What is a Dual-Class Stock Structure?
A dual-class stock structure basically means that a company has given disproportionate voting rights to one group of shareholders, typically its founders. In most companies, one share of stock equals one vote. But companies with dual-class structures give founders super-voting stock that may have 10 or more votes per share, though it’s treated the same as other common stock in terms of economic rights.
Dual-class structures are becoming more popular because a number of highly visible companies have implemented super-voting stock. Companies with visionary founders, like Facebook, Snap[1] and Alphabet, have put such structures in place as a means of preserving founder control. As an example, Facebook has Class A shares and Class B shares. Investors hold Class A shares, but Mark Zuckerberg holds Class B shares, which have 10 votes each. His shares represent roughly 14% of Facebook’s economic ownership but control nearly 60% of the voting rights.
A Look at the Math
Let’s take a quick look at how super-voting shares work in practice, in a company with two co-founders, a couple of key employees and other stockholders. Here, the founders only own 30% of the company, but control 81% of the vote:
|
|
Shares
|
% Ownership
|
Votes
|
Voting Power
|
|
Founder 1
|
100 Class A
|
10%
|
1,000
|
27%
|
|
Founder 2
|
200 Class A
|
20%
|
2,000
|
54%
|
|
Key Employee 1
|
50 Class B
|
5%
|
50
|
1.4%
|
|
Key Employee 2
|
50 Class B
|
5%
|
50
|
1.4%
|
|
Others
|
600 Class B
|
60%
|
600
|
16.2%
|
|
|
1,000 Shares
|
100%
|
3,700
|
100%
|
Why Put in Place a Dual-Class Structure?
Whether a dual-class structure makes sense for a company is highly situation-specific. Founders that want to protect their vision[2] might pursue a dual-class structure that gives them the freedom to focus on long-term strategic projects.[3] As we all know, a founder with a successful business will have more negotiating leverage in implementing a dual-class structure: there’s more evidence that her leadership is important and there’s more demand from investors. But investors may balk at a mechanism that could entrench founders and shield them from accountability, and notable stock indices like the Russell 2000 and S&P 500 have changed their rules to make dual-class shares ineligible for inclusion.
Other Considerations
For a company that has decided to implement a dual-class structure, the first question is when to implement it. Many companies with dual-class stock structures adopt them late in their lifecycle, often immediately prior to their initial public offering, rather than at incorporation.
The second question is when to end the dual-class structure. Often the company’s governance documents provide that the super-voting shares convert into regular shares upon a transfer, or if the founder’s total ownership percentage drops below a specified threshold. The dual-class structure can also include a “sunset” provision that removes super-voting rights after a period of time.
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[1] Snap went public by selling shares of common stock with zero voting rights. The founders and early investors held voting stock.
[2] Other methods of protecting founders include (1) director super-voting rights, allowing an individual director more than one vote; (2) founder protective provisions, giving the founders veto rights over certain key decisions; and (3) large severance packages, forcing the business to pay a pre-set cash amount to a founder on termination.
[3] This concern is often more relevant to public companies, which are dealing with the pressures and incentives of short-term owners and the liquid public markets, and not to private companies.
