Founders’ Preferred

Founders’ Preferred refers to Preferred Stock issued to Founders that addresses certain tax and accounting issues when Founders decide to get early liquidity by selling shares of their stock to investors at the same price of other Preferred Stock sold in a concurrent equity financing.

Most startups have no need for Founders Preferred, but it can be helpful if the Founders believe they may want liquidity prior to an exit event. If a Founder has Founders Preferred Stock and wants to receive some liquidity on their Founders’ shares prior to an exit event, they can sell their shares of Founders Preferred Stock to an investor in connection with a future equity financing, and those shares will automatically convert into shares of preferred stock sold in that financing. This automatic conversion likely avoids potential tax and accounting pitfalls of a Founder selling shares of common stock under the same circumstances.