Common Shares

Common shares are the ordinary shares in a company, usually held by founders and employees. They have no special preferential rights and rank behind preferred shares in a payout. In return, they fully benefit if the company is successful. In a German GmbH these are the ordinary shares, which absent deviating provisions carry equal voting rights and profit participation in proportion to holdings. Preferential rights arise only through specific provisions in the articles and the shareholders' agreement.

The economic difference is particularly visible on exit. Depending on the terms, liquidation preferences are served first. Allocation of the remaining proceeds depends in part on whether preferred shares continue to participate or convert into common shares. At low and moderate sale prices this can leave founders with little despite a substantial percentage holding, while at high prices the preference loses relevance and the percentage governs again. A noticeable valuation gap between common and preferred follows: the price an investor pays per preferred share cannot simply be applied to common shares, so a separate valuation is needed for employee plans and tax purposes. It also matters in practice that employee participation in Germany is often structured not as real shares but as virtual participation sharing contractually in exit proceeds, economically modelled on common shares. On a sale of the company, common and preferred shares are normally transferred together, which is why drag-along provisions in the shareholders' agreement ensure that individual minority holders cannot block completion.

Valuing this share class across several scenarios has become the norm, because its payout depends on the ranking and terms of preferences. Common shares may receive nothing at a low exit value. Their value before exit also reflects the chance of higher future proceeds. For employee plans it follows that communication must be honest, since a plan whose value only emerges at a very high exit creates no incentive if those affected cannot assess it. Many plans fail in practice for exactly that reason.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.