Founder stock are the shares of a company that are granted at the very beginning, usually right after formation, to its founders or early key contributors. These shares are what give founders an ownership stake in the company and are issued at a lower price than the shares that are issued later to investors or employees. Issuing founder stock is crucial for several reasons:
- Lowest Priced Stock – You can only issue stock at such low prices, typically at or right above par value of the stock, at the very beginning, before the company has taken on any outside funding or undertaken operations, which increase the value of the company, and thus the stock. This means founders only get one bite at the apple, and have to ensure founders stock is properly issued at the beginning. Otherwise, you can only issue stock at higher prices that are based on the value of the company.
- Ownership and Control – The stock establishes ownership and control of the company. Usually, founders stock gives founders a significant ownership stake in the company, allowing them to maintain control over decision making and the company’s decision-making, ensuring that the founders’ vision and goals for the company are aligned with the company’s trajectory in the long term. Founder stock may also grant certain voting rights and decision-making powers to founders, which gives founders control over the company’s strategy, board composition, and corporate activities, allowing founders to protect their vision and guide the company’s growth in line with that vision.
- Alignment of Interests – Typically, founders stock includes vesting provisions, so the stock vests over a period, such as over four years. This gives founders a vested interest in the company’s success because they are incentivized to grow the company, thereby maximizing the value of their stock.
- Attract Talent – Founder stock can be used to attract and retain key early employees or advisors. It can be offered as an incentive to join the company at formation, aligning the interests of key employees or advisors with those of the founders and fostering a sense of shared ownership and vision for the company’s growth.
- Future Fundraising and Cap Table Management – The allocation of founder stock, including the total stock issued and the ownership percentage the founders stock represents, sets the baseline for future fundraising. Investors will look at the founders’ stock as a sign of the founders’ confidence in and commitment to the company. As the company grows and attracts outside investment, the founders’ ownership percentages will be diluted as equity is offered to investors and employees, so it is important to grant sufficient equity to founders at the outset and plan for future dilution and growth of the capitalization table of the company.
Founder stock is what sets the initial ownership interest of the company, and in the long term, incentivizes founders to work towards the success of the company while protecting their ownership and control over the company. It helps foster a sense of shared ownership, commitment and purpose among founders, early key employees and advisors and also impacts future fundraising and capitalization as the company grows. Contact us if you have any questions about founders stock!
