It is important to know exactly what you are investing in when it comes to venture capital. There are two types of securities you are purchasing, equity in a company or debt in a company that can potentially be converted into equity.

When it comes to equity, there are two types, Common Stock and Preferred Equity. Common Stock is the simplest form of equity. The shares are most commonly held by founders, employees and possibly some early investors. Common stock generally grant voting rights, which can be limited and often have lesser rights than preferred shareholders. Investors can only claim their common stock share of a company’s assets after the claims of debt holders and, following, preferred equity holders have been met. Preferred Equity is usually issued to outside investors. The class of stock grants special rights and privileges that usually provide greater protection and avenues of greater influence on company decision-making, these can include anti-dilution rights, pro-rata rights, and a liquidation preference. Investors can claim their preferred share of a company’s assets before common stock holders.

Purchasing debt can come in the form of a Convertible Note, Safe Note, or Crowd Note. Convertible debt is a unique form of short-term debt that converts into equity, usually conjunction with a future financial round. Unlike buying debt in a convertible note, when buying a SAFE, an investor is buying the right to buy stock in an equity round when it occurs. Crowd Note are a note-alternative crowd-sourced to fit the demands of equity crowdfunding.

View the infographic on Types Of Securities below, or download it here.