Less Common: FF Preferred Stock

Some startup attorneys recommend incorporating with an additional class of stock that can convert into preferred stock later, often called FF Preferred Stock.¹ FF Preferred can also be referred to as:

• Founders Preferred Stock
• Founders' Preferred Stock
• Founder Preferred Stock
• Class FF Preferred Stock
• Series FF Preferred Stock

Please note that even though FF Preferred Stock has the words "preferred stock" in its name, it's actually typically a form of common stock.

FF Preferred Stock was invented to make it easier for founders to get liquidity as part of a venture capital financing. As part of the financing, the founders can convert the FF Preferred Stock into the type of preferred stock being sold in the financing. Then the investors can purchase those shares from the founders, in addition to purchasing shares directly from the corporation. This way the founders can get some liquidity without selling shares of common stock. Selling common stock instead could lead to a higher valuation for the common stock, which would be undesired for equity compensation purposes. In addition, investors generally prefer buying preferred stock.

Selling FF Preferred Stock may also help founders avoid unfavorable tax treatment in some circumstances. There are scenarios where a founder's gains from selling common stock might be treated as compensation income rather than capital gains for tax purposes. Some tax attorneys think that FF Preferred Stock reduces the chances of a founder's gains receiving this less favorable tax treatment.

There are also startup attorneys who believe that these potential benefits of FF Preferred aren't worth the increased legal expenses that come with the additional complexity it introduces. This is compounded by the fact that only a very small percentage of startups end up in a position where investors are willing to purchase shares from founders. If the founders never end up selling their FF Preferred shares to investors, the additional expense of forming and maintaining a corporation with FF Preferred will be wasted.