The VentureBeat article on the FF class of stock captured my attention. From Matt Marshall’s post:

[FF Class stock is] for founders who want to cash out a small percentage of their stake in a company so they don’t have to wait until the company is sold or goes public.

I don’t pretend to be an expert in capitalization and structuring appropriate incentives for management. In fact, I know very little about the subject. I do not speak from any stance of authority throughout this post. That being said, based on my intuition, I see this FF Class stock as a win/win for both entrepreneurs and venture capitalists alike.

Benefit for VCs: It’s a good way to settle down an entrepreneur that is eager to sell a company too early. It allows VCs to keep entrepreneurs motivated towards a much bigger payday than many of the early exits we are seeing in this hot M&A market. As I have said before, I don’t think any of the early exits we are seeing by lightweight web services are necessary by any means. Entrepreneurs can do better.

Benefit for Entrepreneurs: Entrepreneurs don’t have the luxury of a portfolio play that VCs have. Entrepreneurs have all their payday tied to the success of a single company. As such, it’s an incredibly risky situation. FF Class stock can provide a sense of comfort that allows entrepreneurs to hedge their bets and take a nice amount of money off the table.

All that being said, I would caution entrepreneurs negotiating terms to be careful when asking for FF Class stock. I am of the opinion that the more plain, vanilla a term sheet is, the better for all parties involved. Everyone’s motivations are aligned when a super simple, vanilla deal is in place. Asking for FF Class stock could be countered with more complicated terms request on behalf of the VCs, which may throw people’s motivations and goals into question, or worse, in conflict with each other.

I will be curious to see if FF Class stock becomes more standard going forward.