Chris Nenno

For all founders and investors in the crypto or crypto-adjacent world (which is most of us), the SEC and CFTC just released long awaited guidance on securities laws and compliance that will absolutely impact the future of your business and investments. Mike Katz is your guide and guru. Check out the article below.

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I loved seeing my partner Maggie White chime in on Founder Preferred/Series FF Stock in The Information last month (article linked in the first comment). I share Maggie’s view that this structure is more or less well-accepted at this point by the early-stage VC investment community. That said, I think we both agree, it’s important that founders be thoughtful about the percentage of their holdings that reside in the form of these shares, since this is a situation where you certainly can have too much of a good thing. Although I’m not overly concerned about VC push back on the fundamental concept behind this sort of equity structuring, over the years I have had a few VCs express concern with founders who they felt were overly focused on secondary opportunities from the outset. “We want to avoid founders solving for Maserati Money in the near term,” a VC memorably told me regarding the topic. Every company is different, every deal is different, and every founder is different, but there are a few points for founders to weigh as they consider the right mix of common stock & Founder Preferred/Series FF. -- Balance: Since shares of Founder Preferred/Series FF are investment securities and generally cannot be subjected to vesting, my experience is that holding no more than 8% or 9% of a founder’s shares as Founder Preferred might be a bit of a “sweet spot” for a formation. -- Alignment: Keeping the number of Founder Preferred shares under double digits does a good job of responding to the “Maserati” concerns and aligning the interests of the founders and the VCs, since it clarifies that a founder is not looking to monetize a large portion of their shares apart from an exit transaction for the business, and that they are in for the proverbial long haul. -- Incentives: Capping Founder Preferred/Series FF at 8% or 9% also limits the damage should a founder depart early and walk away with this equity. Because you can’t subject this sort of stock to vesting, there’s no “cliff” or any other easy contractual provision that takes the shares away from a departing founder. A company might ask a departing founder to surrender those shares as a voluntary measure, but it would be a strictly voluntary choice for them to do so. It's your startup and your mileage may vary, but in my experience, this is one area where founding teams benefit from a balanced approach that aligns incentives and doesn't strive for too much of a good thing.

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