Class F Shares: A Good Idea?
A client told me that she wants to include Class F shares in the Certificate of Incorporation for her Delaware corporation. This post describes how we concluded that – for this client, at any rate – this was not a good idea.
Class F Shares – History
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.
Class F Shares – Problems
Sounds great – shouldn’t every founder want these protections? The main problem is that Class F shares are likely to discourage many prospective investors. Class F shares 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 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. If this happens, 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. 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.
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