What is Class F common stock?
April 23, 2009
Adeo Ressi, the founding member of The Funded, recently announced the establishment of The Funded Founder Institute.
The Founder Institute helps founders launch innovative companies by providing training, services, and company-building assignments, such as incorporating the business, filing provision patents, and setting up books and records. The Institute offers a four month program, called a Semester, hosted initially in the Bay Area and then expanding to locations around the world. The program participants, the Founders, receive extensive training in weekly sessions overseen by three Mentors – two seasoned CEOs and one domain expert for each topic.
The driving beliefs behind the Institute are that (1) great founders are often overlooked by the current entrepreneurial ecosystem, and that (2) innovative startups have a dramatic positive effect on the global economy. Startup companies consume resources intelligently, put people to work in efficient ways, and produce market driven products at lower costs. Helping smart people start new companies should, in fact, help the global economy.
The Founder Institute recently published a sample certificate of incorporation that Adeo used when incorporating the Founder Institute, Incorporated. Adeo was focused on creating mechanisms to protect founders who may lose control of the companies they created after raising financing from investors. The current customary form of venture financing documents has not changed much since with mid-1970s when they first became widely adopted in Silicon Valley.
Therefore, Adeo wanted to include a number of extremely founder-friendly provisions in the certificate of incorporation for companies formed in connection with the Founder Institute. These provisions include a special class of super-voting common stock, called “Class F” common stock, which is named for “Founders.”
- Voting. The COI includes Class A common stock, which has one vote per share, and Class F common stock, which has 10 votes per share. Companies such as Google, Martha Stewart Living Omnimedia, Broadcom and others have super-voting common stock. Super-voting common stock is sometimes seen in companies where founders or a family wish to maintain control of a company after obtaining outside investment.
- Protective provisions. Similar to protective provisions in a Series A preferred stock financing, there are certain fundamental actions that cannot be taken without the consent of holders of more than 50% of the Class F common stock. The Class F common stock protective provision basically provides:
As long as any of the Class F common stock is outstanding, consent of the holders of at least 50% of the Class F common stock will be required for any action that (i) alters any provision of the certificate of incorporation or the bylaws if it would adversely alter the rights, preferences, privileges or powers of or restrictions on the Class F common stock; (ii) changes the authorized number of shares of Class F common stock; (iii) authorizes or creates any new class or series of shares having rights, preferences or privileges with respect to dividends or liquidation senior to or common stock on a parity with the Class F common stock or having voting rights other than those granted to the Class F common stock generally; (iv) approves any merger, sale of assets or other corporate reorganization or acquisition, or the liquidation or dissolution of the Company; (v) increase the size of the board; or (vi) declares or pays any dividend or distribution.
- Directors. Holders of Class F common stock are allowed to elect one director. The Class F director has 2 votes per director, as opposed other directors, who have one vote. Section 141(d) of the Delaware General Corporation Law permits a company to have directors with more than one vote per director. This may address a situation where there is a desire to keep the size of a board small, but ensure that board “control” is maintained by a particular group of stockholders.
The Class F common stock and the Class A common stock otherwise participate equally with respect to dividends and distributions and other economic rights. The Class F common stock can be converted into Class A at any time at the option of the holder, and will automatically convert if the holder dies or if the Class F common stock is transferred to someone other than another Class F holder or an entity for the benefit of a Class F holder.
Whether any of these provisions will survive after a typical Series A venture financing depends on the negotiating position of the parties. At a minimum, people like Adeo and blogs like Venture Hacks are educating founders about financing terms that may be detrimental to founders.
[Update: Class F common stock is discussed in Techcrunch, VentureBeat, PE Hub and the WSJ. In addition, Marc Andreessen has a blog post strongly supporting dual class stock structures in certain circumstances.]
WSGR online venture financing term sheet generator
April 22, 2009
[Below is the text of a WSGR email update.]
