What do founders actually own before outside investors arrive? Common shares are the company’s original equity class, held by founders, management, and employees. They represent ownership, but they do not carry the preferential exit or liquidation treatment given to preferred shares. section 10.3 section 10.4
The ownership tradeoff
At Dover, one founder initially owned every share. Adding cofounders and employees diluted that ownership, and the seed round diluted common ownership further when new shares were issued to investors. The uncomfortable but practical choice was owning a larger percentage of nothing or a smaller percentage of a funded company. section 10.3
Keep these practical points in mind:
- Common is the only share class before the seed round; seed investors receive a new preferred class. section 10.3
- Issuing preferred shares reduces common’s percentage of the overall company, even when the financing makes the company more viable. section 10.3
- In a low-value exit or liquidation, preferred shareholders are paid first, leaving common holders with little or nothing. section 10.4
Figure 10.1 Pre- and post-money valuations for a sample seed and Series A. Values are in millions, except price per share.
Compare how common ownership changes as preferred seed and Series A shares are added to the capitalization structure. section 10.4
