Founder Friendly Standard gives founders 24:1 super-voting equity. Here is the rationale behind it.
This weekend, I’ve been reaching out to startup influencers to coordinate a twitter campaign where we celebrate Indie Hackers, bootstrappers, customer-funding, and Zebras during the unicorn-obsessed Tech Crunch Disrupt conference in San Francisco, October 2 – 4, 2019. If you want to join us, we’re using the hashtag #DisruptVC.
One of the influencers I approached asked why Founder Friendly Standard gives founders a 24:1 voting advantage. The reason is to keep founders in control of their companies. Here’s an excerpt from the email:
Founder Friendly Standard is a checklist of issues for founders in every country in the world, not just Delaware C-Corporations. Section 2.2 says that founder stock vests over 4 years. In some legal jurisdictions, unvested stock cannot vote. Thus, 24:1 voting rights allow founders to be generous with their equity while still retaining control during (and after) vesting.
Do you think economic participation and control should be separated? Or should they be interlinked? Reply in the comments below.
Here are additional data points we considered when writing Founder Friendly Standard Section 1.1, which gives founders special voting shares:
- Google has 10:1 super-voting equity for its founders. Snapchat doesn’t give shareholders any voting rights. Investors buy stock in these companies every day.
- The Credit Suisse Family 1000 research found that companies controlled by their founders build for the long-term, which translates to a competitive advantage over time.
- Principal-agent theory suggests that agents (investors) may be more short-term focused than principals (founders).
- Prospect theory suggests that diversified investors would engage in riskier behavior to seek outsized gains. Founders whose net worth is not diversified would often prefer the opposite.
Many first-time founders don’t grasp the significance of these issues on an emotional level until it’s too late. Nor do they understand they can walk away from investment and things can be OK if they’re focused on cash generation and balanced growth.
Dan, Adam, and I learned these lessons the hard way. Founder Friendly Standard is our way of helping other entrepreneurs go further by raising awareness of the 17 issues in Founder Friendly Standard.
What’s your opinion about how the Founder Friendly Standard compares to term sheet templates like the Y Combinator Safe or the 500 Startups KISS? Please leave a comment below.
Thank you for taking the time to read. If you liked it, sharing the thread on Twitter is really appreciated.