Who should have control: investors or the CEO? Dual-class share structures

Dual-class structures (founders reserving a separate class of shares for themselves, to keep voting rights), have been quite controversial. The argument is that this protects companies from some of the short term thinking of investors once a company goes public and enables them to focus on the long term. But Facebook’s have had quite a lot of criticism after the Cambridge Analytica privacy scandal for example, as Zuckerberg controls 60% of voting power which makes it very hard for investors to remove him as CEO.

There is a flip side to that story though, as Box are discovering -

that tweet links to this story -

Marc Andreessen said back in 2016 that -

If you go public in this environment under the single-class share structure and a board that gets reelected every 12 months, God help you. You’re chum in the water.

so maybe if we want these companies to go public, we have to accept a dual-class structure? Or do you think that investors should have the final say in these situations?

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It really does come down to why does a company want to sell it’s equity.

Are you looking to purely raise capital, then don’t give voting rights and you will offer the equity at a discount. Worst still if the B-class is not liquid. Investors can speculate on your business and see where it takes them (or for a promised dividend.)

If you want to attract investors, create a smoother pathway for M&A activity, and allow investors to truly be part of your organisation. Then it’s clearly A-class, voting rights.

In the end of the day each company has control over the amount of shares offered out in the wild, both the company and the existing shareholders have a say in how much is available publicly. If you end up in a situation where voting control is possible in the public domain, that is a situation you have created.

Here is a very detailed write up about UK company law around voting rights, the two key numbers being 50% and 75%.

Generally speaking there isn’t a process for shareholders to “overthrow” the board. They can (depending on your AoA) reappoint executive members, who are likely board members themselves.

To sum up, it all comes down to what a company is seeking to achieve. If you are looking at just raising capital and you don’t really want shareholder input, there are plenty of solutions for raising capital without selling equity.

It can be tough to take outside feedback, it can be challenging when you have worked hard on a product or company to have someone else make decisions. That is the reality you face when you sell voting class shares, and something you need to be ready to welcome. If you can’t accept decisions from those who have paid you to have a say, how could you ever take feedback from your customers?

Personally I’m a big believer in what @Truman_Du proposed to the team when we first agreed to raise funds. We want to make all the key stakeholders in the business have the same power and respect. The investors, our staff, and the customers we serve, all three groups must be aligned for true success. By selling our voting share class I think that is a critical step towards achieving that.

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