What’s one thing Google, Facebook, Snapchat, and Ford all have in common? At some point, they each implemented a dual-class stock structure that gave the founders super-sized control over the future direction of their respective companies.
Entrepreneurs who plan to raise capital from investors, but are concerned about maintaining control, might also consider implementing a dual-class stock structure.
Currently, one of the most common dual-class stock structures is Class F Common Stock as developed by The Founders Institute in collaboration with Yokum Taku of Wilson Sonsini. Under this structure, founders are issued Class F Stock that grants them the following special rights:
- Super-voting rights (10 votes per share instead of the standard 1 vote per share)
- Veto rights over certain key decisions (e.g. increasing the size of the board, selling the company)
- The right to elect a Class F director who has 2 votes instead of 1
While this sounds great for founders, there are some downsides that should also be considered:
- Implementing a dual-class stock structure will increase your legal costs at incorporation and when you raise money from investors.
- Despite the high profile examples, implementing a dual-class stock structure is far from the norm. Consequently, potential investors may strongly (and reasonably) object to investing in a company with Class F Common Stock.
While Class F Stock is relatively easy to “turn off” in advance of an investment financing, it shouldn’t be adopted haphazardly.
Before adopting a dual-class stock structure, make sure you consult with an attorney who can help you understand the pros and cons.