On top of that, as long as the preferred investors get their slice they don’t care if common stock gets fucked over. There can be side deals where the buyer will “buy” the company for a lower price but gives the founders a huge salary and/or shares in the buying company.

For example, lets say a company is valued at 100mil with 50mil in preferred stock and 50mil in common stock where the preferred stock is owned by institutional investors and everyone else (including founders and angel investors) has common stock. Lets say there are two founders that own 10% each, an angel which owns 10%, and an employee options pool with the remaining 20%.

Now lets say there are two scenarios:

1. The company is sold for 90mil, 50m goes to preferred stock, and the remaining 40m goes to the common pool — 8m to each founder and angel and 16m to the options pool.

2. The company is sold for 50m, but the founders each get a salary of 5m for 3 years. The preferred stock gets the entire 50m. The angel and employee pools get 0, and the founders get 15m each.

In scenario 2 the preferred stock gets their share, the founders come out ahead by 7m each, AND the buyer has to pay 10m less than option 1. But the angel and employees get shafted.