in a bankruptcy (also above preferred shareholders).
Common stockholders should view statements differently than
preferred stockholders who should view statements differently than junior debtholders who should view statements differently than senior debtholders.
This means that
preferred stockholders tend to have the pleasure of earning a static dividend payment whether the company does well or tanks.
Representing General Electric Co., GE Capital, and its former directors in a fiduciary duty class action brought in the Delaware Court of Chancery by a former GE
Capital preferred stockholder, challenging GE's merger with GE Capital.
Frank, you can do some really good stuff in an Operating Agreement, like having members
as preferred stockholders and common, in concept... spliting voting rights, having other events of withdrawl and indemnification agreements.
Preferred stock: Preferred stock is a little more exotic than common stock in this way:
preferred stockholders generally have no voting rights; however they generally profit more based on the fact that dividend payments are somewhat more structured than common stock.
It would be completely off - market (and offensive) if a venture term sheet entitled
the preferred stockholders to, say, a 2.5 x liquidation preference.
If things don't go according to plan, being
a preferred stockholder can mean the difference between getting your money back and not.
In this world, preferred stock guarantees that if there is a pay out,
the preferred stockholder will get paid before the common stockholder (i.e. they quite literally have «preference»).
This measurement disregards
the preferred stockholders and is the equivalent of shareholders equity less preferred equity.
Suffice it for our purposes to say that Trados Inc. entered into a merger agreement with SDL, plc, under which Trados»
preferred stockholders would get $ 57.9 million to satisfy their liquidation preference, management would get $ 7.8 million under a golden parachute - type arrangement, and the common shareholders would get exactly nothing.
That said, I would be uncomfortable owning Fannie or Freddie here; just because the government might stand behind senior obligations doesn't mean they would take care of the common and
preferred stockholders, or even the subordinated debt.
Bondholder claims rank higher than
preferred stockholders in both their regular interest payments and in assets in the event of liquidation, but preferred stockholders rank above common stockholders.
In the event of a company's liquidation, common stockholders have lowest priority and receive assets only after bondholders,
preferred stockholders, and other debt holders have been paid in full.
Common stock dividends, if they exist at all, are paid after the company's obligations to
all preferred stockholders have been satisfied.
That would guarantee the banking system, but let the common and
preferred stockholders, and bondholders go broke before the taxpayer coughs up the first dime.
That's right folks,
preferred stockholders might get preferential treatment when it comes to payments.
Holders of senior debt secured by a claim to assets of the company will be first in line, followed by junior / subordinated debt holders, followed by
preferred stockholders, and finally those holding common stock.
Bank debt is a loan to a corporation that typically has first priority to make claims on the company in bankruptcy, ahead of the bondholders, much less
the preferred stockholders and the common equity.
Also, the board of directors can vote to suspend the dividend payments, and
the preferred stockholders can not sue them.
«Preferred» stock usually gives up the voting rights, but pays a higher dividend percentage (maybe double or triple that of common stock) and may have payment guarantees (if a promised dividend is missed in one quarter and then paid in the next,
the preferred stockholders get their dividend for the past and present quarters before the common shareholders see a penny).
If the company liquidates, however, common stockholders receive assets only after bondholders,
preferred stockholders, and other debt holders have been paid in full.
In the case of liquidation of the business, owners of common stock are last in line behind creditors, bondholders, and
preferred stockholders.