What are the two classes of stock? A guide for small businesses

For startups and small businesses, understanding the different types of stock is essential — especially when raising capital, structuring ownership, or offering equity incentives to your employees.

But stock classes can be confusing. You may have heard of Class A and Class B shares, but what’s the actual difference? And what about Class C shares? How do these categories impact voting rights, control, and decision-making?

In this guide, we’ll break it all down, helping you make informed decisions about issuing stock.

The two main classes of stock: Common and preferred

Before diving into Class A and Class B shares, it’s important to first understand the two primary categories that corporate stock falls into:

1. Common stock

2. Preferred stock

These categories define how ownership is structured and what rights shareholders have.

Common stock

Common stock is the standard type of equity that most businesses issue. It represents ownership in your company and gives shareholders certain rights, such as:

• Voting power. Typically, common stockholders can vote on major business decisions, such as electing board members.

• Profit sharing. If your company pays dividends, common shareholders receive a portion of the profits.

• Capital gains potential. If your company grows in value, common stockholders can benefit from an increase in stock price.

However, common stock also comes with greater financial risk. If your company goes bankrupt, common shareholders are last in line to receive any remaining assets, after creditors and preferred stockholders.

Preferred stock

Preferred stock is less common in startups and small businesses but is often used in larger corporations or companies seeking investment from venture capital firms. Holders of preferred shares:

• Usually have no voting rights

• Receive dividends before common stockholders

• Have priority over common shareholders in the event of liquidation

Because of these benefits, preferred stock is attractive to investors who want financial security rather than control over the company.

Some businesses offer convertible preferred stock, which can be converted into common stock under certain conditions, such as an IPO or acquisition.

Class A vs Class B vs Class C stock

Within common stock, companies often create different classes of shares to define who has more control over the business, which is where Class A, Class B, and Class C shares come into play.

Class A shares

Class A shares often provide greater voting rights than Class B or Class C shares. They are typically held by founders, executives, and early investors who want to maintain control over the company’s decision-making process.

For example, in some companies:

• Class A shareholders may have 10 votes per share, while Class B shareholders have only one vote (or even no votes) per share.

• Founders and key executives often hold Class A shares to prevent hostile takeovers.

• Even if Class B shareholders own more shares, Class A shareholders can still maintain the majority of voting power.

Class B shares

Class B shares usually have less voting power than Class A shares — or none at all. These shares are often issued to:

• Employees as part of stock compensation plans

• Investors who buy into later funding rounds

• Public shareholders in companies that want to maintain founder control

Class C shares

Some companies issue Class C shares, which don’t carry voting rights but may have different financial benefits.

Class C shares are often created to:

• Raise capital from investors without diluting voting control

• Offer financial benefits, such as higher dividends or different tax structures

• Trade on the stock market while ensuring founders keep decision-making power

It’s crucial to note that companies can define their shares at their own discretion, and stock class naming isn’t standardized.

For instance, Google (Alphabet Inc.) structures its shares in the following way:

• Class A shares (GOOGL): 1 vote per share, available to the public.

• Class B shares: 10 votes per share, held by the founders and executives.

• Class C shares (GOOG): No voting rights, but tradable on the stock market.

Under this structure, Class B shares act more as Class A shares and vice versa. Facebook (Meta) also operates in a similar way.

This is because there’s no universal rule that Class A = more votes, and Class B = less votes. Each company decides its own stock class structure, so you always need to bear this in mind.

How many shares can your company have?

When starting a business, one of the first decisions you must make is how many shares to authorize. This number affects everything from ownership distribution to future fundraising and employee stock options.

Many startups arbitrarily choose a high number of authorized shares (often in the millions), but this can depend on several factors, including:

• Your company growth plans. Startups often authorize a large number of shares (e.g., 10 million or more) to provide flexibility for future fundraising and equity incentives (see below).

• Founder equity distribution. At the time of incorporation, founders typically allocate themselves a significant percentage of the total shares. This way, they can distribute equity without diluting their percentage ownership too early.

• Investor expectations and fundraising needs. Venture capital firms and angel investors expect a company to have a structured equity plan before they invest.

• Employee stock option plans (ESOPs). Many startups set aside 10-20% of their total shares for an employee stock option pool (or similar equity incentive scheme), which helps attract and retain top talent.

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There’s no legal minimum or maximum number of shares a company can authorize, but most startups follow common industry practices:

• Early-stage startups: 10 million shares, which allows for easy division among founders, employees, and investors.

• VC-backed startups: 10 million to 100 million shares, which ensures sufficient shares for multiple fundraising rounds and employee stock options.

Your company must clarify the number of authorized shares in its corporate charter, although it is possible to create more through amending the charter, issuing stock splits, or creating new share classes.

Does share issuance affect your company valuation?

A common misconception is that more shares mean a higher company valuation — but that’s not the case. The value of a company is determined by market demand, revenue, and other financial metrics — not just the number of shares issued.

For example, a company with 10 million shares at $1 per share has the same valuation as a company with 1 million shares at $10 per share. Both are worth $10 million. The number of shares simply determines how ownership is divided.

Setting up equity incentives

For small businesses and startups, choosing the right stock structure is a critical decision that affects control, fundraising, and long-term growth. As mentioned, it also enables you to plan and offer equity incentives, which are a huge advantage for attracting and retaining top talent.

However, setting up and managing equity incentive schemes (such as ESOPs) can be hugely challenging — especially if you have team members in different countries.

This is why it’s advisable to work with a trusted, knowledgeable equity incentives partner, like Remote Equity. To learn more about getting started with equity incentives — and how Remote simplifies the entire process — check out our in-depth guide below:

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Startup equity guide: How to add incentives to your global benefits package

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