Startups Stack Exchange Archive

What are the pros and cons of Founder Dual class stock?

• posted by: user1091558 on 2017-04-19
• tagged: investors, founder, stock
• score: 0

I would like to have a Dual class stock structure for my common stock to have super voting rights.

Can someone explain what are the pros and cons if I go with such structure?

Answer 12520

• posted by: Marcus D on 2017-04-19
• score: 3

It is not uncommon for companies that want to limit the decision making process through voting to have multiple classes of shares.

For example, "class A Ordinary" will be full voting shares, but "class B Ordinary" will have the same value from a purchase and dividend point of view, but not from the point of view of voting rights. It is very common in the UK within an EMI Scheme to do this sort of thing, where the founders of a business will have A class shares and the employees will be granted B class (non-voting) shares.

They are sometimes called Golden Shares to be exercised under certain conditions.

In a business founder situation, you would need to have some good reasons for a difference of voting rights. There are some very good articles on this site written around this issue

Pros

• If you have the super voting right shares, then you will probably control the company with fewer shares
• You will have a smaller cut of the pie from a dividend point of view

Cons

• With another person having the super voting rights shares, you will most likely lose control of the company
• You will have a larger cut of the pie from a dividend point of view

Other questions to consider

• Are these super shares able to be purchased at a premium cost?
• How are they to be disposed of? i.e. do you have a shareholders agreement that specifies that the other party can only sell them back to the business and not to an outside party?
• What is the basis of these super shares being offered/taken? Is it more equity, time, ideas, ip or other resource provided up front to equalise the relationship
• Be careful that the other founding parties in the relationship do not feel like minority shareholders, otherwise, you will have business partners that are not engaged in making the business succeed

You should perhaps get some legal advice on this with regard to your right to control the business.

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