Founders Stock and associated features

Nowadays companies emerge, develop, and get sold pretty quickly (sometimes as quickly as in a few months). Most exits of startup companies arise opportunistically rather than from planned long-in-advance transactions. Business climate requires law to follow the course. In order for the markets to function efficiently the laws must be aligned with the new business concepts and satisfy the needs of market participants.

Class F common stock is a recent legal development in the world of startups. What’s the difference from a regular common or preferred stock we get used to?


Class F common stock.


It is not a secret that founders may loose some control over their enterprise once they bring investors and their share in the company gets diluted. Class F common stock was developed to protect founders’ interests while getting financing. It includes a number of founder-friendly provisions. “F” in its name stands for “Founders.”


     Voting.  While common stock has one vote per share, Class F common stock has 10 votes per share


     Protective provisions.  Certain actions that are considered to be vital for the company cannot be taken without the consent of holders of more than 50% of the Class F common stock. 


     Directors.  Holders of Class F common stock are allowed to elect at least one director.  This is helpful in a situation when the size of the board has to be small. This provision ensures founders are not squeezed out from the board.


The Class F common stock and regular common stock participate equally in dividends distributions and other economic rights.  The Class F common stock can be converted into regular common stock any time at the option of its holder. It is automatically converted into a regular common stock if the holder dies, the Class F common stock is transferred to someone other than another Class F holder or an entity for the benefit of a Class F holder.

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