With the growth of the startup has come the growth of the founder driven company. Whereas the 1980's saw professional management and emphasis on stockholder's equity, the modern day has seen companies driven by their charismatic founders. One of the ways this has manifested itself is with exotic shareholder structures designed to maximize control in the hands of a few owners.
A good example of this is Google, which recently announced a reworking of their share structure. The existing Class A shares, with a tenth the votes of the Class B that the founders hold, would be phased out in favor of Class C, which holds no voting shares. Class C shares are to be issued for acquisitions and employee compensation and is now the share used in S&P benchmarks. Following the split, Google’s founders, Sergey Brin and Larry Page, retain around 55% of the voting power with only 13% of the total voting shares outstanding. This new system seems like it will help to keep control of Google in the founders hands for much longer. In a recent filing, the founders announced plans to sell stakes amounting to around $4.4 bn. The effect on their votes? They would lose less than 3% of their control and retain a 52% majority.
This is not an isolated case, as there are many examples of such dual-share systems at work in newer, tech focused companies. Facebook, LinkedIn and Zynga are some examples. One of the main reasons Alibaba group listed in the US was to avoid a Hong Kong stock exchange rule barring dual-share structures.
The question going forward is whether or not this matters. Stockholders do not seem to be too bothered about it; the Class A stock is not valued that differently to the Class C. However, the consequences are already apparent. A measure to change the shareholder structure garnered 180 million supporting votes, the most support of any measure that evening. But it was not enough to outweigh the founders' votes, at 551 million against. When the founders are benevolent and competent this might not be an issue. However, the real questions will rise when the interests of those in control diverge from those who own the company. That will be the real test of this new share system.
- Kaan Tuncel