Founder Shares vs Common Shares: A Comprehensive Guide

Founder shares are typically given to the founders of a company, and they often come with unique voting rights and ownership structures.

Founder shares usually represent a larger percentage of the company's ownership than common shares.

In many cases, founder shares are non-voting or have limited voting power, which can be beneficial for the company's long-term growth and stability.

This means that the founders may have more control over the company's direction without being able to make decisions that might harm the business.

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Founder's Stock is a type of equity interest issued to founders at or near the time a company is formed. It's often issued for a nominal cash payment, such as $0.0001 per share, or assignment of intellectual property.

Founders Stock can be subject to a vesting schedule, which gives the company the right to buy back unvested shares if a founder leaves the company before the shares are fully vested. This is typically done to prevent the "free rider" problem, where a departing founder gets a benefit from the efforts of the remaining founders.

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A vesting schedule can be agreed upon at the time of issuance or imposed later as a condition of investment by outside investors. This can be a good idea, as venture capital and angel investors often seek vesting restrictions.

Founders shares are a hybrid equity between common stock and preferred stock. They're issued at a lower strike price than preferred shares, can be sold or transferred, and come with voting rights. They may also come with special rights and privileges, such as super-voting rights.

Here are some common rights that may be included in a Founder's Stock agreement:

Anti-dilution rights are a crucial aspect to consider when it comes to founder shares and common shares. Many founders and investors prefer broad and narrow-based-weighted-average anti-dilution rights over full ratchet anti-dilution rights because they protect investors without excessively diluting common shareholders.

Full ratchet anti-dilution rights can dilute the company founder's shares of common stock too early, which is a risk many investors want to avoid. This is because it's essential for startup founders to hold a substantial amount of ownership interest in their business to incentivize them to lead the company to a successful exit.

Preferred shares are often used in venture investing, with investors receiving these shares and founders and employees receiving common shares. The investor's preferred shares may convert into common shares at some future liquidity event, such as an IPO or acquisition.

Preferred shareholders have certain key benefits, including getting paid ahead of common shareholders if the company fails or getting protected from getting overly diluted as a result of future fundraising rounds.

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Stock transfers can be a complex issue for founders, but there are ways to control them. A right of first refusal, often contained in the company's bylaws, gives the company and/or other founders the opportunity to purchase shares before they can be sold to a third party.

This right can be a useful tool for controlling ownership, but it's only effective if the person or entity with the right has the funds to finance the purchase. Otherwise, the share can be sold to the buyer.

Companies have become more concerned about controlling their stockholder base and the flow of confidential information, especially with the rise of secondary markets for private company stock.

Founder's Stock is often subject to a "right of first refusal", which gives the company and/or the other Founders the opportunity to purchase shares that a Founder proposes to sell to a third party.

This right is often contained in the Company's Bylaws and automatically applies to all shares issued after the Bylaws are adopted.

The priority of who gets to purchase the shares first can be a matter of negotiation between the company, Founders, and investors.

A right of first refusal is only useful for controlling ownership of stock if the person(s) with the right have the necessary funds to finance the purchase.

Companies have become more concerned about controlling their stockholder base and the flow of confidential information, especially with the rise of "secondary markets" for the sale of private company stock.

It's become increasingly common for bylaws to include the requirement of Board approval for a stockholder to transfer stock.

Founders shares are typically issued when a startup is formed before any other equity has been purchased by investors or venture capital or stock is issued to employees.

Issuance of founders shares can happen at a later time, but it usually occurs as soon as the startup is formed.

Founders issue founders shares to minimize tax implications, such as filing special elections that enable them to pay taxes on deferred gains at the time they were issued rather than when the shares vest.

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Co-Sale Rights allow other Founders and investors to participate in a sale by a third party, giving them the opportunity to be a seller. This is less common than the right of first refusal, but is usually requested by investors.

A co-sale right can limit the amount of shares that can be sold by one Founder, as seen in the example where one Founder could sell only 4,000 shares out of 10,000. This is in contrast to the situation where the co-sale agreement operates only in favor of the investor, allowing the selling Founder to sell 6,667 shares.

