What is Founder Preferred Stock?

Specifically, founders' preferred gives the founders the right to convert a portion of their founders' stock (up to 20 percent) into a future series of preferred stock in order to sell it to future investors. This benefits the founders because they can sell stock at the preferred stock price. This benefits investors because they can buy from the founder exactly the same series of preferred stock as the company is selling in a venture financing. And, this benefits the company because preferred stock is being sold, avoiding 409A problems on employee common stock - companies get to keep the employee common stock at a discount to the last preferred stock price.

As part of this structure, please note the following:

1. Most VC's are OK with this structure if the founders' preferred stock portion is kept to no more than 20 percent of a founder's holdings.

2. The founders' preferred stock portion needs to be fully vested. The founder's remaining common stock holdings can still vest over the usual 48 months.

3. Founders' liquidity happens in connection with a future financing event. Based on empirical data, it is usually in connection with a future VC or strategic financing where the investor is also buying preferred stock from the company.

4. The founders' preferred structure needs to be put in place at the time of company formation. There are potentially income tax problems if it occurs later.

5. The founders' preferred has the same voting rights as the founders' common stock, and it is junior to the preferred stock purchased by investors.