Are Class F Shares a Good Idea?
A client told me that she wants to include Class F shares in her Certificate of Incorporation for the Delaware corporation we were forming. This post describes how we concluded that – for this client, at any rate – Class F shares were not a good idea.
Class F shares were invented by the Founder Institute several years ago to protect founders (largely against investors, especially VCs – see If You Accept Venture Capital, You will Lose Control of Your Company). Class F shares provide 2:1 board votes per founder versus normal board members, and 10:1 share votes as compared to normal common shares.
Sounds great – shouldn’t every founder want these protections? The main problem is that Class F shares are likely to discourage many prospective investors, because they suggest that the founder is too interested in exercising power. This is especially likely to be true for institutional investors, such as VCs, who are investing large amounts and, understandably, want to have certain protections in place.
Furthermore, even if the prospective investor is not turned off, it may make elimination of the Class F provisions a condition of making the investment – in which case, the incremental effort and expense of the Class F shares will have been wasted.
In light of the foregoing, my client concluded that Class F shares would not be helpful, and we formed the corporation accordingly.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.