What is Security Class

Overview

A security class is a type of share or stock that a company issues. Just like a restaurant might offer different menu items with different features and prices, a company can issue different classes of shares, each with its own set of rights and characteristics.

When you invest in a company, the security class determines what rights you have as a shareholder, such as voting power, dividend entitlements, and priority if the company is liquidated.

Key Features of Security Classes

Different security classes come with different attributes but no limited to:

Voting Rights - Some shares give you one vote per share, while others might give you ten votes or no voting rights at all.

Dividend Rights - Your shares might entitle you to a fixed percentage return (like 8% annually) or discretionary dividends that the company decides whether to pay.

Conversion Rights - Some shares can be converted into a different class. For example, preference shares might convert to ordinary shares after a certain period.

Transfer Restrictions - Some security classes can be freely bought and sold, while others have restrictions on who can own them.

Why Security classes Matter?

For Startups

Startups use different security classes to balance control and fundraising:

  • Founders might hold Class B shares with 10 votes each to maintain control

  • Investors might receive preference shares with fixed returns and priority in liquidation

  • Employees might get ordinary shares through stock option plans

This structure lets founders raise money without losing control of their company.

For Private Companies

Private companies often use security classes to maintain family or management control:

  • Family members might hold shares with full voting rights

  • Outside investors might hold shares with limited or no voting rights but preferential dividend treatment

For Listed Companies

When companies go public through an IPO, they often maintain dual-class structures:

  • Public investors receive ordinary shares traded on the stock exchange

  • Founders retain shares with superior voting rights