In structuring the terms of a financing, there are two broad categories that founders and startup lawyers should always be laser focused on: economics (dilution) and governance (voting power).

Most founders intuitively understand the corporate governance oriented distinction between the common stock and the preferred stock. The common stock tends to be founders and employees, whereas the preferred stock tends to be investors. Thus paying attention in a term sheet, and in deal docs, to how much power is allocated between the common and preferred is very important.

However, a more subtle but nevertheless extremely material distinction that founders should also be aware of is between the early (pre-Series A/B) common stock and the later common stock (post-Series B). People who joined the company in year 1 or 2 are going to, long-term, have a very different outlook than people who joined post-Series B; as the latter will have entered at a much higher entry “price point” (equity valuation), and thus will evaluate exit options and risk differently. Later-stage common holders are also more likely to be beholden to VCs, who may have played a role in recruiting them (particularly C-suite).

Founders are always part of the early common stock. Professional CEOs/executives are always part of the later common stock. Who among these parties represents the “common stock” broadly in voting and on the Board of Directors will have monumental consequences in the company’s governance.

Pay close attention to this granularity in how common stock voting occurs in your financing documents. Importantly, investors will often cleverly insert language in docs that says only common stock “performing services” for the Company gets to vote its shares. Fast-forward 5-10 yrs, and that can mean founders, who’ve since departed the company, have been disenfranchised of their right to vote on key company matters. Trustworthy company counsel should push back against these kinds of provisions, ensuring that the early common stock’s voting rights are not muzzled as the company grows and interests of various constituencies on the cap table potentially diverge.

For a deep dive on this, see: Early v. Late-Stage Common Stockholders in Startup Governance