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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 118757
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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I have a question about joining a "startup". I was told by

Customer Question

i have a question about joining a "startup". I was told by my CEO that I would be given "founders shares", and how important that is. I was told that they would be non dilutive, I'd own 1% of the company, and whatever happened to his shares would happen to my shares. however, when I received my shareholder agreement, it said that I had "C" class shares with a cost basis of $2.00. the VC firm owns the class A preferred, my ceo and cto own the class B shares, and they created class C for me. they are actually "profit interests", due to the fact we are an LLC. I'm concerned about two things. 1) my class C shares seem to be to be subordinated to my CEOs class B shares, even though he's maintained all along and still does, that whatever happens to his shares happen to mine (in the event of a future exit). if that's the case, why not just make mine class B. seems strange. also, it was never told to me I'd have a $2 cost basis. I joined after they received $15 million in funding, which was the explanation. it just doesn't feel like my shares and his are ANYTHING what's the huge benefit of my supposed "founders" shares? sorry for the long explanation.
Submitted: 1 year ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
The classes of shares are based on the rights and benefits of the shareholders, so even though you may have A, B and C class shares, the difference in those are rights and benefits.
So you need to look at what the Class B shares receive compared to what Class C shares receive to make the proper comparison. The "par value" or cost basis is something set by the board on all shares, so that is not necessarily the issue. You need to look at whether or not the agreement specifies that the shares are non-dilutive as you were told and you need to look at what entitlements you have to dividends and your rights to sell or transfer the shares, that is what matters and not whether you are called Class A, B or C.
There is no real such thing as "founder's shares" that is just a made up term. Stock is either common shares or preferred shares. Preferred shares mean they get paid first before anyone else and may be paid dividends even when the common share owners are not paid dividends. Founder's shares, those of forming owners, may be common stock or preferred, typically with faster vesting rights than other shareholders, meaning that those shares vest them with rights before other shareholders rights are vested.