Financing Terms giving power to entrepreneurs to retain control
Every entrepreneur tries to maximize the growth of his startup by building and selling more product and services in a wider demography. In order to achieve an organic growth, entrepreneur has to either merge or acquire the companies which are of same size or smaller start ups.
When the mega mergers and acquisitions like Facebook acquiring What’s App, Flipkart acquiring Myntra or RelativeWave merger with Google, more and more companies are getting financing at eye popping valuations.
To many startups, the venture capital and exit markets mean an increase in leverage when negotiating with the investors resulting in founder-favorable terms. These terms are increasingly becoming a part of formation and financing documents which were not there few years back.
a) Supervoting stock:
Stock which allows the promoters to retain a greater level of control over the company for a longer span. To implement Supervoting stock, promoters has to issue 2 types of stocks viz., Class A and Class B. Class A refers to Supervoting stock which may multiple votes (varies from company to company which may be 10 to 20 more) per share on all matters in which shareholders approval is required. Founders will be sole owners of Class A stock. Class B will be reserved to the issuance of financial institutions or employees.
These need to be implemented at the inception of the company, if the founders choose to adopt after inception. Then they have to issue this stock to all shareholders irrespective Class A or Class B.
b) Supervoting at board level:
A Common Director chosen by common stockholders will have greater control over board decisions in terms of mergers and acquisitions. Although common stockholders have control the board, at they will not greater control at the stockholder level. Class A stockholders will have a substantial say in all major corporate actions of the company.
c) FF Preferred Stock : Early Liquidity
FF or Founders Fund Preferred stocks are identical to common stock, except that it is convertible at the option of the holder into the same series of preferred stock in the subsequent round of equity financing. It occurs only if the board approves the same. Implementing FF Preferred stock before an equity financing sends a message to the investor that the founders want liquidity in connection with an equity financing.
Over a period of time, it’s been noticed that more and more companies are not willing to provide venture capitalist, some of the protective voting provisions which has been a standard to give during acquisitions or equity financing. This means the investors and founders will lock step for all corporate actions of the company. Ideally venture Capitalist will receive some protections in their investment documents, which are getting limited. Protecting voting provisions will be negotiated during each round of financing with each VC’s
e) Aggressive Founder Vesting resulting greater ownership :
Founders increasingly maintain aggressive provisions on Founder vesting. In recent times, it’s been observed implementations of founder favorable vesting during seed and angel rounds of investing, where investors are less concerned about this vesting.
Founder Vesting has to be setup during the formation of the company, since there will be multiple founders.