| Welcome back! You'll sometimes find signs of the times buried in companies' bland corporate charters. The latest example: A growing number of startups that raised venture capital this year have issued a type of stock designed to make it easier for founders to sell some of their stakes. Nearly 11% of companies that raised money in the first half of the year issued founder preferred stock—nearly double the percentage from two years ago, according to Aumni, a JPMorgan Chase–owned investment software firm that specializes in analyzing legal documents. For convoluted reasons I'll explain later, this stock has advantages to common stock when founders want to sell. The special stock has been around for nearly two decades and is still a rarity in the startup world, lawyers said. But its growing popularity is a sign of the increasing leverage startups have over investors, who are in hot pursuit of promising founders and buzzy deals. "There are increased rights sought by founders that investors are willing to give them," said Alex Woodgate, head of corporate development, data and artificial intelligence solutions at Aumni. The companies with such share classes include hot AI companies like Perplexity, Mercor and Skild AI, according to Caplight, a data aggregator for VC and secondary markets. The share class, which for tax reasons has to be enshrined in the early days of a company, is sometimes designated as Series FF stock in startup documents because startups backed by Founders Fund have used it heavily. You'll find a special founder share class in the corporate documents of older companies like Anduril and Stripe, for instance. And, often, founders that have started companies previously are more likely to ask for it, startup lawyers told me. Here's the most important feature of the shares: They act like common shares in the hands of a founder, but get converted into preferred shares when sold in a later financing round. (Preferred shares are those that get paid out first in the event of a sale or liquidation, which venture capitalists typically receive.) That potential conversion from common stock to preferred stock matters for two reasons, in theory. First, it allows founders to sell their shares to investors without hiking the startup's internal valuation, or the price at which stock options get issued to employees, which companies want to keep low. Plus, some lawyers (not all, there's some debate here) argue it can create tax advantages for founders who sell the shares. The structure allows them to pay capital gains taxes on the profits of the shares they sell, rather than the higher levels of ordinary income taxes. Still, many startups are reluctant to issue these shares to their founders because it creates the perception that they intend to sell stock relatively early in the company's life, Silicon Valley lawyers said. "Having this in here can send that signal that people may not want to be sending," said Katherine Duncan, a partner at Fenwick & West who advises startups. "It becomes one additional barrier to an investor to write you that check." Her colleague, Allison Cooper, another partner at Fenwick & West, told me she represented a client recently in a fundraising negotiation where a venture capitalist only agreed to invest in a startup's funding round if it got rid of founder preferred stock. I see another potential problem: If founders sell, the share class adds to the number of preferred shares that stand in the way of employees getting paid if the startup sells itself. The founder preferred shares often accounts for up to 20% of founders' holdings (although it can be less) and vests immediately, unlike regular common stock. (That accelerated vesting is for tax reasons, according to the law firm that claimed to design the security, Orrick Herrington.) Despite those potential problems, Maggie White, a corporate and securities partner at Gunderson Dettmer's Silicon Valley office, said she has seen founder preferred stock become more prevalent across the startup world. "It's become more generally accepted because more people have seen it," she said. "Across the industry, I haven't seen much pushback from the investors. Slowly, over time, it's seen as tax optimization."
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