Common Stock Ownership Spreads Among Startup Investors

It does showcase the preferential treatment and the motives of investors who have preferred stock. When they need to ensure a return they seem to have the leverage to do so. In this example though we see the battle emerging between large common stock owners against preferred stock owners.

From that article on Good:

"In October, Brian Bogosian, a former Good C.E.O. and a significant shareholder, along with two institutions that own common shares, said the board was not looking after the interests of common stockholders and sued in Delaware Chancery Court. They are seeking unspecified damages and fees."

The double-edge sword (taxes and cost to take ownership in a company that will probably only payout from a long, expensive lawsuit, brought on mostly by wealthier owners of common stock...) is when employees exercise their options to obtain shares to then have ownership to contest payouts that obviously favor preferred stock.

I think if you had that level of traction and revenue, more often than not you wouldn't need any investment at all.

You don't need traction to get that. There are a few big investors that are willing to buy common stock. I have one owning part of my company today. I had zero traction, just an early functional product.

I would never allow an investor into my company under any other terms: they eat the same dog food I or anyone else does. You don't need their money, there is a lot of money flowing around out there, so set the terms how you see fit and find the investor to match it.

Apologies if I misunderstood your comment, but are you implying the price per share can be different for common and preferred stock, and therefore the spread used to calculate AMT for employees can be negligible even post investment?

I assume you're referring to the "AMT" alternative minimum tax, which is calculated based on the spread between exercise price and current valuation according to most recent 409(a) filing. My impression was that this valuation, calculated post-series A/B/C, reflects the most recent per-share price paid by investors. Since investors typically receive preferred stock, the per-share price in the 409(a) filing will reflect the price investors paid for preferred stock.

In most cases, common stock will not have a real "per share" price until a liquidity event. So how is the price-per-share valuation calculated for common stock?

I was under the impression that the spread used to calculate AMT is the difference between the most recent preferred stock price per share, and the exercise price of the options, regardless of whether they bought common or preferred stock.

Getting a chunk of stock options with huge upside seems palatable vs guaranteed shares at a large tech company. Offering me a 15% discount seems insignificant. The moment you go public, everyone is going to buy all the shares available. How do you decide how many each person can buy? If I buy before an exit event, I am taking on even more risk than the option because now I am paying all of the taxes. This offers no benefits, but increased tax risk and I'm paying more to buy shares in the first place.

I would suspect that the common stock and preferred stock are priced according to their value (voting rights, preference at payout, etc). I think that ownership of common stock by other investors with the desire to ensure that common stock gets fairly represented (i.e. gets its money's worth) in a liquidity event is the biggest benefit here because it may balance the desires on both sides of the fence.