The market has changed, but supervoting shares are here to stay, says Mr. IPO

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Yesterday, ride-sharing company Lyft said its two co-founders, John Zimmer and Logan Green, will step down from running the day-to-day operations of the company, though they will retain their board seats. According to a relative regulatory submission, they actually have to hang around as “service providers” to receive their original share award agreements. (If Lyft is sold or they are fired from the board, they will see “100% acceleration” of these “time-based” vesting terms.)

As with so many founders who have used multi-class voting structures to bolster their control in recent years, their original rewards have been quite generous. When Lyft went public in 2019, its dual-class share structure provided Green and Zimmer with super-voting shares entitling them to 20 votes per share in perpetuity, meaning not just for life, but for a period of nine to 18 months upon the death of the last living co-founder, during which time a trustee would retain control.

It all seemed a bit extreme, even when such arrangements became more common in technology. Now Jay Ritter, the University of Florida professor whose work tracking and analyzing IPOs has earned him the moniker Mr. IPO has shown that Lyft’s trajectory could at least make shareholders even less nervous about dual-stock structures.

For starters, with the possible exception of Google’s founders – those with a brand new share class in 2012 to keep their power – founders lose their stranglehold on power when they sell their shares, which are then converted to a one-vote-per-share structure. For example, Green still holds 20% of shareholder voting rights at Lyft, while Zimmer now holds 12% of the company’s voting rights, he told the WSJ yesterday.

Further, Ritter says, even tech companies with dual-class stocks are controlled by shareholders who make it clear what they will or will not tolerate. Again, just look at Lyft, whose shares traded 86% below their offer price earlier today, a clear sign that investors have – at least for now – lost faith in the outfit.

We talked to Ritter last night about why stakeholders are unlikely to push too hard for super-voting stocks, despite now seeming like the time to do it. Excerpts from that conversation, below, have been slightly edited for length and clarity.

Majority voting for founders has become widespread over the last 12 years as VCs and even exchanges did what they could to appear founder-friendly. According to your own research, between 2012 and last year, the percentage of technology companies going public with dual-class shares shot up from 15% to 46%. Should we expect this to go the other way now that the market has tightened and money is not flowing so freely to the founders?

The bargaining position of founders versus VCs has changed over the past year, it’s true, and public market investors have never been thrilled with founders with super voting shares. But as long as things are going well, there is no pressure on managers to give up super-voting stocks. One of the reasons US investors have not been overly concerned about dual-class structures is that companies with dual-class structures have, on average, performed well for shareholders. It’s only when stock prices fall that people start to wonder: should we have this?

Isn’t that what we’re seeing right now?

In a general downturn, even if a company is performing according to plan, in many cases the stock has fallen.

So you expect investors and public shareholders to remain complacent on this issue despite the market.

In recent years there have not been many examples of entrenched managers doing things wrong. There have been cases where an activist hedge fund said, “We don’t think you’re following the right strategy.” But one of the reasons for complacency is that there are checks and balances. It is not that, as in Russia, a manager can loot the company and public shareholders can do nothing about it. They can vote with their feet. There are also shareholder lawsuits. These can be exploited, but the threat of it [keeps companies in check]. Also, especially for tech companies where employees get so much stock-based compensation, CEOs will be happier if their stocks go up in price, but they also know their employees will be happier if the stocks do well.

Before WeWork’s original IPO plans famously imploded in the fall of 2019, Adam Neumann expected to have so much voice control over the company that he could pass it down to future generations of Neumanns.

But when the attempt to go public failed – [with the market saying] just because SoftBank thinks it’s worth $47 billion doesn’t mean we think it’s worth that much – he faced a trade-off. It was “I can be in control or grab a bunch 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 made the same trade-off.

Meta is perhaps a better example of a company whose CEO superpower has worried many, most recently when the company leaned into metaverse.

A few years ago, when Facebook was still Facebook, Mark Zuckerberg suggested we do what Larry Page and Sergey Brin had done at Google, but met with a lot of backlash and gone backwards instead of pushing it through. Now if he wants to sell stocks to diversify his portfolio, he’s giving up some votes. The way most of these companies with super-voting stock are structured is that if they sell it, it automatically converts to sales of one share, one share, so someone who buys it doesn’t get any additional votes.

A story in Bloomberg today asked why there are so many family dynasties in the media – the Murdochs, the Sulzbergers – but not in technology. What do you think?

The media industry is different from the tech industry. Forty years ago there was an analysis of dual class companies and at that time many of the 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 many dual-class structures associated with gambling and alcohol companies before technology companies started [taking companies public with this structure in place]. But family businesses don’t exist in technology because the motivations are different; are dual-class structures [solely] meant to keep founders in check. Tech companies also come and go quite quickly. With tech you can be successful for years and then suddenly a new competitor comes along. . .

So the bottom line, according to you, is that dual-class stocks won’t go away, regardless of whether the shareholders don’t like it. They don’t dislike them enough to do anything about it. Is that correct?

If one were to worry about entrenched managers who have been pursuing stupid policies for years, investors would demand bigger cuts. That might have been the case with Adam Neumann; his control was not something that got investors excited about the company. But for most tech companies — which I wouldn’t consider WeWork — because you have not only the founder, but also employees with stock-linked compensation, there’s a lot of implicit, if not explicit, pressure to maximize shareholder value rather than increase to the whims of the founder. I’d be surprised if they disappeared.