The structure you describe is 1) legal and 2) typical. Preferred shares cost more, but for that extra money they come with preference. What is preference? It c

The structure you describe is 1) legal and 2) typical. Preferred shares cost more, but for that extra money they come with preference. What is preference? It can vary, but the term that matters most is that they get to earn their money first. A 1X Preferred share (very generous) will be paid their investment back before anyone else sees a dime. Often shares are not 1X, they can be 2X or 3X, which means they will get more than they put in before anyone else sees a dime. There are more variations, but this is what matters in the story you’re telling. Common shares, which is what employees receive, are much, much cheaper (the strike price will often be pennies on the dollar compare to preferred shares that investors receive). However they simply convert to common stock when they’re exercised, with no special treatment. How does anyone make money then? The answer has to do with liquidity events that are large enough that everyone is getting their money. If money is limited, the investors get it first.