Equity in a private company comes in classes with negotiated rights. The names are conventional; the substance is in the documents.

Common stock carries residual economic rights and usually the general voting power. Founders and employees hold it.

Preferred stock carries a liquidation preference, paid before common on a sale or liquidation, often with a stated multiple and sometimes participating in the remainder as well. It typically carries protective provisions — a veto over sales, new senior issuances, charter amendments and debt above a threshold — and conversion rights into common.

Dividends on preferred may be cumulative, accruing whether or not declared, or non-cumulative. Cumulative dividends compound the preference over time and are easy to overlook when modeling an exit.

LLC units replicate all of this contractually, often as classes with different distribution waterfalls. Profits interests give a share of future appreciation only, and their tax treatment depends on structuring them properly at grant.

The practical point for a minority owner is that the waterfall, not the percentage, determines what a sale produces. A twenty percent common holder behind a three-times participating preference may receive nothing in a sale that looks successful.