Why? We’ve observed that when founders and investors own different types of stock, this structure can do odd and unpredictable things in misaligning interests.
Investing will always be about finding exceptional people attacking or creating big markets with a disruptive idea. When we find one, we can invest on terms that align investor, founder and employee interests and focus on upside enhancement, not downside protection.
Common Stock is issued to Founders and Employees. Preferred Stock is a different class of ownership with terms (features) that provide advantages to investors – typically designed to help them in instances where the investment doesn’t work out as planned. Those terms normally include a preference, anti-dilution, dividends, and voting controls. For example, preference gives investors a choice at the time of an exit to either get their money back or convert into the percent of the company they own. Almost universally, investors typically buy Preferred Stock when they invest in a company.
Founders receive Common Stock. Executives and employees receive options that enable them to purchase Common Stock at a later date at a specific price.
Each new round of investment in a startup adds another layer to a preference “stack” that resembles a cake. This stack represents the order in which investors will be paid out in an exit if the company is sold for less than the post-money each of them paid.
The Common Stock (Founders and Employees) is the bottom layer of the stack. The next layer is the Seed preferred, the next layer is the Series A preferred, then Series B, etc.
If an investor purchases Common Stock, they will be in the bottom layer of the stack, alongside the employees and the Series A Preferred will sit above the Common.
While we always offer to buy Common Stock when we lead an investment in a company, we leave the decision up to the founder around whether they prefer to structure the investment around Common Stock or Preferred Stock. This is a personal decision, and we’ve seen founders lean both ways––you can read more about the Common Stock movement and the impact we’ve experienced here.