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Understand (And Avoid if You Can) the "Voting as a Single Class" Trick

TheFunded.com Advice

Posted by Nand on 2008-11-04

Tags: Negotiation Terms

PUBLIC:

There is some similarity between this and the elections, so it's a good time to discuss this.

What does "Voting as a single class" means for you (and other small investors) " and don't get it wrong, you may be a big shareholder today, but you must think like the small shareholder you will be down the road.

Here is an example of how a VC with 20% of the shares can force a decision on all the other shareholders and investors, most of which are against that decision.

The lead VC has 20% of the shares (5% B shares+ 15% C Shares)
The lead VC wants to force a decision, the rest of the shareholders are 80:20 against it.

There are 30% series C shares and 20% series B shares. the rest are common and options (who don't vote).

The holders of the C shares vote first, the decision, forced by the lead VC wins (although 40% of the C shares are against). but all of them are now "voting together as a single class", e.g. casting all their votes in favor of the decision.

The holders of the B shares do the same, they are against the decision (80:20) they "vote together as a single class" against the lead VC.

Then there is a second vote. The "holders of the preferred shares", although most of the holders of the preferred shares are against, and although all the B shares votes are against the decision. All "the holders of the preferred shares" are now forced to vote for the decision.

Now all the preferred shares vote together for the decision, although most of the holders of shares and most of the investors were against it.

The VC, with it's 20% of shares, against the will of most of the other investors and most of the shareholders can force a decision.

Try and use the smaller VCs to remove this from the investment agreements.
They will tell you this is only inserted to simplify things, they will describe situations where some retired employee can influence the decisions and so on. Remeber, this is just another mechanism to give power to the biggest shareholder (who, in the long run, is not you).

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