Adeo Ressi’s Founder Institute, a seed stage incubator and mentoring program that we first covered last month, is set to release a set of legal documents this afternoon that promise to protect startup founders from, as he eloquently puts it, the “atrocities of investors.”
- Creation of a Class F Founders stock that has 2:1 board votes per founder and 10:1 voting power over normal common stock. These shares vest monthly without a cliff and have single trigger acceleration. Class F holders get acceleration on change in control and approval rights on new investments, liquidity events, Board size, and dividends.
- A clause that requires the payment of $100,000 to the Founders Institute in the event a founder leaves the board of directors to give a disincentive to firing founders down the road.
- Grant of a warrant to the Founders Institute to buy 3.5% of the fully diluted stock of the company in the form of the equity sold in the first round of financing, which is pooled for participating founders and mentors.
The stock grants and any penalty fees paid are put into an exchange fund that all participating founders have ownership in. Therefore, all companies participating in each class have some stock in all the other companies – a great way to reduce overall risk. One big winner in each class means everyone gets a little bit rich. 60% of the warrant stock goes to the founders, the institute keeps the other 40%.
There’s a risk that these extremely favorable founder terms could create problems when the companies try to raise outside funding. Ressi says they won’t let a financing die from these terms and will likely waive rights if forced to. His reputation will require that – if these agreements protect founders he’ll be a hero, but if they kill financing deals the program will collapse.
Applications for the first startup class are open until May 10.