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Characteristics of Founder’s Equity

Often, common stock issued to founders will be made subject to specific restrictions. This is normally carried out by placing limiting provisions in the stock grant agreement or by requiring founders to enter into shareholders’ agreements. The purpose of these agreements is to make the common stock similar in nature to preferred stock, which is generally issued to later investors in the company.

CITE: https://www.r2library.com/Resource/Title/0826102549

Commonly, founder’s stock will be subject to various conditions, as follows:

Restricted Shares – Restriction refers to a shareholder’s ability to sell or otherwise transfer the equity for a specific period. The restrictive provisions generally require that the shareholder offer the company the right to repurchase the shares before they can be transferred to any third parties. This is known as a “right of first refusal”. Also, if the company issues additional shares, the shareholder generally has the right to sell her shares along with the issuance. This is known as “co-sale rights”.

Vesting Schedule – A vesting schedule states that time period or period in the future when shareholders become full owners of the stock granted to them. The vesting term is generally 4 years, with no stock vesting until 12 months after the grant. Granting stock to shareholders subject to vesting makes certain that the shareholder remains loyal to (or perhaps remains an employee of) the company. If the shareholder leaves the company prior to shares vesting, she forfeits her ownership interest. To protect the shareholder, the stock grant generally provides for accelerated vesting if the company is sold, goes through a later equity financing, or the shareholder is an employee and fired without cause.

Super-voting Rights – This is where the class of stock grants the shareholder more than one vote per share. This is extremely important for early founders who wish to retain control of the company.

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Filed under: "Ask-an-Advisor", Accounting, Career Development, Investing | Tagged: founder's equity, founder's shares, stock shares, What is Founder's Stock Equity? |