Broadly speaking, the two main structures utilized by emerging CPG companies for early (seed stage) fundraising are (i) convertible securities (usually convertible notes), and (ii) stock issuances.
For convertible securities, a convertible note is the most common structure. Convertible notes are much easier, and cheaper, to negotiate and close on than a stock financing because there are far fewer variables to negotiate. The main reason for using a convertible note for early fundraising is to defer most of the heavy negotiations to a future date (a larger fundraising, upon which the note converts into stock), while securing core economic rights (like a valuation) for the investors now.
Apart from convertible notes, a stock financing is often considered for fundraising. While in the tech industry preferred stock is most often utilized when issuing stock to investors, CPG companies are a bit more flexible. The reason that tech companies issue preferred stock (which has unique rights not given to common stock) is, apart from investor preferences, often driven by the fact that tech companies heavily utilize equity (stock) for recruiting purposes. It is the norm in tech for employees to be offered stock as part of their compensation package.
By issuing preferred stock to investors instead of common stock, tech companies are able to maintain a lower “fair market value” (for tax purposes) on their common stock, which means a lower price for employees on that common stock. Because the common stock has fewer rights/privileges than the preferred, the company can credibly value it significantly lower.
The lower the price employees can get on their stock/options, the more “upside” they see on their equity. If these companies issued common stock (the same security that employees get) to investors, then the price they make investors pay would have to also be the price employees pay. Many tech employees see high-priced options as a negative in terms of how they assess their compensation packages.
Unlike tech, norms around issuing equity broadly to employees are not as solidified in CPG (like Food & Beverage). We are seeing some CPG companies start to move in the direction of tech norms, adopting conventional equity incentive plans designed to give employees stock options, but it is certainly not nearly as “standard” as it is in tech. For that reason, CPG companies are often more inclined to issue common stock to investors instead of preferred stock, because the problem of “pricing” common equity highly doesn’t impact a company as much if that company isn’t broadly issuing common stock/options to employees.
As between convertible notes, preferred stock, or common stock, convertible notes are by far the cheapest to close on from a legal fee perspective. However, some investors may not be comfortable with how “lean” they are on investor rights. Any kind of equity financing is going to be more complex, and therefore more costly, to negotiate and close than convertible notes; but a common stock financing will be slightly cheaper than a preferred stock financing.
The truth is there is no single “standard” for how to fundraise. Work with experienced advisors, including counsel, to assess what makes sense in your context and in line with your own investor’s expectations.