The law firm, Gunderson, invented FF Preferred Stock. But for what it's worth, the need to set up FF preferred is not as critical as our Alchemist video may have suggested. A few of our Alchemist alum have looked into this in the past and this is what we learned about why they ended up choosing not to pursue FF Preferred Stock.
Simplicity: Introducing FF Preferred Stock might add unnecessary complexity to your current setup. Simplicity trumps complexity at an early stage when you want to be heads down focused on your customers and product. If possible, err on the side of having a straightforward capital structure.
Investor Perception: Some investors are unfamiliar with FFPS or view it negatively. If you do pursue FFPS, it might add complexity during due diligence. Investors don't like surprises and so it's worth it to keep a more traditional equity structure. Many investors also disfavor founders holding FF preferred given that it can indicate that founders are looking for a quick exit. Some investors refuse to purchase FF preferred (including one particular institution investor with whom we work) because of uncertainty around the IRS’s treatment of it
Negotiating Power: Founders’ negotiating power can often better be used for other very founder friendly terms (e.g., additional Board seats down the road, favorable refresh grants, etc.)
Cost and Legal Implications: The process of introducing a new class of stock post-incorporation can be both time-consuming and costly, requiring an upfront cost and on an ongoing basis.
Future Flexibility: Keep your options open for future financing rounds. By not committing to FF Preferred Stock now, you'll retain the flexibility to make decisions that best suit your needs and the company's direction as it evolves.
Alternative Liquidity Options: As Cooley mentions below, selling a portion of our common stock to investors and then having the company exchange that common stock for preferred can achieve similar liquidity results. We’ve seen many accountants lately treat the spread between the common stock price and preferred price as long-term capital gains.
The above also corroborates with what Cooley is seeing in the market. And if you do choose to pursue FFPS, Cooley usually recommends holding no more than 15-25% of your stock as FFPS.
Overall, FFPS is not very common and will add complexity and cost and there are other ways for founders to get some liquidity early without using FFPS and causing alarm.