Name: Fortune Explains: Dual Class Shares
Uploaded: 2019-03-29
Duration: 3 min 50 s
Description: Lyft, Facebook and other tech companies use this structure - but who truly benefits?

So I really want to make pizza, but I only have $ 3 to buy all the ingredients I need. My colleague, Lucinda, decides to chip in $ 20. But then I decide to add pineapple. Which I did not vote for, and never would have. Since making the pizza was my idea And since I'm the one who actually did all the work, I figured my vote counted more than hers. Sorry Lucinda. This is how voting works in some public companies. It may seem unfair in the beginning, but it's ultimately a really good thing in the long run. I disagree, but we'll explain. [ MUSIC ] So traditionally, when a company issues stock, one share equals one vote. But, increasingly, companies have been taking on a so- called dual share structure, which gives founders and inside investors outsized control in how their company is being Being run. Some company insiders like the foudners and early investors get super voting shares in which one share equals ten or more votes. The dual class share structure has actually been around for a really long time. But since the 1920s the structure has gone in and out of Family- owned businesses, as well as news organizations, have been the types of companies traditionally to employ a structure like this. Because they often wanna maintain news independence, or keep the control within the family. But now so many companeis are choosing to go this route, and many of them are tech companies. 25 % of the companies that listed on the US Exchange in 2017 Her dual class, share structure whereas only 1 % had it in 2005. Tech companies that have begun implementing this model in recent years have included Go Pro, Yelp, Google, Snap, Dropbox, Lyft, Ali Baba, LinkedIn, Square as well as Zynga. One of the most high profile companies to use this type of structure is Facebook And CEO, Mark Zuckerberg owns 14 % of shares, yet has about 60 % voting power at the company. This means that you and I can buy common stock, class A shares. Whereas, Mark Zuckerberg and a few company insiders Have class B stock, which is one share equals ten votes. This pattern of giving founders and their early shareholders an outsized level of power really came to a head with Snaps IPO in 2017. That company gave about 90 % of the voter rates to the two founders Evans Spiegel and Robert Murphy. When the CEO or founder holds the majority voting rights in a company that also means that they can turn down shareholder proposals very easily without input from their investor So critics argued that the dual- class share structure can promote something of a dictatorship in certain firms, where investors are expected to continuously trust a CEO regardless of his decisions. Shareholders also want more say in the Money that they are investing in it is their capital being put on the line I would argue that this is actually great for founders and for innovation in the company. So this type of structure incentivizes founders to stick with the company for the long term and make decisions that will maximize the value Otherwise you risk losing the founders and the keen management right when the company goes public with nobody to lead it into the future. I hear what you're saying, and that's why we're seeing more and more investors asking for a compromise known as the " sunset clause ". So, the sunset clause calls for the unwinding of individual class share structure over a period of say seven to ten years going to a one vote one share model at the end of the Period. That's a good compromise because without it companies might choose to stay private even longer than they do now or not go public at all, which is ultimately a loss for the public investor. And if those companies don't go public, nobody gets a piece of the pie.

Fortune Explains: Dual Class Shares

Finance

Lyft, Facebook and other tech companies use this structure - but who truly benefits?