Photo: Owen Thomas, Business Insider
Square CEO Jack Dorsey and Jim McKelvey, his cofounder in the online-payments startup, negotiated a great deal for themselves when they started the company.According to documents reviewed by Business Insider, the founders have a right to sell shares alongside the company in any equity financing. And all they need to do is drop a letter in the mail.
Most startups have two broad categories of stock: common and preferred. Within the preferred, each round of financing represents a different series—hence “Series A,” “Series B,” and so on. Preferred shareholders usually have more rights than common shareholders—for example, liquidation preferences that ensure they get repaid first in the event of a sale.
Square has three categories: common, preferred, and Series FF. A source familiar with Square tells us that Dorsey and McKelvey are the two holders of Series FF shares.
Holders of Square’s Series FF shares have the right, whenever Square does an equity financing, to convert their shares into the class of preferred shares that’s being sold and sell them.
Series FF has been much-discussed in Silicon Valley circles. But its actual implementation appears to be rare.
Private sales of startup shares are less controversial than they used to be. Investors frequently allow them, even without the explicit licence granted by a structure like Square’s, to keep entrepreneurs happy.
This founder-friendly behaviour can backfire—for example, when Digg’s board allowed founder Kevin Rose to sell some of his shares after the company turned down acquisition offers, he grew less interested in driving the company’s success.
But unlike those arrangements, where a board grants permission, Dorsey does not appear to need permission from his board to sell his FF shares. Here’s how he exercises his rights according to Square’s articles of incorporation—by old-fashioned mail:
Any notice required by the provisions ofthis Section 4 to be given to the Corporation shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to the Board of Directors at the principal business address of the Corporation.
No board vote, no fuss, no muss. Just a stamp.
Whether or not Dorsey has sold any shares, the extremely driven entrepreneur does not show any sign of distraction. If anything, despite his ongoing role at Twitter, where he is cofounder, executive chairman, and product czar, he appears to be more focused on Square as of late.
Square appears to be in the midst of a new round of financing. Two weeks ago, it filed papers authorizing the issuance of $200 million in shares at an implied valuation of $3.25 billion.
Square’s Series FF shares represent about 3 per cent of the company’s shares outstanding, according to an analysis by VCExperts.com—and those are now worth just under $100 million, according to the price the company set for its latest share issuance.
Most of Dorsey’s holdings are in common stock—just over a quarter of the company, taking into account dilution from the recently authorised shares. He would need the board’s permission to sell those.
Earlier this week, Square held a board meeting, according to a tweet by Dorsey. That’s an obvious occasion for ratifying any pending investment deals, such as the rumoured agreement to sell the shares it authorised to an investor group led by Rizvi Traverse Management.
Is Dorsey selling in this round? We don’t know. The point is, he can if he wants to.
A Square spokesperson did not respond to a request for comment.
Here’s Square’s articles of incorporation.