Always looking for ways to better serve the entrepreneurial community, Wilson Sonsini Goodrich & Rosati is pleased to announce the release of the WSGR Term Sheet Generator, a publicly available online tool that allows entrepreneurs and investors to generate an initial draft of a term sheet for a preferred stock financing. By answering a series of questions, users are guided through the principal variables contained in a venture financing term sheet. Brief explanations of the questions and typical deal terms are included. After answering as many questions as desired, users can generate, print, and save a Word version of the term sheet, which is intended to be useful in deal discussions between entrepreneurs and investors and in crafting a final, customized term sheet with the help of attorneys.
The term sheet generator is another example of the firm’s commitment to providing services to our clients more quickly and efficiently. Our attorneys use a more extensive version of the tool to generate initial drafts of documents for Series A preferred stock financings, including Certificates of Incorporation, Preferred Stock Purchase Agreements, Investor Rights Agreements, Right of First Refusal and Co-sale Agreements, Voting Agreements, corporate approvals, and closing documents. By using this tool, we believe that we are able to represent clients and complete transactions more efficiently. We also have a similar tool for generating initial drafts of more than 20 start-up company formation documents. In addition to document automation, Wilson Sonsini Goodrich & Rosati has developed other sophisticated knowledge management and related resources that enable our attorneys to better serve clients by tapping the essential expertise and experience of the entire firm.
Users with general comments regarding the WSGR Term Sheet Generator should contact partner Yoichiro (Yokum) Taku at ytaku@wsgr.com or Practice Resources Special Counsel Anthony Kikuta at akikuta@wsgr.com. To learn more about Wilson Sonsini Goodrich & Rosati’s entrepreneurial services, please click here.
[Update: See below for various mentions of the term sheet generator.]
Altgate: Law Firm Wilson Sonsini Now Preparing Term Sheets For Free (Furqan Nazeeri provides a review of the tool along with a sample term sheet that he created.)
Mendelson’s Musings: Wilson Sonsini Term Sheet Generator
Legal Blog Watch: Law Firm Replacing Itself With Free Term Sheet Generator
Guy Kawasaki: Free Online Term Sheet Generator
WSJ Blogs: The Daily Startup: Putting Terms in Entrepreneurs’ Hands
ABA Journal: Wilson Sonsini Offers Free Document Assembly Tool
Adams Drafting: The WSGR Term Sheet Generator: The Inoxerable Creep of Document Assembly
Prism Legal: New WSGR Term Sheet Generator – an Innovative Online Service
Law Shucks: WSGR Term-Sheet Generator
Startup CFO: Automatic Term Sheet Generator
The Startup Lawyer: WSGR Launches Term Sheet Generator
VC Confidential: Term Sheet Tool
CenterNetworks: Wilson Sonsini Launches Free Term Sheet Generator
Strategize: Wilson Sonsini Term Sheet Generator
Sophisticated Finance: Wilson Sonsini Term Sheet Generator
Kentucky Startup Blog: Term Sheet Generator
Steven Cox: Need a Venture Capital Term Sheet? Here’s a FREE One
Legal Process Outsourcing: Have Wilson Sonsini Read “The End of Lawyers?”
Reuters: Free financing tool to help startups get legal ball rolling
Reuters: Hoopla over automated term sheet may be legit
WSJ Law Blogs: Wilson’s Little Gift to the World
Xbusinessman: WSGR term sheet generator (in Japanese)
The Lean Marketer: Online Term Sheet Generator for Venture Capital Funding
What is an accredited investor?
April 3, 2009
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. In addition, the company must also comply with securities laws in each state where securities are offered.
The Act provides companies with a number of exemptions from federal registration requirements. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors” defined in rule 501 of Regulation D. Offerings to accredited investors are exempt from the registration requirements on the theory that accredited investors are sophisticated enough to protect their own interests.
The following types of individuals are accredited investors:
- a director, executive officer, or general partner of the company selling the securities;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase; or
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
Net worth includes the value of houses and automobiles. Thus, many homeowners are accredited investors due to the value of their houses. The $1 million net worth and $200,000 income standards were established in 1982 and have not increased with inflation.
The following types of entities are accredited investors:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a business in which all the equity owners are accredited investors; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
TheFunded Founder Institute
Apply to TheFunded Founder Institute. More information is available at "What the TheFunded Founder Institute?"