Lock-Up Agreements prevent the sale of stock for a period of time following an IPO, typically lasting 180 days. This restriction is included in founder stock purchase agreements to prevent large sales of stock into the market, which could depress the stock price.

A co-sale right is a provision in an agreement that gives one party the opportunity to participate in a sale by a third party, providing they have the right to be a seller. This right is often requested by investors.

The co-sale right is less common than the right of first refusal, but it's usually included in agreements among founders and investors. In fact, it's more likely to be requested by investors than by founders.

If one founder finds a buyer for part of their shares, the co-sale right would allow the other founder to sell a portion of their shares, as well as the investor. For example, if one founder finds a buyer for 10,000 shares, the co-sale right would allow the other founder to sell 4,000 shares and the investor to sell 2,000 shares.

In some cases, the co-sale agreement operates only in favor of the investor, limiting the selling founder's ability to sell their shares. In this scenario, the selling founder could sell 6,667 shares and the investor 3,333 shares.

A lock-up agreement is a contract that prevents the sale of stock for a period of time following an IPO, typically lasting 180 days.

The main goal of a lock-up agreement is to prevent large amounts of stock from being sold into the market, which could depress the stock price.

Lock-up restrictions are often included in founder stock purchase agreements to ensure that all existing stockholders agree to the restriction up front.

This is because lock-up restrictions cannot be imposed unilaterally, and a founder may have moved on or be unwilling to sign later.

The underwriters ask the company's existing stockholders to enter into lock-up agreements to prevent sales of large amounts of stock into the market following the IPO.

This is done to make the IPO more attractive to potential buyers, who may be deterred by the prospect of insider selling immediately following the IPO.

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Super Voting Stock is a special class of stock that gives founders more voting power than other shareholders. It's not as common as you might think, but it's been used by companies like Google, Facebook, and Zoom to ensure the founders maintain control.

Founders shares can have 10 or more votes per share, making them much more powerful than regular voting stock. This special voting power can be a major advantage for founders who want to make key decisions without external interference.

Supervoting stock is typically only granted to founders and their families, and it usually converts to regular voting stock if transferred to other parties. This means that founders can maintain control of their company even if they bring in new investors.

Some founders choose to have super-shares with a high number of votes per share, such as 25, 50, or even 100 votes per share. This gives them a significant advantage over other shareholders, who may only have a few votes per share.

Here's a comparison of the voting power of different types of stock:

As you can see, super-shares have a lot more voting power than preferred shares. This can be a big advantage for founders who want to make key decisions about their company.

Common stock is often the go-to choice for founders and employees, and for good reason. It's a cost-effective way for employees to share in the company's financial returns, and for founders, it's a way to keep things simple without compromising control.

Common stock typically doesn't come with voting rights, which means holders don't have a say in major strategic decisions. In contrast, founder shares come with super-voting rights, giving holders greater voting power.

One of the benefits of common shares is that they can be used as a recruiting and retention tool. By offering equity in the company, employees can feel invested in its success and more likely to stick around.

Common shares are also cheaper than preferred shares because they don't come with the same rights and privileges. This can be a plus for companies looking to keep costs low.

Here are some key differences between common stock and founder shares:

Investors in different financing rounds may receive preferred shares with different privileges. This means that the benefits and protections of preferred shares can vary depending on when you invested in the company.

One key difference is the liquidation preference, which can be participating or non-participating. Participating liquidation preferences give preferred shareholders a pro-rata share of any remaining funds, while non-participating liquidation preferences only give them their liquidation preference amount.

The specifics of the liquidation preference can make a big difference in the investor's downside risk. For example, if an investor received preferred shares with a 2x liquidation preference, they would be protected from getting overly diluted as a result of future fundraising rounds.

Investors in later rounds may also ask for specific privileges to be renegotiated, such as anti-dilution protection. This can be a challenge for founders and employees who already hold common shares, as it may dilute their ownership percentage.

Founder's Stock is often subject to a vesting schedule, which means the stock vests in monthly or quarterly increments over four years. If a founder leaves the company before the stock is fully vested, the company has the right to buy back the unvested shares at the lower of cost or the then fair market value.

