A class of stock typically held by investors that has priority over common stock in liquidation and often carries additional protective rights.
Preferred stock is what most outside investors — angels and VCs — receive in exchange for their investment. It sits above common stock in the payment hierarchy: if the company is liquidated or acquired, preferred holders get paid before common holders, typically at least their original investment back (the "liquidation preference"). This protection is what allows investors to invest in companies where most outcomes might result in modest returns or losses.
Beyond liquidation preference, preferred stock often comes with other rights: anti-dilution protections (which adjust the conversion ratio if the company raises money at a lower valuation), board seats, information rights (the right to see financials), and voting rights on specific matters. These rights are negotiated and documented in a term sheet and ultimately in a Stock Purchase Agreement and Certificate of Incorporation amendment.
At an IPO or large acquisition, preferred stock typically converts to common stock, eliminating the distinction. But in the more common "middle outcome" scenarios — company sold for 2-5x its last valuation — the allocation between preferred and common holders can look very different. This is why founders care about liquidation preference terms even when things seem to be going well.