Question: My brother and I area unit launching a replacement venture, and we’ve scanned some articles on the net regarding incorporating in Delaware and alternative things we want to try and do from the legal facet. One issue that came up that we have a tendency to don’t perceive is category F stock, which we have a tendency to examine on a few blogs. what’s category F stock and does one suppose we must always be utilizing it?
Answer: This issue has come up quite a bit recently with a couple of of my new purchasers. “Class F” stock could be a special category of common shares that was designed by The Founder Institute (with the help of Yokum Taku, a sensible geographic area lawyer) to shield founders.
The “F” is for “Founders” – however, it extremely doesn’t matter what you decide it: category H, category letter of the alphabet, or category X. The key purpose is that a separate category of common shares is issued to the founders upon incorporation with the subsequent special rights (as set forth within the sample certificate of incorporation on the Founder Institute’s website):
Super-voting rights (10 votes per share);
Certain protecting rights kind of like those who most popular stockholders area unit usually granted (e.g., the consent of a majority of the category F holders is needed for the corporate to enter into a “Liquidation Event”); and
The right to elect a director that has 2 votes on the Board (not one).
The advantage of issuance category F Stock is that it arguably levels the enjoying field for founders in reference to their negotiations with investors. once investors gift their term sheets, founders can own not solely typical shares of common shares (referred to as “Class A” within the certificate of incorporation), but additionally shares of sophistication F stock, that may offer entrepreneurs extra negotiating leverage.
The disadvantage of sophistication F Stock is that it’s going to scare investors away. It’s robust enough for start-ups to boost capital these days; throwing category F stock within the equation might create your company less enticing. Moreover, the additional complexness of issuance category F stock will increase your legal fees each at the incorporation stage and at the funding.
The bottom line is that the supply of sophistication F Stock is comparatively new and uncommon. consequently, within the current economic atmosphere (where cash is scarce and investors usually have the leverage), category F Stock most likely solely is sensible for no-hit, serial entrepreneurs United Nations agency area unit getting to have numerous investors fascinated by their venture. For first-time entrepreneurs, it most likely is sensible to stay it straightforward and simply issue common shares of common shares.
That being the same, I tip my hat off to Adeo Ressi, the founding father of the Founder Institute, for his efforts. Having spent the majority of my career doing massive M&A transactions in big apple town, I used to be shocked to examine however advanced and pro-investor the quality VC funding documents area unit. Clearly, any effort to level the enjoying field could be a web for entrepreneurs.
Disclaimer: This “Ask the Attorney” post discusses general legal problems, however, it doesn’t represent legal recommendation in any respect. No reader ought to act or refrain from performing on the premise of any data conferred herein while not seeking the recommendation of counsel within the relevant jurisdiction. VentureBeat, the author and also the author’s firm expressly disclaim all liability in respect of any actions taken or not taken supported any contents of this post.