Some companies issue a special type of stock (sometimes called “Starter Stock” or “FF Preferred Stock” or “Founders Preferred Stock”). Founders Preferred Stock is a special class of stock, pioneered by Orrick attorneys, that converts into any series of preferred stock sold by the company when sold by the founders to investors in connection with that future round of financing. This allows founders to more easily sell their stock to investors in connection with a future round of financing, giving the investors valuable preferred stock and allowing founders to receive some well-deserved liquidity. Except for this conversion feature, Founders Preferred Stock is identical to Common Stock.
Founders Preferred Stock can usually only be implemented when shares are initially issued to founders. Therefore, it is important to decide whether to issue Founders Preferred Stock at the time of formation. If you choose to utilize this founder-friendly feature, Founders Preferred Stock most often covers between 10-25% of the total amount of stock to be issued to any individual founder with the remaining 75-90% in the form of common stock. For tax reasons, Founders Preferred Stock must be fully vested at the time of grant and is therefore not subject to forfeiture or repurchase if a founder leaves the company.
Because it has additional rights and privileges, Founders Preferred Stock is worth more than Common Stock. Typically, Founders Preferred Stock is valued around 30% higher than Common Stock, but you should consult with counsel before purchasing Founders Preferred Stock.
Founders Preferred Stock is a sophisticated development in start-up company capitalization. Therefore, it is important to consult legal counsel before putting this special class of stock into effect.