Lesson 4 of 8 · All lessons in this module
- Equity versus debt, why companies issue shares, and equity in global markets
- Common shares: voting rights, share classes, callable and putable shares
- Preference shares: cumulative, participating and convertibleVideo lesson
- Integrated cases: share classes, control and the liquidation ladder
- Private versus public equity: venture capital, buyouts and PIPEs
- Investing in foreign equity: direct, depository receipts, GRS and BLDRs
- Risk and return of different equity securities
- Book value, market value, ROE and the cost of equityVideo lesson
Lesson 4 of 8 · 15 min
Integrated cases: share classes, control and the liquidation ladder
A class structure has three separate layers to read: who votes, who is paid first in liquidation, and what the preferred shares take before either common class sees a cent.
In short
- Read a share-class exhibit in three passes: votes, dividends and liquidation, then preferred claims that rank ahead of both common classes.
- Liquidation ladders work per share, layer by layer: fill each slice for the classes entitled to it, then split the remainder equally.
- Cumulative preferred claims in liquidation = par (liquidation preference) + arrears; they come off the top before the common ladder starts.
- Control follows votes, not ownership; converting a high-vote class into a low-vote class can cost the founders their majority.
- To parse a term sheet, take each word as a separate feature and ask who holds the option: issuer, holder or nobody.
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