Profit shares vs voting shares


2

My co-founders and I plan to issue profit shares and voting shares separately. For example, I might receive 35% of the profit shares, and 15% of the voting shares.

What disadvantages are there to this approach?

-- Added on 2011-05-13:
We're considering this approach because we want one of us to control at least 51% of the voting shares at all times. We want that so that we co-founders always have control of the company.

Equity Shares

asked May 13 '11 at 05:13
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A Fake Username
86 points

1 Answer


3

The obvious disadvantage to this is that if you deserve 35% of the profit, there is no good reason why you shouldn't have 35% of the say. You have built in a system where someone gets to privilege their interests over yours.

Second of all, these shares are themselves going to be more difficult to market - you can't simply sell them as is as a tagalong to another deal.

Maybe you have a good reason to do this, but unless you can articulate to yourself a good reason to do this, don't.

Edit: That's a silly reason. Until you have outside investors, as founders, you will collectively control the company. Doing this will just make one of you dictator over the others. Such a structure is also going to be profoundly unattractive to equity investors. Anyone who wants to invest (other than your mother) is going to insist that you abandon such an arrangement.

Disclaimer: don't rely on anything someone said to you for free on the internet.

answered May 13 '11 at 07:53
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Marcin
526 points
  • thanks for those tips. I added some more details to my initial question. Does that clarify things sufficiently? – A Fake Username 6 years ago
  • Good answer. Feels like this sort of arrangement would put the partner relationship on the back foot. Business is all about relationships. – Tinny 6 years ago
  • thanks for the follow-up edit in your answer. What would make this structure unappealing to potential investors? – A Fake Username 6 years ago
  • Investors will want more legal control than you have, to counterbalance your factual control. – Marcin 6 years ago
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Equity Shares