Editor’s Note: One fear that all-too-often freezes ambitious entrepreneurs out of their own success is this: if and when they seek professional funding, they’ll have to fork over ‘a pound of flesh’ to get it. They don’t want to give up ownership, so they put off raising capital, sometimes until it’s too late. If they do take pro money, and their company is successful enough to merit a second round, the sour grapes only get worse – further dilution.
Is Bob right to be so cyncial? If he is, how can a founder build anti-dilution protections into his or her stock, in preparation for fundraising?
It’s a Hobson’s Choice! Fail, or see your equity ground down to grains of sand.
Or is it? Some entrepreneurs cling to the myth of a “special” unit of ownership, so-called “founder’s equity” which is too precious to be diluted, like Class A shares with super-duper voting rights. But is this for real? One of our readers would like to know, once and for all, if “founder’s equity” is a panacea, as he’s been told that it is.
Question of the Day:
Can someone please define “founder’s stock”? I have seen this term thrown around at liberty, but as far as I can tell, there is no such thing as “founder stock.”Recently there has been the concept of FF class stock but that’s not what I believe most people mean when referring to “founder stock.” My understanding of founder stock is that it is common stock, pure and simple. Am I right? — Bob Ngu, founder of JiggyMe
Is Bob right to be so cyncial? If he is, how can a founder build anti-dilution protections into his or her stock, in preparation for fundraising?
5 comments so far
4:34 PM PT
Whenever I’ve heard “Founder’s Stock” thrown around it is actually referring to the price per share rather than any elaborate voting rights. Most founders will purchase the stock at par value instead of the valuation price that might follow financing (which is when most employees would join). Any employee would love to get the founder’s price on the stock since it’s usually fractions of a penny.
The other major difference is that Founder’s typically own shares instead of options so they have inherent long term capital gains benefits (since they don’t have to take a hit when exercising the option). It also means that you retain the voting rights associated with the shares instead of waiting until you exercise your options when they vest.
While it’s not part of the stock class, founders can usually negotiate different vesting and other terms as part of their stock restriction agreement upon venture investment. For example, while most employees would see their vesting rest when the Series A round closes, a founder might retain some % of their shares. They might also have special terms in the case of termination or demotion that accelerate vesting. Unfortunately, these have less to do with the type of stock and more to do with who the person is and how strategic they are to the organization.
Hope that helps.
5:53 PM PT
Yes, Bob is right (as is Sean above). Founder’s stock is common stock.
Normally I see founders dividing up a brand-new company among them and paying a low price for it. Later (even key) employees generally get smaller percentages and pay higher prices- hence the distinction between “founder’s” shares and other common stock.
The best way I have discovered to protect one’s stock from dilution (from investors, presumably) is to build value in the business. The higher the pre-money valuation the less of the company investors will take. Easier said than done, though.
8:52 PM PT
“how can a founder build anti-dilution protections into his or her stock, in preparation for fundraising?”
Um, that’s an oxymoron. You are SEEKING to get diluted, and most likely sit a “class below” the capital going into the company. Founders stock is… the stock the founder has/had… I agree with the others that it’s typically the initial common in the company.
4:48 PM PT
Thanks everyone, I appreciate your helpful comments.
9:59 AM PT
If i get 2,000,000 shares of common stock or 20% non-dilutable of 10,000,000 shares.In the long run when the company IPO’s will my stock be worth alot of money if the company is successful. If we exit like sell the company will my return be great. Please give me some examples of how this will work.
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