Coming from Hyderabad, let me use the Hyderabad Biryani analogy here. Why are certain spices are preferred over others in a biryani? It’s because each spice brings unique flavours.
Similarly, angel or seed investors usually opt for preferred stock over common stock. Here’s why:
- Preference in Dividends: Just like saffron takes precedence in biryani for its royal flavour, preferred stock gives investors precedence when dividends are distributed.
- Liquidation Preference: The way cardamom seeds add their aroma first in the biryani, in the event of a company’s liquidation, preferred stockholders get paid before common stockholders.
- Conversion Rights: This is like having a magic masala in your biryani. Preferred stock often comes with the option to convert into common stock, which could be beneficial if the company’s value rises.
In India, many angel or seed investors generally go for ‘CCPS’- Compulsorily Convertible Preference Shares. It’s like having a secret spice that transforms the entire dish, these shares eventually convert into equity shares, giving investors the benefit of preferred shares and the growth potential of common shares.
