Jay Parkhill November 25th, 2009
News came out yesterday that Facebook has created a dual-class stock structure where Class B Common Stock has 10 votes per share compared to the ordinary 1 vote for Class A shares. I certainly don’t know what Facebook plans to do with this type of stock, but Google has a similar deal (Cypress Semiconductor does as well), which has caused a lot of entrepreneurs to ask me about this type of setup. Here’s what I think.
The Good – Voting Control
This type of structure allows founders to retain a lot of control over a company even as it grows enormously. To use a very simple example, as founder of a company I could issue 1,000,000 shares to myself. If the company grows rapidly and takes on a lot of employees I might want to issue 3,000,000 shares to them.
When I do that, I incur economic dilution and voting dilution. This blog won’t speak to the economic side at all and will just assume the money all works out. On the voting side, though, you can see that I went from controlling 100% of the stock to a mere 25%. I have lost most of my control over the company.
I could issue more shares to myself to bring my percentage ownership back up, but there are a bunch of tax and logistical issues that make that hard to do.
Instead, I could convert my shares into supervoting stock. If my shares all vote 10:1 and the other 3M shares are 1:1, then I keep control of the company because my 1M shares have 10M votes compared to everyone else’s 3M.
Google has said it adopted this system before going public because it wanted to think long-term and the founders did not want to risk being outvoted on shareholder matters. B corporations can use similar structures to ensure that their companies’ core social missions can not be easily stripped away.
The Bad -Investors Hate it
My experience with these structures is that investors have a hard time getting comfortable. Professional investors want to know that they can influence major decisions by the company, so it takes a while to get folks comfortable with the idea that founders have super-special voting rights.
My advice to entrepreneurs is not to rock the boat. There are lots of perfectly good, non-investor-threatening reasons to create supervoting stock, but if the setup makes it harder to raise money then it’s a big gamble for a startup.
These things work for Facebook and Google because those are well-established, already successful companies. They have negotiating leverage on their side. Most startups are not so fortunate.
Related articles by Zemanta
- Facebook introduces dual-class structure for stock (financialpost.com)
- A New IPO-Style Stock Structure for Facebook, But No Official IPO Plans (insidefacebook.com)
- Comments Off on Class A/B Stock Structures