Because someone who might invest some money, maybe wouldn't invest that money if they didn't get the preferred class protections?
This is similar to how different credit risks get assigned different interest rates.
Companies failing (or close enough to failing that they restructure and wipe out common) is not uncommon in start-ups. If you want a more or less sure thing, you'll have to work at a more or less sure employer, and the risk/reward will be different.
Now, whether those who exercised their Philz options and paid for the shares, were really aware in what they were doing -- I don't know! But there doesn't seem to be anything explicitly sinister about the way this was set up, or went down -- simply, the business didn't do well enough. Which is too bad, because I think their coffee is actually good.
If you raise money, sometimes you just want the money. Other times, you are happy to cede some ownership and/or control. If things go pear shaped, investors want some protection. If things go really well, sometimes they band together and kick you out of your own company. At some point rules have to be codified: the systems for doing this are share classes, voting rights, information rights, articles of association, board resolutions, etc. While you can start a totally new system and run your company using a magical talking stick and rubber duckies on the blockchain, the reality is that just makes it unfamiliar and hard for conventional institutional capital to invest in, it also makes it hard for slow-moving conventional institutions such as banks and lenders to grok your operational process and internal structure, which in both cases generally limits your upside.
Yes. Preferred shares give investors their investment back first if things go wrong.
If an investor gives you a million dollars for a piece of your company, and you turn around and sell the company for a million dollars, then the investor gets their million dollars back and you get nothing. Obviously. Any other outcome would be shenanigans.
Under standard deal terms investors get 1x, i.e. their money back. That's all.
I mean, look at Meta. The stock you can actually buy through your broker is not actually a stock that can control the company, so in a very real sense it's not a "share" in Meta. Zuck controls nearly all the "preferred" shares that have supervoting privileges, so he can operate it as though it's essentially a private firm. The board, which in a conventional public company could exercise control over the CEO, has no ability to remove him.
