What is the difference between common and preferred stock ?

You can look up the exact difference between the two on Wikipedia at

• http://en.wikipedia.org/wiki/Common_stock
• http://en.wikipedia.org/wiki/Preferred_stock

... but it's a little hard to understand so I will just sum it up quickly:

• Common stock usually has voting rights, meaning: if you own a company's common stock you may take part in decision making processes and vote for/against them: Examples: company policy, board of directors, voting on legal/contractual issues etc.. Common stock holders get paid dividends after preferred stock holders.

• Preferred stock gives you more security in terms of dividends paid etc. but usually doesn't involve voting rights. Meaning: potential money paid to you is "more" secure but you can't decide on the company's future and decisions taken.

What Wikipedia doesn't directly tell you is that you can use those two forms of stock options as a utility to more easily control ownership of the company as well as use them as an incentive to potential investors and partners (although the tough and experienced ones will want to have both).

Example: an IT company implements your product and gets a share in your company. You don't want to give up control over your company so you offer them preferred stocks. If they insist on voting rights you may offer them a higher percentage of preferred stocks, so their future payout is higher. Your risk/loss is still nothing you need to worry about since common stocks (with voting rights) may be sold at a higher price to potential investors (since the voting rights give them some control over the company).

So you can utilize those two forms of stocks to shape your company into an ownership structure according to your business strategy:

• Do you care more about owning a higher percentage of your company?
  or
• Do you care more about actually controlling your company?