A typical vesting schedule for founders shares is four years, with a one-year cliff, meaning founders can't access all their shares until four years have passed. They can access ¼ of their shares at the one-year mark and then 1/36 of the remaining shares each month thereafter.

Vesting provisions protect the company from the "free rider" problem, where a departing founder gets a "free ride" on the efforts of those who remain to build the company. They also give the company the right to buy back unvested shares if a founder leaves before the shares are fully vested.

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Here's a breakdown of the typical vesting schedule:

This vesting schedule can be adjusted to reflect the individual contributions of founders, such as the example of a company with three founders who decide to subject their shares to a four-year vesting schedule with retroactive credit reflecting their respective periods of work before incorporation.

A vesting schedule for stock is a crucial aspect of equity and vesting in startups. It outlines when founders can access their shares, ensuring they remain with the company and contribute to its success.

Typically, a vesting schedule is four years, with a one-year cliff, meaning founders can't access all their shares until four years have passed. However, they can access ¼ of their shares at the one-year mark and 1/36 of the remaining shares each month thereafter.

Vesting schedules can vary from company to company, and milestones may be set for founders to receive their shares. These milestones can include completing certain tasks or achieving financial targets.

A vesting schedule may be imposed as a condition of investment by outside investors, or it may be agreed upon by founders at the time of issuing their stock. This restriction gives the company the right to buy back unvested shares if a founder leaves before the shares are fully vested.

Here's a breakdown of the typical vesting schedule:

Founder's Stock is often subject to a vesting schedule, which can be agreed upon at the time of issuance or imposed later as a condition of investment. This restriction protects the company from the "free rider" problem that can occur when a founder leaves early in the company's existence.

Vesting provisions often include protections for termination without cause following the sale of the company. However, be careful about agreeing to vesting acceleration for a termination without cause, as it can lead to unintended results.

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Issuing founders shares can be a complex process, and there are several common pitfalls to avoid. Over-issuing equity is a major mistake, as it can dilute the value of the shares and create tension among founders.

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You should be mindful of how much equity is issued and make sure the split is fair and equitable. This means considering the contributions and value each founder brings to the company.

Handing out founders equity like it's going out of style is a bad idea – founders stock should only be granted to those who have significantly contributed to the company's growth and success. This ensures that the equity is rewarded to those who deserve it.

Not putting restrictions in place is another common mistake. Individuals with founders stock should be subject to lock-up periods, transfer restrictions, and repurchase rights to prevent them from selling their shares too quickly or without permission.

A well-documented equity structure is essential, including a shareholders agreement that outlines the rights and responsibilities of each stakeholder. This helps prevent disputes and ensures everyone is on the same page.

Here are some key things to keep in mind:

Determining co-founder equity can be a complex task, but it doesn't have to be. To make it easier, you can use a co-founder equity split calculator, which takes into account the founders' contributions, such as the number of hours invested, the type of work performed, and the amount of capital invested.

Several top founder equity calculators are available, including foundrs, gust, and capbase. These tools can help you determine a fair and equitable split of equity among your co-founders.

To ensure a fair split, it's essential to consider the contributions of each co-founder. This might mean giving more equity to the co-founder who has invested the most time and effort into the company.

Here are a few key things to consider when using a co-founder equity split calculator:

By considering these factors, you can create a fair and equitable split of equity among your co-founders.

Here are some top founder equity calculators to consider:

Equity provides a sense of ownership and motivation for employees, which can lead to higher productivity and job satisfaction.

By issuing equity, companies can attract key members of the founding team and minimize churn, as it gives them a stake in the company's success.

Founders shares can maintain control and align interests, allowing the founding team to make strategic decisions and drive growth.

Common shares are often used for employees, providing a sense of "skin in the game" and motivating them to contribute to the company's success.

Common shares can also be cheaper for employees to purchase than preferred shares, making them a more attractive option.

Founders may choose common shares over preferred shares because they already have control over the company, making preferred shares unnecessary.

Issuing preferred shares to founders can complicate the cap table and deter future investors, so it's often avoided.

Here are the benefits of using founders shares: