What is it:
Common stock is the basic class of ownership in a company. At a venture-backed company, it is what founders and employees typically hold, and it's the class of stock a Stock Option gives you the right to buy. When a company is sold or wound down, common stockholders sit last in line, receiving what remains only after holders of Preferred Stock have been paid according to their rights.
Why does it matter:
Because common stock is paid last, its value depends heavily on how the company's story ends. In a strong outcome, the difference between the two classes largely disappears. Preferred stock typically converts to common stock at an IPO, and in a large sale, investors with a standard liquidation preference usually do better taking their share as if they held common stock than claiming their preference. In a modest outcome, the claims ahead of common stock can take most of the proceeds. If your equity at a private company is options or shares, that range of outcomes is the range your equity is exposed to.
What do people most often get wrong:
People often assume every share in a startup is worth the same amount, so the price from the latest funding round must apply to theirs too. That price was paid for preferred stock, which carries protections common stock doesn't. Common stock usually has a lower fair market value as a result, and treating the two as interchangeable can overstate what your equity is worth.