Investors in your company likely will want special rights for their investment. As holders of common stock (or common units in a limited liability company) their rights and privileges would be the same as every other owner. This is usually not acceptable to investors. There are two sets of preferred rights investors generally seek: economic rights and governing rights.
Economic rights may include a preferential right to funds on distributions or liquidations. Investors might also receive a preferential return, such as twice their investment before the founders receive any dividend or distribution.
Governing rights might include the right to elect specific members of the board of directors, the right to separately vote on certain matters such as debt, or the right to serve on specific committees.
Each of these rights is preferred – granting the holder of preferred stock some preferential treatment.
Preferred stock is the ownership stake an investor in a corporation is issued to provide evidence of their preferential rights.