Should my company establish multiple classes of common stock?
A dual class structure for common stock can be used to protect founders’ interest in a company by securing them outsized voting rights. However, adopting a dual class structure can have significant drawbacks that make it a risky choice for the majority of early-stage companies. Here’s why:
A company must have atypical early traction in order to enter a prospective deal with enough leverage to defend the additional protections provided to founders through a dual class structure. Investors highly value their ability to influence the company through shareholder voting. This is why many dual class structures are abandoned at the Series A financing round.
Since dual class structures are not (yet) typical in the early-stage ecosystem, no standards exist. Therefore, adopting this type of structure requires thoughtful and thorough consideration by a legal professional. That’s an additional up-front cost that most companies should avoid.
Risk to Investment
Can a dual class structure be undone at the time of investment? Yes, but it adds additional negotiation, legal effort, and cost. It may also discourage some investors from approaching a deal in the first place. Fundraising is challenging to begin with, and adding additional complications could put a startup at risk of losing out on critical investment.
Because of the lack of standardization and the risk a dual class structure presents for the majority of founders, Gust Launch does not currently support multiple classes of common stock. That said, we’re always open to revisiting our choices based on the evolution of the early-stage investment landscape.
Last updated on August 19, 2019