A class of stock that confers special privileges not available to common stock.

For example, holders of preferred stock have special rights in a company liquidation, and also special rights to receive dividends before they are paid to common shareholders. Employees in a private company should understand whether the outside investors (e.g. venture capital firms) have convertible or participating preferred stock (sometimes called participating or nonparticipating preferred stock), as this will affect the value of employee stock options and private company common stock in an acquisition.

For more on private company stock and the impact of preferred stock and preferred overhang, see an FAQ in the Pre-IPO section of this website.