I am pleased to make available our official form of Founders Preferred Stock in WORD format for entrepreneurs created by us at Orrick. The first form can be used to create Founders Preferred Stock at the time of incorporation. The second form implements Founders Preferred Stock after a company has already incorporated. You should consult legal counsel prior to using these forms.
As I've previously discussed, Founders Preferred enables founders to sell a portion of their founders' stock in a future round of Preferred financing and to do so as exactly the same series of Preferred Stock sold in such future round. As a result, investors in that future round can buy Preferred Stock directly from the founder. Existing investors benefit because the transfer of shares from Founders to future investors does not dilute their ownership. Investors also benefit when Founders can take some risk off the table and therefore continue to build the company over a longer period of time. Founders benefit because it provides them with a path to some earlier liquidity. The company benefits because the sale of Preferred Stock by the founder does not jeopardize the company's ability to maintain a lower price on its Common Stock for employee options. And, Future investors benefit because they can purchase the latest series of Preferred Stock authorized and issued by the company.
In my experience, Founders Preferred usually comprises about 20% of the total shares of the company held by the founders. The remaining 80% is Common Stock. Please remember that Founders Preferred must be fully vested on grant for tax purposes. The Common Stock held by the Founders however may be subject to vesting (the most common vesting schedule is 4 year monthly vesting either with or without a one year cliff).
FOUNDERS PREFERRED AT TIME OF INCORPORATION:FOUNDERS PREFERRED AFTER INCORPORATION