The Stock Purchase Agreement (sometimes referred to as an “SPA”), should, near the top of the first page, make it very clear what type of stock is being bought and sold in the round. If you cannot tell, you should check with the company. Here is an overview of the different types of stock typically issued.
Common Stock - the baseline equity of a company; typically owned by founders and granted to employees, consultants, advisors and board members upon the exercise of stock options. (Common Stockholders are the last to receive assets and cash in the case of a sale, liquidation or bankruptcy)
Convertible Note - technically this is a “security” under the SEC’s broad definition, but it is not stock. It is convertible into stock, but you are not a stockholder, and do not have the rights or protections of a stockholder until it converts. Convertible notes are often referred to as a “debt” or “bridge” round, because they are a form of financing in which investors lend money to a company for agreed-upon terms, including interest, with the intention that the money will not be repaid in cash, but rather be converted to equity as part of the next round of financing
Options - contractual right (but not an obligation) granted by a company, typically to employees, consultants, advisors and board members, to purchase a specific amount of securities, at a specific (future) date for a specific price. Stock options are typically for the purchase of common stock, but options on preferred stock are not unheard of. An option-holder’s right to exercise options and thereby convert them into stock, generally “vests” over time according to a pre-determined schedule. Options are typically issued pursuant to a predetermined option plan out of a pool of shares authorized to be used for the purpose of granting options. It is the responsibility of the option holder to track the exercise date and make sure they exercise before expiration - Seraf’s date tracking functionality can help with that.
Preferred Stock - most common type of security issued and purchased in the private equity investing context (e.g. angel, VC, PE); preferred stock is a class of stock, created under a company’s charter, which comes with special rights, privileges, protections, and possibly obligations. A company can have many different layers of preferred stock (usually sequentially named such as “Series A Preferred Stock”, “Series B Preferred Stock” etc.) Aside from its customizability through negotiation, preferred stock’s main advantage is that, in the event of a sale, liquidation or bankruptcy, it is repaid before common stock (though different layers or series of preferred stock may have different seniority by agreement). Preferred stock comes in a nearly infinite number of variations and so it is important to read the documents and charter amendments to understand your rights and obligations.
Restricted Stock - can be any type of stock, but is referred to as restricted because it is granted pursuant to a contract which imposes various restrictions on ownership. Although there can be many types of restrictions, the most common restriction is the requirement that time pass before ownership is outright. This schedule is very similar to options vesting (see Options), although technically it is different: it is not ownership rights vesting, but rather ownership restrictions lapsing with the passage of time. Restricted stock is typically issued to executives and directors as compensation and can have different tax and accounting treatment than options. Restricted stock is often issued pursuant to a predetermined option and restricted stock plan out of a pool of shares authorized to be used for the purpose of granting options and restricted shares.
Warrants - very similar to options; a contractual right (but not an obligation) granted by a company, typically to lenders, investors or strategic partners, as a right to purchase a specific amount of securities, at a specific (future) date for a specific price. Warrants are often for the purchase of common stock, but warrants on preferred stock are not unheard of. A warrant-holder’s right to exercise warrants and thereby convert them into stock, generally “vests” over time according to a pre-determined schedule. Warrants are typically one-offs and are generally not issued pursuant to a predetermined option plan or out of a pool of shares authorized to be used for the purpose of granting options. Angel investors usually see warrants in situations where the company wants to make a convertible debt deal perform more like equity, or where special incentives are offered to close earlier, or to bridge a gap on valuation. It is the responsibility of the warrant holder to track the exercise date and make sure they exercise before expiration - Seraf’s date tracking functionality can help with that.