Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

Common? Preferred? Founder? Making Sense Of Startup Shares

2 min read

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1) Preferred vs Common

Historically there have been two types of stock: preferred and common. Preferred is for investors, common for everyone else including founders. When a company has an exit, preferred gets paid first before common. Investors in later rounds typically have higher preference. Two examples below recap how these dynamics work at a high level:

Example 1: a bad exit. A company raised $10M in the A, $20M in the B, and was sold for $25M. The B series holders get their $20M back, the A series holders get $5M, no one else gets anything.

Example 2: a good exit. A single investor bought 10M shares at $1 / share for a total of $10M in the series A. A single different investor bought 5M shares at $4 / share for a total of $20M in the series B. The company was sold for $250M, with 25M shares outstanding i.e., $10 / share. The B investor would get $50M (5M shares x $10 / share) which includes their $20M principal. The A investor would get $100M (10M shares x $10 / share) which includes their $10M principal. The common shareholders would then get $100M (250-50-100) back.

These examples are simplified on purpose since they are not factoring in many other variables like employee option pool (an amount of shares set aside specifically for future hires) or liquidation preferences (a 2x liq pref would mean an investor gets twice as much upon an exit).

2) Founder Shares

What people often call founder shares are actually versions of common or preferred that have become popular in the last few years.

F stock is common shares with very low purchase price since they are issued when the company is just getting started. So if a founder is issued 1M options at $0.0001 they are just paying $100 to exercise (purchase) them. Oftentimes F stock also contains provisions around right of first refusal (company has the right to buy them before the founder can sell to anyone else) and accelerated vesting (if the company has a change of control then the founder vests quicker). Mind you the tradition remains a monthly vesting, 4 years, 1 year cliff i.e., wait a year to get 25% and then 1/48 vesting per month.

FF stock have been popularized by Founders Fund and are preferred shares that can be converted into shares of a future round. Typically they are issued upon incorporation or immediately before a series A. Then the founder can choose to convert them into say series B shares, paying the price difference, and with the board’s approval.

3) Supervoting Rights

What a few entrepreneurs also do with Founder Shares is give them higher voting rights. This is essentially separating economic ownership from control. Example: a founder issues 1 F stock with 10x voting right, the investors own 4 shares, and the 5 shares are all the company has issued. Then the company is owned 75% by investors but majority controlled by the founder (10 votes / 14 votes total = 71%). Supervoting is a controversial provision. When it happens it is typically with a repeat entrepreneur (investors more comfortable) in a very hot deal (pressure to give in, otherwise investors miss on the company).

4) Trade-offs

At Tau we believe balancing interests is the key to maximize the company’s success. One of our goals is that founders own ~50% of the company till series B. Another goal that is much harder to quantify is ensuring good governance. Startups are inherently risky endeavors and entrepreneurs almost by definition ambitious people. For real and recent stories of bad governance look no further than WeWork or Theranos. In both cases there are bad behaviors from founders which were enabled by the lack of safeguards or scrutiny from VCs. So whether you are doing a traditional common vs preferred, or more sophisticated provisions, or F and FF shares, caveat emptor: it’s not just about the good intentions but also the correct implementation.


Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.

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Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

6 Replies to “Common? Preferred? Founder? Making Sense Of Startup Shares”

  1. Super underrated topic! Great breakdown, and solid analysis all around! Actually really good and accurate explanation!

  2. Thank you, Amit! Really appreciate the insights. Comprehensive breakdown also for non VC enthusiasts : )

    Maximilian

  3. “So if a founder is issued 1M options at $0.0001 they are just paying $100M to exercise… ”
    You probably were gonna say just paying $100 without the “M”.
    Nikola founder Trevor Milton is another example of criminal energy in founders of then hyped start-ups.
    I own shares of a small biotech company and read every month or so about this vesting period for new employees. I find this a fair conduct, also with the usual 1 year cliff as you say.

  4. Hi Amit,

    I just passed by your article and I enjoyed reading it. The information I found is insightful and as a young investor, it was very helpful in directing me towards the right investment in common and preferred stock models. Looking forward to reading more of your articles!

  5. I have never thought of the difference between the different types of shares! Thank you for the enlightening article. 🙂

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