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founder-shares-control-startupsBack in 2oo9 Adeo Ressi started the Founder Institute and came up with the idea of a new type of common shares for startup founders called Common F Shares (F stands for founder). These F shares were designed to allow a startup founder to maintain control of his company even if he didn’t own the majority of shares. Until Adeo proposed the idea of a share type that protected founders interests, venture financing documents hadn’t changed since the 1970’s. Wilson Sonsini lawyer Yoichiro Taku drafted the Common F legal documents and Adeo published them on his website (you can download the documents here – you’re going to need a lawyer, but these will give her a headstart).

Whenever I watch SharkTank with my kids I wonder how they’re able to negotiate a deal without understanding the nature of the capitalization of the company. If a SharkTank company has Common F Shares they don’t have to worry about giving Kevin O’Leary more than 51% of your company. Common F Shares provide a founder three major advantages over standard commons shares including:

  1. Shareholder Control. Your Certificate of Incorporation (COI) will include two classes of common stock. The first, Common A offers the holder one vote per share while the Common F offers the holder more than one vote per share (usually between 10 and 100 votes per share).
  2. Board Control. Common F directors receive two votes per director, while common directors only get a single vote.
  3. Protective Provisions. The company is required to obtain the consent of at least 51% of the Common F directors before:
    • the COI or bylaws are altered.
    • additional shares of Common F are authorized.
    • any new series or class of stock is issued.
    • conduct a merger, sale, reorg, acquisition, liquidation or dissolution.
    • appoint additional members of the board.
    • declaring or paying dividends or distributions.

Venture capital was scarce back in 2009 when Adeo first proposed the Common F model; however, today there is more money than their are great startups to invest in so you have a much better chance of securing these protections. Depending on your experience and track record you may or may not be able to convince an investor to allow you to keep your Common F shares; however, it is my belief that EVERY entrepreneur should include Common F shares in their startup upon formation. It is a great way to get to know a potential investor. Make him explain why he doesn’t want you to maintain control of your startup over time. Common F shares aren’t anything that new. Lots of companies including Google, Martha Stewart Living Omnimedia, Broadcom and Facebook have used similar protections to ensure that the founder maintained control of the company even though she was no longer the majority shareholder.

If you’re looking for a startup lawyer to help you should consider talking to Kevin Vela from VelaKeller (I work with him and he’s a sponsor of the StartupMuse).