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Security Types ​

The choice of a security type is a foundational decision for any offering. It dictates the legal rights of investors, the disclosures required, and the functionality the investment platform must support. This guide provides a compliance-oriented overview of the most common security types.

1. Equity Securities (Ownership) ​

Equity represents a direct ownership stake in a company. All equity offerings require establishing a clear valuation for the issuer.

Common Stock ​

  • What It Is: The most basic form of ownership in a corporation, granting the holder voting rights and a claim on the company's residual assets.
  • Compliance Standpoint & Key Disclosures: Issuers must clearly disclose the price per share, the total number of shares outstanding (capitalization), and the voting rights associated with each share. The core legal documents defining these rights are the Articles of Incorporation and Shareholders' Agreement.

Preferred Stock ​

  • What It Is: A class of stock with superior rights to common stock.
  • Compliance Standpoint & Key Disclosures: All the disclosures for common stock are required, plus a clear explanation of the "preferences." These must be legally defined in a Term Sheet and the corporate charter. Key disclosures include:
    • Liquidation Preference: (e.g., 1x, 2x) The multiple of their investment that preferred holders receive before common holders.
    • Dividend Preference: The rate and terms of any dividend payments.
    • Conversion Rights: Terms for converting preferred shares into common stock.

LLC Membership Units ​

  • What It Is: An equity interest in a Limited Liability Company (LLC), common in real estate and fund structures.
  • Compliance Standpoint & Key Disclosures: The offering is governed by the LLC Operating Agreement, which is the single most important disclosure document. It details member rights, capital contributions, and how profits are distributed. The distribution waterfall (the order of profit sharing) must be clearly explained.

2. Convertible & Hybrid Securities ​

These instruments convert into equity at a future date, allowing an issuer to raise capital while delaying a formal valuation.

SAFE (Simple Agreement for Future Equity) ​

  • What It Is: A contract granting the investor the right to receive equity in a future priced round. It is not debt.
  • Compliance Standpoint & Key Disclosures: The SAFE Agreement itself is the core document. The key terms that must be disclosed are the Valuation Cap and any Discount Rate. Issuers must be clear that a SAFE is not a debt instrument and has no maturity date or interest rate.

Convertible Note ​

  • What It Is: A loan that automatically converts into equity upon a future priced round. It is a debt instrument until conversion.
  • Compliance Standpoint & Key Disclosures: The Convertible Note Agreement must clearly disclose both the debt terms and the conversion terms:
    • Debt Terms: Interest Rate and Maturity Date.
    • Conversion Terms: Valuation Cap and Discount Rate.

3. Debt Securities ​

Debt is a loan made to the company. The investor is a lender, not an owner.

Promissory Note / Loan Agreement ​

  • What It Is: A straightforward loan to the company.
  • Compliance Standpoint & Key Disclosures: The Loan Agreement or Promissory Note is the core document. It must clearly define the Principal Amount, Interest Rate, Payment Schedule, and Maturity Date.

Revenue Sharing Agreement (RevShare) ​

  • What It Is: A type of loan where repayment is based on a percentage of the company's future revenue.
  • Compliance Standpoint & Key Disclosures: The Revenue Sharing Agreement must clearly define the Investment Amount, the Revenue Share Percentage, the Repayment Multiple (e.g., 1.5x), and the specific Definition of Revenue used in the calculation.

Investor Rights & Control ​

This defines how much influence an investor has over the company.

  • Equity (Common/Preferred Stock): Grants direct ownership and typically voting rights. Investors are owners who can influence major corporate decisions.
  • Debt & Convertibles (before conversion): Grants no ownership and no voting rights. The investor is a lender whose rights are limited to being repaid.
  • LLC Units: Rights are flexible and defined by the Operating Agreement, and can be structured to be either voting or passive.

Company Valuation ​

This determines how the company is priced at the time of investment.

  • Equity (Common/Preferred Stock, LLC Units): Requires an immediate, fixed valuation. A "price per share" must be set, declaring the company's worth today.
  • Convertible Instruments (SAFEs & Notes): Delays valuation. The company raises capital now, and the valuation is set during a future funding round.

Risk Profile & Seniority ​

This defines an investor's place in line if the company is sold or liquidates.

  • Debt: Highest seniority. Lenders are paid first, making it the lowest-risk position.
  • Preferred Stock: Middle seniority. Paid after debt but before common stockholders.
  • Common Stock: Lowest seniority. Paid last, making it the highest-risk position.

Tax Reporting ​

This dictates the tax documents investors receive annually.

  • C-Corporations (issuing Stock, SAFEs, Notes): Investors receive a Form 1099-DIV for any dividends paid.
  • Pass-Through Entities (LLCs & LPs): Investors receive a Schedule K-1, reporting their share of the company's profit/loss, even if no cash was distributed.

Distribution & Return Profile ​

This defines the primary mechanism for how investors get their money back.

  • Equity (Common/Preferred Stock): The return is typically realized through a future liquidity event, such as an acquisition or IPO. Cash returns via dividends are possible but rare for growth-focused companies.
  • Debt & Revenue Share: The return comes from scheduled, contractual payments (principal + interest) or a percentage of ongoing revenue. The potential return is capped.
  • LLC Units: Returns are paid as cash distributions from the company's operating profit, as dictated by the Operating Agreement's "waterfall." This is common for cash-flowing businesses like real estate.
  • Convertible Instruments (SAFEs & Notes): The return is delayed. There are no cash distributions. The instrument must first convert into equity, and then that equity must achieve a liquidity event.