Unless you have a lead investor pressing for preferred, it is generally better to go with common. It’s not that later rounds find earlier rounds of preferred threatening, but rather earlier rounds of preferred can complicate things–issues ranging from consents to amend the charter documents, veto rights, liquidation issues and priorities, and legal and compliance expenses come to mind. Issues don’t always come up, but later investors appreciate a “clean cap table” consisting of common only. As I state in the post, simpler is often better.

If you’re going to be selling securities to individuals who are not accredited investors, be sure to keep securities law compliance in mind. In the U.S., if a company decides to have a Rule 506 offering, it is limited to 35 investors (not accredited) and with investors who are not accredited there are a variety of items that the company must include in the information that it provides to investors (very similar to the types of information provided in a public offering, like audited financials). If a company decides on a Rule 504 offering (under $1 million) instead, it is important that it complies with the state blue sky requirements (while Rule 506 offerings generally preempt state law, Rule 504 offerings do not). Each state where investors are located has its own rules for selling securities to residents of its state.

If you’re looking for more background information on the Internet before talking with an attorney, do a search on “small business and the sec.” The Securities and Exchange Commission has some helpful information (probably more than you want) on how to sell securities in compliance with securities laws. Many states also have a website that address selling securities to residents of their state. You can check that out as well.

Hope that helps.

I do not know any accredited persons, yet I must raise money from friends. Still having trouble determining if a weak “Preferred A” or Common would be better. Main concern is later rounds. Wouldn’t it be possible to craft a Preferred series that has ‘Drag Along’ and other provisions to make it non-threatening to Professional Investors?