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I've first heard of this special class of stock through The Founder Institute. It's basically a way for founders to protect from dilution by authorizing both Common stock and a special Class F (for Founder) Common stock, which has 10x voting rights over Class A Common.

Most of the people I've asked haven't seen this structure around, and a few other people advised me against using it because apparently VCs won't be happy with it (I'll let you know later in any case).

What do you feel about this kind of special stock for founders? Evidently as a founder you gotta feel good about it, but have you seen this around? Have you heard any stories of teams with this structure getting funded/busted?

If you can read legalese or are plainly curious (as I was when I first read the sample certificate), here's a link to download the sample certificate of incorporation with this special class of stock. I post this because when I downloaded it (like a month and a half ago) it was posted on the Founder Institute site for free too, so I'm assuming it is a public document by now.

Thanks!

Edit 1: I found the original link to download the forms, you can see it here.

Finally, is it possible that someone edits this post and adds a tag like: "stock" or "common-stock", and also erases this sentence. Thanks!

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3 Answers

up vote 0 down vote

VCs will not be happy with any sort of preference that reduces their control. I asked around a bit and no one I know heard of this as well. That would lead me to believe that it's not that common.

The typical founders stock price/structure is usually purchased for a deep discount compared to the common stock price (e.g. if common is $0.10 then founders is $0.01) but that's just a pricing thing. I guess that does mean that founders have 10x the voting power per $ invested.

Once the founders stock is issued, I have not heard of any other preferences given. The benefit of founders stock is that it's stock, not options (which most other employees get). So, it has voting power unlike options which have no voting power (unless exercised).

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up vote 2 down vote

Here's a pretty good article on the matter: http://entrepreneur.venturebeat.com/2010/03/01/ask-the-attorney-what-the-heck-is-class-f-stock/

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+1 Great link thanks for sharing! – newyuppie Mar 7 '10 at 1:16
up vote 2 down vote

Strikes me as having the potential to do more harm than good, particularly in today's environment where investors have the upper hand (more entrepreneurs seeking money than investors willing to invest their money).

Risk: Potential investor will think that you are being too cute / aggressive and will be turned off for fear that you will be difficult to work with.

Reward: Modest, at best. If the investor is savvy, the Class F protections will be negotiated away. If the investor is not savvy, (a) you probably could have negotiated favorable terms more simply, and (b) its not clear that you want a non-savvy investor, anyway.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

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+1 but it is ironic that investors usually do the exact same thing - veto/approval rights for certain events and their own class of stock... – TimJ♦ Mar 6 '10 at 18:54
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The cynic's version of the Golden Rule: "He who has the gold rules." – Dana Shultz Mar 8 '10 at 17:09
thank you for your comments. Why is it that one equates investor savvyness almost always with predatorness? The current environment is strongly pro-investor, when it's the founders that are sweating their as* off in the grind 24/7. – newyuppie Mar 10 '10 at 16:45
Run your company well, and you will not have to take more funding diluting the company further - all the other games are just monkey-play, where a serious investor will just get around the issue anyway, possibly just making you restructure or not invest at all. The worst case for you would be if the VC would impose a Preference on their investment of say 10x where they will take 10 times the investment of any exit regardless of any Class-F stock you have, and then you are still left with next to nothing In short watch out for term sheet "preferences" rather than being fixated on dilution – Soren Jul 10 '11 at 23:22

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