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Best Practices for Startup Founder Equity
- siegel 9y agoRegarding this: "Founders typically receive common stock, i.e. a class of stock with no special rights or preferences. Although there have been efforts by various organizations to promote the issuance of special classes of stock for founders that contain “super voting” rights or similar protective provisions, in practice, those provisions hardly ever survive the first round of outside investment. In the vast majority of cases, we recommend sticking to the K.I.S.S. principal and issuing common stock to the founders." I completely disagree: 1) There are other functions of special classes of stock for founders, other than "super voting" or protective provisions. Founder stock can be structured to facilitate early liquidity without adversely impacting the company's 409A valuation and with potentially better tax treatment than common stock repurchases by the company (the typical alternative). This latter function can serve its purpose regardless of whether it survives the first funding round because it's in a funding round that such stock gets purchased (and, thus, provides early liquidity). 2) If you don't build in special rights at the beginning, you are unlikely to ever get them. You may have more leverage in a funding round than you may think. So, what's the downside of trying? 3) What if you never get VC funding, but end up growing based on revenues? Won't you then regret not having built-in special protections for yourself at the outset? Without a VC forcing you to ditch those protections, they could survive indefinitely. 4) Assuming your lawyer knows what he or she is doing at the outset, marginal cost of eliminating these rights in a VC round is basically $0. Everyone knows this. So, having a special class of stock at incorporation is not a deterrent to financing. If the VC insists and you don't have the leverage, you just get rid of it. I'm actually writing something about this that I'll post eventually. But I do not understand this point of view in the startup community at all. It's the one area of the world I interact with where a party (the startup founders) pre-negotiates against itself before a negotiation.
- jana1975 9y agoWhen you publish it I would love to read it. send it.
- panda88888 9y agoSame here. Please share on HN when you are done. I would love to read it.