Class A/B Stock Structures

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.

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Someone Actually Fired over Facebook Photos

November 7th, 2008

I regularly hear people worry about the lack of privacy on social networks, that notes or photos posted for a group of friends are not private and that sooner or later someone was going to lose a job over it.

Until today I had never actually heard of it happening.  Former New England Patriots cheerleader Caitlin Davis was fired this week for photos posted on her Facebook page.

The photos show her and a friend using markers to graffiti a passed-out-drunk person at a party.  The graffiti apparently included the words “penis”, “I’m a Jew” and a pair of swastikas.

Davis’s conduct is obviously offensive and inappropriate.  It is remarkable that she would compound that stupidity both by allowing photos of the activity to be taken, and then letting them be posted to her Facebook profile- or anywhere else.

The only positive element in this whole story is that I now have a very memorable example to offer people of how not to behave online.  There is no privacy on social networks.  End of story.

[N.B. I haven’t spent a whole lot of time reviewing this story. From what I can tell no one has accused Davis of writing anti-Semitic graffiti, just of being dumb enough to associate herself with it. Either way, it was enough to get her fired.  Lesson learned, I hope. ]

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Why is Facebook the Place I Have the Most Friends, but Get the Least Value?

March 31st, 2008

I write this blog, I have a tumblog/lifestream at www.park3.org, a Twitter account and a Facebook page.  These are my principal forums for self-expression on the web.  I’ll come right out and say that I don’t like Facebook very much.  I’ve tried to find value in it, but I have mostly failed.

I like to write, which is my I like to blog.  Facebook isn’t about that at all.  Fair enough.  I like music a lot and FB lets me pull content from Last.fm, Pandora, Sonic Living and the Hype Machine, but I can do less in the applications on my FB page than I can on the original sites themselves, so there’s no draw there either.

I tried using Facebook to aggregate content from my other online outlets, but it does that poorly because each aggregation source is siloed in an application box on my profile and the whole thing gets cluttered pretty quickly.

Photos are one of Facebook’s strongest suits.  I continually tell myself to take more photos.  Maybe if I can do that I will start using FB photos more.

Groups and fan pages are useless- nothing ever happens on them that I can tell.

That leaves the other Facebook-native features: Wall, Poke, Zombies, etc. I know a lot of people who have fun poking one another and leaving wall messages.  That’s great, but I find it unfulfilling.  Messaging is good and I use Wall, but chest bumping, fish-slapping etc. don’t appeal to me at all.

All that said, I have connected with more real-life friends online through Facebook than anywhere else.  What this means, practically speaking, is that I get the most value on Facebook from status updates.

Why is this the case, though- why are more friends on FB than anywhere else?  I think it’s because it is so easy.  Twitter and Flickr do a much better job at status updates and photos, respectively, but Facebook brings them together and does them both just well enough to be a single point of focus, and throws in the quick-touch poke stuff to help people feel close even when they aren’t in real life.

I didn’t mean to end this post so cynically- saying that Facebook is really a lowest common denominator that does enough things just well enough to be appealing to the broadest segment of the population- that’s what it seems like to me, though.

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Dear Mr. Facebook: Less Application-Spam and More Group News in My Feed, Please

February 1st, 2008

Facebook’s news feed is, in my opinion, the best thing about the platform. I understand that lots of users happily bounce around among friends’ profile pages, but that isn’t something that interests me at all. Let’s say I’m too busy for that- though in truth I bounce around to various web pages elsewhere a bunch. I guess I just don’t use my “down time” that way.

This is why I am frustrated that the news feed has been taken over by application-spam. I really don’t care that someone scored __ on a Flixter quiz, or that so-and-so challenged someone to something or other.

On the other hand, there are loads of FB groups and fan pages that do nothing for me because I don’t use the site that way. I belong to a handful of groups, but I’m not even sure why since I never visit the group pages.

Putting these two observations together, then, here is my request to Mr. Facebook:

1) Let me opt out of application spam. I don’t even have the Movies application and I still get spammed by it in my feed.

2) Publish updates from my Groups pages. I joined the darn Paris-Roubaix group so I’m interested in it. Tell me when people post messages or upload new photos. If you show me there is activity happening I’ll be more likely to visit the page.

Feel free to show me ads based on my group interests too. I’ve already self-selected my interest in certain topics, so I’m more likely to click through on ads reflecting those interests.

I’m not sure if this goes against the current on how Facebook monetizes traffic. Everyone seems focused on applications (probably because this is the only- and weak- hope for third parties to make money on FB), but I find them really superficial and transient. Groups (and possibly fan pages) represents lasting interests. Let’s see them get some more love from Facebook.

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Scrabulous’s Triple Word Score to Electronic Arts for “Dexterous”

January 22nd, 2008

Scrabulous is, I am told, the 9th most popular application on Facebook. It was created by two student brothers in Calcutta, launched on FB in June 2007, and as of this writing is used by approximately 600,000 people per day and generates “over $25k” in monthly revenue for its creators.

Metrics courtesy Adonomics.com

The rights to the Scrabble board game are co-owned by the world’s #1 toymaker Hasbro (US market), #2 toymaker Mattel (rest of the world) and #1 electronic game maker Electronic Arts. Hasbro sent the Agarwalla brothers and Facebook a notice of copyright infringment and takedown demand shortly before the start of 2008, and Mattel apparently joined the demand shortly after.

So if I understand the story so far: somehow these three giants let slip Scrabulous’s meteoric rise on Facebook for six months, and nearly a month after the takedown notice the application remains live on Facebook with nary a reference to the controversy.

Some opine that the toy makers are losing a great marketing opportunity and accruing negative publicity. I doubt it. I am inclined to agree with Josh Quittner that the toy barons are simply letting Scrabulous take the line and run with it, building a fan community and working out bugs in the online implementation. They’ll reel it in when they’re ready and land the fish for themselves.

EA’s position is ideal here. A friend in the game industry told me that EA has more attorneys on staff than any other type of professional (including developers!). My guess is that they are pushing Hasbro and Mattel behind the scenes and quietly locking up their online rights without risking negative press.

I’m still rooting for the little guys- the Agarwalla brothers- and hopeful they can work out a deal that nets them something for their effort to build the platform. Time is not on their side, though. The bigger Scrabulous gets the tighter the vise is likely to squeeze them.

As Quittner’s article says, they started the game “without thinking through the legal aspects”. Here’s hoping they pull through with enough cash to try again, and give those legal details a few moments’ thought.

Full disclosure: I played Scrabulous once and lost badly.

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