Ordinary shares vs preference shares in UK startups — what's the difference?
By SuLe · Updated 2 July 2026
Ordinary shares carry votes and sit last in line for proceeds on an exit; preference shares carry extra rights — typically a liquidation preference, anti-dilution protection and consent rights — and rank ahead of ordinary shares. Founders and staff usually hold ordinary shares; investors often hold preference. UK seed rounds, though, are frequently ordinary-only.
Key facts
- Ordinary shares: votes, and last in line for proceeds on an exit.
- Preference shares: a liquidation preference, anti-dilution, consent rights, and usually the ability to convert to ordinary.
- Founders and employees typically hold ordinary shares; investors often hold preference.
- UK seed rounds are frequently done on ordinary shares, with preference terms arriving at Series A.
- Share rights are defined in your articles of association under the Companies Act 2006.
What rights do ordinary shares carry?
Ordinary shares are the base layer of a company's equity. They typically carry voting rights and a share of dividends and exit proceeds — but they sit at the back of the queue when money is distributed.
Founders, employees and option-holders almost always hold ordinary shares. They win when the company does well, because they share fully in the upside once any preferences ahead of them are paid.
The trade-off is that in a modest exit, ordinary shareholders are paid only after preference shareholders have taken their preference — so they carry more downside risk.
What extra rights do preference shares carry?
Preference shares layer protective rights on top. The core one is the liquidation preference: the right to be paid a set amount, usually the money invested, before ordinary shareholders on an exit.
They commonly also carry anti-dilution protection against down rounds and consent rights (reserved matters) over major company decisions. Bundled together, these are the protections institutional investors expect.
Crucially, preference shares usually convert to ordinary — automatically on events like an IPO, or at the investor's choice when converting pays more. That convertibility is what lets a non-participating investor take whichever route gives the higher return.
Do UK seed rounds actually use preference shares?
Often not. Many UK seed rounds are done entirely on ordinary shares, with no liquidation preference, and the full preference-share machinery arrives at Series A when institutional funds lead.
This keeps early rounds simple and founder-friendly. An ordinary-share seed avoids negotiating preferences, anti-dilution and reserved matters at a stage where the sums are smaller and speed matters.
Whether to issue preference shares at seed is therefore a genuine negotiation, not a rule. UK venture terms commonly follow the BVCA model documents, which offer both ordinary and preference-share structures.
How are share classes actually created in the UK?
Different share classes and their rights are defined in your articles of association, within the framework of the Companies Act 2006. Creating a preference class means setting out its rights in the articles and passing the necessary resolutions.
Once created, the rights attaching to a class generally cannot be changed without the consent of that class — a "variation of class rights" — which is itself protected by the Act. That is why getting the drafting right at the round matters: unwinding it later needs class consents.
Each new share issue must also be properly allotted and filed at Companies House, whichever class it is. The company setup cluster covers the basics of issuing shares.
| Ordinary shares | Preference shares | |
|---|---|---|
| Votes | Usually yes | Sometimes, as negotiated |
| Liquidation preference | No | Yes |
| Anti-dilution | No | Often |
| Consent rights (reserved matters) | No | Often |
| Position on exit | Last in line | Ahead of ordinary |
| Typically held by | Founders, staff, option-holders | Investors |
| Common at UK seed? | Yes — often ordinary-only | More common at Series A |
Worked example
Aisha and Tom found a consumer health app and raise a £600k seed round from angels. To keep it simple and fast, they issue ordinary shares only — the angels take the same class as the founders, with no liquidation preference.
Two years later they raise a £4m Series A from an institutional fund. This time the fund insists on a new class of preference shares carrying a 1x non-participating preference, broad-based weighted-average anti-dilution and reserved matters.
The founders' and angels' ordinary shares remain ordinary; the fund's preference shares rank ahead of them on an exit but convert to ordinary if that pays more. The single seed class has become a two-tier cap table.
Where founders go wrong
Assuming every round needs preference shares
— many UK seed rounds are ordinary-only, which is simpler and more founder-friendly.Treating "preference shares" as one thing
— the preference multiple, participation, anti-dilution formula and consent rights are all separately negotiable.Forgetting class rights are sticky
— once set in the articles, changing them needs class consent, so get the drafting right first time.Overlooking conversion
— preference shares usually convert to ordinary, which is how investors keep the upside as well as the downside protection.
Related questions
What is the difference between ordinary and preference shares?
Ordinary shares carry votes and sit last in line for proceeds on an exit. Preference shares carry extra rights — typically a liquidation preference, anti-dilution protection and consent rights — and rank ahead of ordinary shares on exit. Founders and staff usually hold ordinary; investors often hold preference.
Do UK seed rounds use preference shares?
Not always. Many UK seed rounds are done on ordinary shares with no preference at all, with preference terms arriving at Series A when institutional investors come in. Whether you issue preference shares at seed is a negotiation, not a requirement. [More: What should a UK seed-stage term sheet include?]
Why do investors want preference shares?
Preference shares bundle the protections investors care about: getting their money back first on an exit, protection against down rounds, and consent rights over major decisions. They also usually convert to ordinary shares if that pays out more, so the investor keeps the upside too. [More: What is a liquidation preference?]
Can preference shares convert to ordinary?
Yes — most preference shares convert to ordinary, either automatically on events like an IPO or at the investor's choice when converting pays more than taking the preference. This convertibility is what lets a non-participating investor pick whichever route gives the higher return. [More: Participating vs non-participating liquidation preference — what's the difference?]
Whether your investors take ordinary or preference shares — and exactly what those preference rights say — shapes who gets paid, and how much, at every future exit. A SuLe solicitor can draft the share classes into your articles cleanly and flag where a preference term reaches too far. Book a free term sheet review before you set the classes.
Keep reading: What is a liquidation preference? · Participating vs non-participating liquidation preference — what's the difference? · What is anti-dilution protection and how does it work? · How many shares should I issue when incorporating a UK startup? · What founder protections should I negotiate in a term sheet? · What should a UK seed-stage term sheet include?
Primary sources: BVCA — model documents for UK venture capital · Companies Act 2006
