Equity · Legal structures

Multiple voting rights for founders

Richard Pridham Investor, President & CEO at Retina Labs

September 19th, 2015

When creating a new company and founder stock, is it a common (accepted) practice to allow one shareholder to have multiple voting rights (e.g. 2 votes per common share) as a means to protect that individual should he own less than 50% as a result of future funding rounds? I recall this being the case for Page, Brin, Zukerberg and many others. Under what circumstances is this approach reasonable and acceptable to future investors?

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

September 19th, 2015

I am responding to you from the perspective of a founder/CEO/entrepreneur, non-practicing lawyer and one who has observed issues of others derived from this topic. I am not offering an answer.

In my view there is not a simple answer. It is an issue that deserves the best opinions and drafting by tax and estate counsel and views by a crown-jewel valuation expert who has testified many times in civil and tax litigation on similar issues. You might want to check Comcast's 10K to see their different voting rights on the same classes of stock, unless they have corrected the issues. A lot of the multiple answers have to do with how voting rights impact the allocation of value to different shareholders in a capital event or in the instance a large block of super-voting shares end up in an estate. I have never used a C Corporation and always used an Delaware LLC where it is easy to allocate value and voting rights among different classes of shares and owners. I am not current on public LLC's. My guess is that the most established state law on this issue is in Delaware. Bottom line, from experience I know that this is a complicated tax issue that is worthy of paying the best legal and valuation experts before you do anything rather than waiting until you lose to find out the answers.With all due respect, I would only lightly listen to investment bankers and finalize everything with counsel who has "done this before." It's critical that the drafter of the agreement has spent a lot of time litigating the issue in court....not an issue for a lawyer to 'learn on job' in his/her first court case.

I am not sure if this pertains to this issue, but I am almost always in favor of formally agreeing that potentially complicated, costly and political disputes or claims be resolved by binding arbitration, rather than litigation, before the American Arbitration Association (www.adr.org) or JAMS (www.jamsadr.com/) (the largest private alternative dispute resolution (ADR) provider in the world specializing in mediating and arbitrating complex, multi-party, business/commercial cases - those in which the choice of neutral is crucial). This requires exquisite attention to detail in pre-setting the rules in the founding agreements. Otherwise you may be dealing with a lot of confused judges, lawyers and jurors; and the party with the most money and best story usually financially squeezes the smaller party and wins disputes.

Good luck, D

Hunter Ashmore

September 20th, 2015

It's not common, but really depends on the venture.  If this is something that has so much obvious potential and such an incredible team that investors are scrambling to get in on the deal, the founder will have more negotiating power.  If it is a "typical" startup, the VCs will have all the power and will push more common terms on you.  

To that point, for a typical venture-backed company it isn't going to make a ton of difference how much of the voting rights you retain in the common stock.  Even if you have 100% of the common stock voting rights, you will not own the majority of preferred stock that is granted to the investors.  As such, you will still only have the board seats granted to the common stock shareholders, which will likely be less than the seats held by the preferred shareholders by the end of a few rounds.

Founders typically get wrapped around the axle obvious items like valuation and % ownership.  The reality is control of the organization is one of the often neglected, yet extremely impactful levers in the negotiation of deal terms.  This probably will not come through multiple voting rights of common shares.  Instead, it will likely be through items independent of % equity, such as specific provisions for additional board seats for founders, management, advisors, and/or common stock shareholders.