What is Shareholder Class Voting?

The articles of incorporation may divide stock into classes of shares. Once common scenario is to divide stock into classes where each class has the right to elect a certain number of directors.

Another common mechanism in class voting is where each class may have a different voting power (i.e., greater number of votes per share). This is commonly known as “dual class voting” and is often used in startups.

Founders of a startup will want to maintain their power or control over the business, while offering ownership rights to outside investors.

Using a second class of founder’s stock, will allow the founders to maintain a disproportionate amount of voting power compared to the outside investors.

Another common situation is the formation of a type of preferred stock. Preferred stock can have a number of characteristics, including preference to dividend and liquidation payments.

Further, the preferred stock may have some exercisable feature, such as conversion to debt or common stock after a certain period of time or upon the request of the preferred stock holder.

In exchange or along with these preferential rights, the preferred stock holder often has limited or no voting rights.

Again, this situation is very common when dealing with outside investors, such as venture capital firms.