Market has changed, but high-voting stocks are here to stay, says IPO
Yesterday, ride-sharing company Lyft said its two co-founders, John Zimmer and Logan Green, were stepping down from managing the company’s day-to-day operations, although they will retain their seats on the board. According to a related regulatory filing, they actually have to hang around as “service providers” to receive their original stock award agreements. (If Lyft is sold or fired from the board, it will see a “100% acceleration” of these “time-based” vesting terms.)
As with so many founders who have used multi-class voting structures in recent years to cement their control, their initial rewards were quite generous. When Lyft went public in 2019, its dual-class stock structure provided Green and Zimmer with high-voting stock that entitled them to 20 votes per share in perpetuity, which means not just for life but also for a period of nine to 18 months after the death of the last living co-founder, during which time a trustee would retain control.
Everything seemed a little extreme, even as such arrangements have become more common in technology. Now Jay Ritter, a University of Florida professor whose work tracking and analyzing IPOs has earned him the nickname Mr. IPO, suggests Lyft’s trajectory could make shareholders even less jittery about dual action structures.
On the one hand, with the possible exception of the founders of Google – who came up with an entirely new share class in 2012 to preserve their power – the founders lose their grip on power when they sell their shares, which then convert to a one-vote-per-share structure. Green, for example, still controls 20% of Lyft’s shareholder votes, while Zimmer now controls 12% of the company’s voting rights, he told the WSJ yesterday.
Plus, says Ritter, even tech companies with dual-class shares are controlled by shareholders who make it clear what they will or won’t tolerate. Again, just look at Lyft, whose shares were trading 86% below their offer price earlier today, which clearly shows that investors have, at least for now, lost confidence. in the society.
We spoke with Ritter last night about why stakeholders aren’t likely to push too hard against high-voting stocks, even though the time seems right to do so. Excerpts from that conversation, below, have been lightly edited for length and clarity.
TC: Majority voting power for founders has become more widespread over the past dozen years as VCs and even exchanges have done what they can to appear founder-friendly. According to your own research, between 2012 and last year, the percentage of tech companies going public with dual-class stock rose from 15% to 46%. Should we expect that to reverse now that the market has tightened and money is no longer flowing as freely to the founders?
JR: The bargaining power of founders versus venture capitalists has changed over the past year, it’s true, and public market investors have never been enthusiastic about founders having high voting shares. But as long as things are going well, there’s no pressure on managers to drop high-voting stocks. One of the reasons US investors haven’t been too concerned about dual-class structures is that, on average, companies with dual-class structures have served shareholders. It’s only when stock prices go down that people start asking: should we have this?
Isn’t that what we see now?
With a general slowdown, even if a company is executing according to plan, stocks have fallen in many cases.
So you expect investors and public shareholders to remain complacent on this issue despite the market.
Over the past few years, there haven’t been many examples of entrenched management doing things wrong. There have been instances where an activist hedge fund has said, “We don’t think you’re pursuing the right strategy.” But one of the reasons for complacency is that there are checks and balances. This is not the case where, as in Russia, a manager can loot the company and the public shareholders cannot do anything about it. They can vote with their feet. There are also shareholder lawsuits. These can be abused, but the threat of them [keeps companies in check]. What’s also true, especially for tech companies where employees have so much equity compensation, is that CEOs will be happier when their stock price goes up, but they also know that their employees will be happier when the stock is doing well.
Before WeWork’s original IPO plans imploded in the fall of 2019, Adam Neumann expected to have so much voting control over the company that he could pass it on to future generations of Neumanns.
But when the attempt to go public backfired [with the market saying] just because SoftBank thinks it’s worth $47 billion doesn’t mean we think it’s worth that much – it had to compromise. It was, “I can stay in control or take a lot of money and walk away” and “Would I rather be poorer and in control or richer and move on?” and he decided, “I’ll take the money.”
I think the founders of Lyft have the same compromise.
Meta is perhaps a better example of a company whose CEO voting power has worried many, most recently when the company looked to the metaverse.
A few years ago, when Facebook was still Facebook, Mark Zuckerberg offered to do what Larry Page and Sergey Brin had done at Google, but he got a lot of pushback and backed off instead of pushing it through. Now, if he wants to sell stocks to diversify his portfolio, he gives up some votes. The way most of these companies with high voting shares are structured is that if they sell them they automatically turn into one share for one share sales so someone who buys it n does not get any additional votes.
An article in Bloomberg earlier today asked why there were so many family dynasties in media — the Murdochs, the Sulzbergers — but not in tech. What do you think?
The media industry is different from the technology industry. Forty years ago, we analyzed dual-class companies and, at the time, many dual-class companies were media: the [Bancroft family, which previously owned the Wall Street Journal], the Sulzbergers with the New York Times. There were also a lot of two-class structures associated with gambling and alcohol companies before tech companies started. [taking companies public with this structure in place]. But family businesses are non-existent in tech because the motivations are different; two-class structures are [solely] intended to keep control of the founders. Plus, tech companies come and go pretty quickly. With technology you can be successful for years and then a new competitor comes along and suddenly. . .
So, in your view, the bottom line is that dual-class shares don’t go away, even if shareholders don’t like them. They don’t hate them enough to do anything about them. Is it correct?
If there were concerns about entrenched management pursuing stupid policies for years, investors would demand deeper discounts. This could have been the case with Adam Neumann; its control was not something that made investors enthusiastic about the company. But for most tech companies – which I wouldn’t consider WeWork – because you don’t just have the founder but the employees with equity-linked compensation, there’s a lot of implicit, if not explicit, pressure on maximizing shareholder value rather than bowing down to the whims of the founder. I would be surprised if they disappeared.