Venture Beat: FF Class Stock for Founders
Sun, December 17, 2006 at 12:19 PM in Angels & VCs 
FF Class Stock for Founders
A form venture capital funding in Silicon Valley is getting increased interest from founders of start-ups.
It is called the “FF class” of stock, for founders who want to cash out a small percentage of their stake in a company so they don’t have to wait until the company is sold or goes public.
This practice is not entirely new. Many founders through the decades, including at Intuit years ago and Jonathan Abrams at Friendster more recently, have sold shares in their company to their venture backers and gotten cash to enjoy life a little more. But with the favorable start-up climate now, VCs are doing more to accommodate founders, entrepreneurs are getting more sophisticated, hearing more about these sorts of terms, and increasingly asking for them.
Reader Comments (2)
Founders, by the way, take salaries and benefits along the way. If investors have to wait on an exit for some "comfort", why should founders or management be relieved early? Ah...yes, greed.
Thanks for the comment. I'll blog on this later after I think about it for a bit but here's a PDF from Noam Wassermans Founder Frustrations blog detailing some issues with founder compensation.
http://www.people.hbs.edu/nwasserman/entrepcomp_proceedings.pdf
"At the same time, there are also reasons why founders may receive less compensation than non-founders. First, entrepreneurs’ decisions are affected by their alternative employment opportunities (Gimeno, Folta et al. 1997). Executives with high levels of firm-specific human capital should be less likely to exit their companies than executives with lower levels of firmspecific human capital (Becker 1964; Gimeno, Folta et al. 1997; Castanias and Helfat 2001).
Most pertinent to this study, founders may possess and develop skills that are more firm-specific than non-founders (Wasserman 2003), making them relatively less valuable to other companies
and less likely to receive attractive outside offers.
Considering founders’ stronger attachment to the companies they start (Dobrev and Barnett 2003), boards may perceive them as less likely to leave for an outside offer, further enabling boards to give them lower compensation than a similar non-founder would receive. Founders might also voluntarily accept lower compensation at the companies they founded. Recent researchers have emphasized the “psychic income” entrepreneurs earn from the companies they founded (Gimeno, Folta et al. 1997) and the fact that, in contrast to the identity of people who join an existing company, the identity of organizational founders is “tightly linked” to that of the company they founded (Handler 1990; Dobrev and Barnett 2003). Accepting less compensation may also be more acceptable to founders who became accustomed to acting very frugally while their newly founded companies were cash poor and needed every possible dollar to be spent on building the company. It may also be more acceptable to founders who believe that their compensation anchors the compensation of the rest of the TMT (Allen 1981).
Founders and boards may also have to pay more compensation to attract non-founders.
Although company founders have deep knowledge of their companies, executives recruited from the outside know far less, and companies therefore may need to pay them more to attract them to an unfamiliar environment. The information asymmetry between founders and non-founders would therefore lead to compensation differences even if they were equally risk averse.
It should be noted that the strength of many of these factors is likely to weaken over time. For instance, on the founder side we might expect the degree of founder attachment to decrease as the company matures, more people get involved with shaping the company, and it becomes more formalized and less founder-dependent.
On the non-founder side, as a company matures, it becomes easier for outsiders to assess the company’s quality and performance (Wasserman 2002), and it should be less necessary to pay a large risk premium to attract them. Thus, we might expect any “founder gap” to be smaller in older companies than in younger ones.
H1b: Founders will have lower cash compensation than non-founders. This gap will be wider in younger companies than in older companies.
An alternative explanation for a difference in founder versus non-founder compensation is that, rather than having different levels of influence over compensation, founders and nonfounders have different levels of risk aversion. Therefore, we might expect founders to prefer a different mix of equity versus cash compensation. To control for differences in preferences and for equity effects on compensation, the models control for equity held by each executive.""
Might be greed. Might not.