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What is super voting stock, and can founders have it?

EquityGovernanceCo-founders

Super voting stock is a class of common stock that carries multiple votes per share, commonly ten, issued to founders so that they keep voting control after selling most of the economic ownership to investors and employees. The high-vote shares usually convert to ordinary one-vote shares if transferred to anyone outside the founders and their family, and often sunset after a period or event. Two founders holding 45 percent of the shares cannot control a stockholder vote; with ten votes a share they hold almost 90 percent of the votes. Delaware permits it, the charter can create it at formation, and almost no startup does.

Why not at formation

Because the first institutional investor will refuse to invest into a structure where two unproven founders control the company whatever happens, and the structure will be unwound at that round, at the company's expense, after having signaled to every investor who saw it that the founders expected to be unaccountable. The exceptions are repeat founders with the leverage to insist. For everyone else, control in the early years comes from the board composition negotiated in each round and from the voting agreement, not from a share class.

Where it does appear

Before an IPO. A company going public often reclassifies all existing shares as high-vote and sells low-vote shares to the public, so that founders and early holders keep control of a company most of whose stock trades. As those holders sell, their shares convert, and the voting power of those who do not sell concentrates further. Boards implementing this take advice on their duties and on the justification, because dual-class structures draw stockholder litigation and index-provider scrutiny, and many now carry a sunset.

What founders actually get at formation

Common stock with one vote a share, a majority of the board while they hold a majority of the stock, and, after the first priced round, whatever board seats and vetoes the term sheet gives the common. That is enough control for a company that is being built rather than defended. A founder who wants more should expect to earn it in the market, round by round, rather than draft it into the charter.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.