A startup founder’s desire to hold equity better than plain vanilla common stock is not new. Several years ago, Series FF stock for founders was a popular approach for founder liquidity in subsequent financing rounds. We implemented Series FF for a handful of clients back then, but we have not done so recently. In the past couple years, we have received frequent requests, or at least questions, about setting up a dual class common stock structure to create super voting rights for one or more founders.
This interest in a dual class common stock structure is often driven by the fact that large technology companies like Google and Facebook have implemented variations of this structure. The founder is usually worried about losing control over time and wants super voting rights through a dual class common stock system.
The dual class common stock setup
The usual way to create super voting rights is a dual class common stock structure, generally “Class A” and “Class B.” Class A and Class B are typically identical economically, except for voting power. Usually Class A has multiple votes per share, and a common multiple is 10 to 1. For example, Class A common stock might have 10 votes per share and Class B common stock might have 1 vote per share. At formation, one or more founders receive Class A common stock, and everyone else (employees, advisors, consultants) receives Class B common stock.
Benefits of a dual class common stock structure
As with most governance choices, there are positives and negatives to a dual class structure.
The main benefit for founders is control. As the company issues more shares and founders get diluted, super voting rights can allow founders to maintain voting control with a much smaller economic ownership percentage. With a 10 to 1 vote multiple, a founder can potentially maintain control well below 50% ownership.
This is why the structure is appealing. Founders often put enormous effort into their startups and the idea of losing control can be intimidating. A dual class structure can feel like protection against smaller holders collectively overruling a founder on major decisions. That said, the next question is whether it is a good idea to implement it by default.
Potential red flag for investors and hires
A dual class common stock structure can scare off potential investors and even future hires. Leaving aside other mechanisms that can give investors control (such as protective provisions), a dual class structure can signal that a founder is trying to lock in control too early. A common investor concern is that the founder wants to be treated like the leader of a public company before the startup has proven traction, such as real customers, meaningful revenue, or user growth.
The takeaway is that the structure is easier to justify when the company has leverage, for example, strong traction or multiple competing investors. In those situations, investors may be willing to accept a governance structure that is more founder friendly. Without that leverage, it is less common for a lead investor to accept a dual class structure.
Preemptive strikes do not work by themselves, you need leverage
Some founders believe that installing a dual class structure before seeking outside investment gives them leverage to keep it. I am not confident that is true. Even if a dual class structure is built into your certificate of incorporation, venture financings commonly require filing an amended and restated certificate of incorporation. If an investor wants to remove the dual class structure as a condition to investing, the legal change is often straightforward, because an amended and restated certificate is likely being filed as part of the financing anyway.
This leverage point comes up in other founder friendly terms as well. For example, some founders try to “game” vesting schedules with the belief that if they install a founder favorable vesting schedule early, it will be difficult for a future investor to change it. In reality, if the change is part of a financing negotiation, it can be as simple as amending a few provisions in a founder’s restricted stock purchase agreement. If a term is not a rational position in context, writing it down early does not mean negotiations should start there later.
Tips on implementing a dual class common stock structure
If you are set on a dual class common stock structure, make sure it is actually included in your certificate of incorporation. We have seen founders talk about a dual class structure when the charter does not create separate classes at all. To implement the structure correctly, the certificate of incorporation must authorize both classes, and every stock issuance must clearly state which class is being issued.
You should also consider mechanisms that convert super voting shares (usually Class A) into normal voting shares, either optionally or automatically. Common approaches include: (i) optional conversion at the holder’s election, (ii) automatic conversion upon a vote of the Class A holders, and (iii) automatic conversion upon any transfer of the shares.
What investors usually care about
Control and accountability: who controls board seats and major decisions, and what checks exist.
Protective provisions: investor veto rights over key actions, regardless of vote multiple.
Conversion triggers: when super voting shares convert, especially on transfer or upon an IPO.
Future financings: whether the structure will make it harder to bring in a lead investor later.
Conclusion
In general, I would not recommend that startups implement a dual class common stock structure by default. If you have leverage, you may be able to implement it later in a financing. That said, we have been installing dual class structures more frequently, and in the right situation they can make sense. The key is to understand that super voting rights are a governance choice that comes with tradeoffs, and investors will evaluate those tradeoffs based on traction, trust, and the overall terms of the deal.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
