Question & Answer
What’s the Smartest Way to Structure Share Classes to Maintain Control?
Control is important. Whether you’re a founder raising capital or an investor structuring a deal, the way you structure share classes defines who holds power. Get it wrong, and you can find yourself sidelined in your own company. Get it right, and you control the boardroom, key decisions, and ultimately, the future of the business.
Equity isn’t just about ownership – it’s about influence. That’s why structuring share classes correctly is one of the most important aspects of deal-making.
The Foundation of Share Class Structuring
Not all shares are created equal. Common shares, preferred shares, voting shares, non-voting shares—the options are vast, and the right mix depends on what you’re trying to achieve.
If the goal is to maintain control while still raising capital, multiple share classes are the answer. Investors get a slice of the pie, but decision-making power stays where it should—at the top.
One of the most effective strategies is the dual-class share structure. This is where founders and insiders hold Class A shares with enhanced voting rights, while investors receive Class B shares with lower or no voting power. The result? Capital flows in, but strategic control remains firmly in your hands.
Types of Shares and How They Impact Control
- Common Shares: Standard shares that give voting rights and a claim on profits.
- Preferred Shares: Typically come with priority dividend payments but limited or no voting rights.
- Voting Shares: Shares with voting rights, often issued to founders and key stakeholders.
- Non-Voting Shares: Provide ownership and dividends but no influence on company decisions.
- Dual-Class Shares: A structure where founders hold superior voting shares, while investors get lower-voting or non-voting shares.
- Convertible Shares: Preferred shares that can convert into common shares under specific conditions.
- Redeemable Shares: Shares that the company can buy back at a predetermined price.
- Restricted Shares: Commonly used for employee stock plans, with limitations on transfer or sale.
Structuring Share Classes for Maximum Control
Enhanced voting rights are your first line of defense. A common approach is to assign 10 votes per share to Class A stock and 1 vote per share to Class B. This ensures that even as equity dilutes over multiple rounds, control remains intact.
Non-voting shares are another tool. If you’re raising capital but don’t want external investors to influence major decisions, issuing non-voting shares allows you to take their money while keeping decision-making power centralized.
Convertible preferences can be a middle ground. Instead of giving outright voting rights, structure shares so that investors only gain voting power under specific conditions—such as a failure to meet performance targets or upon liquidation.
Veto rights play a critical role in structuring share classes as well. Even with lower equity ownership, certain classes of shares can be granted veto rights over specific business decisions, ensuring that key strategic moves require approval from those holding control shares.
Common Pitfalls and How to Avoid Them
One of the biggest mistakes? Granting too much power to early investors without safeguards. In Deal Structuring, I outline how certain clauses—like drag-along and tag-along rights—can unexpectedly shift control if not negotiated properly.
Another misstep is structuring share classes too rigidly. Over time, companies evolve. What works in the early stages may not work in later growth phases. Build flexibility into share structures to allow for adjustments while preserving control.
Lastly, failing to align share structures with long-term exit strategies can be costly. If the goal is to take the company public, ensure your share classes comply with exchange regulations. If an acquisition is the endgame, structuring share classes to retain negotiation leverage can lead to better exit terms.
Raising capital without losing control requires precision. The right share class structure protects founders and key stakeholders while keeping investors engaged. It’s about striking the perfect balance between funding growth and maintaining strategic authority.
Done correctly, structuring share classes isn’t just about ownership – it’s about keeping control where it belongs. In Deal Structuring, I break down real-world models, deal structuring tactics, and case studies on how to use share classes to your advantage. The key takeaway? Control isn’t given. It’s structured.
Deal Structuring
Buy the book today and dive into practical techniques that empower you to get started immediately, navigating transactions efficiently and maximizing your success in minimizing cash requirements.
In this book, you will:
- Be introduced to the fundamentals of deal structuring
- Learn 19 proven deal models for structuring deals
- Discover 39 key elements of deal nuances
- Access 32 actionable clauses for your term sheets
- Explore 9 specific deal structures
- Receive 257 pages of invaluable insights
- Gain the distilled expertise of 20 years