Market has changed, but super-voting stocks will remain, says Mr. IPO

Yesterday, ride-sharing company Lyft announced that its two co-founders, John Zimmer and Logan Green, are stepping down from directing the company’s day-to-day operations, although they will retain their board seats. According to a related regulatory filing, they actually have to hang around as “service providers” in order to maintain their original equity grant arrangements. (If Lyft is sold or fired from the board, they will see a “100 percent acceleration” of these “time-based” vesting conditions.)

As with so many Founders who have used cross-class voting structures to tighten their control over the past few years, their initial accolades were fairly generous. When Lyft went public in 2019, its two-tier share structure provided Green and Zimmer with super-voting shares that entitled them to 20 votes per share in perpetuity, meaning not just for life, but for a period of nine up to 18 months after the death of the last living co-founder, during which time a trustee would remain in control.

It all seemed a little extreme, even if such arrangements became more and 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 that Lyft’s development could make shareholders even less nervous when it comes to dual-share structures .

With the possible exception of the Google founders — who created an entirely new share class in 2012 to maintain their power — the founders lose their stranglehold on power if they sell their shares, which are then converted into one vote-per-one -Share structure. For example, Green still controls 20% of Lyft’s shareholder voting power, while Zimmer now controls 12% of the company’s voting power, he told the WSJ yesterday.

Furthermore, Ritter says, even tech companies with dual-tier stocks are scrutinized by shareholders who make it clear what they will or will not tolerate. Look again at Lyft, whose shares are trading 86% below their asking price today, in a clear sign that investors have lost confidence in the company — at least for now.

We spoke to Ritter last night about why stakeholders are unlikely to crack down on super-voting stocks even though now seems the time. Excerpts from this interview below have been edited slightly for length and clarity.

Majority voting for founders has become widespread over the past decade or so as VCs and even exchanges have done everything they can to appear founder-friendly. According to their own research, between 2012 and last year, the proportion of tech companies listing with dual-tier stocks rose from 15% to 46%. Now that the market has tightened and money isn’t flowing as freely to founders, should we expect the course to reverse?

Founders’ bargaining power vis-à-vis VCs has changed over the past year, that’s true, and public market investors have never been excited about founders having super-voting shares. But as long as things are going well, there’s no pressure on managers to give up super-voting stocks. One reason US investors haven’t worried too much about two-tier structures is that companies with two-tier structures have, on average, delivered shareholder returns. It’s only when stock prices fall that people ask themselves: Should we have this?

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

In a general downturn, stocks have fallen in many cases, even when a company is acting as planned.

So they expect that despite the market, investors and public shareholders will remain complacent on the matter.

In recent years there haven’t been many examples of deadlocked management doing something wrong. There have been instances where an activist hedge fund said, “We don’t think you’re on the right strategy.” But one of the reasons for the complacency is that there are checks and balances. It’s not the case where, like in Russia, a manager can plunder the company and public shareholders can’t do anything about it. You can vote with your feet. There are also shareholder lawsuits. These can be abused, but the threat from them [keeps companies in check]. What’s also true, especially for tech companies where employees get so much stock-based compensation, is that CEOs will be happier when their shares rise in price, but they also know that their employees will be happier when the stock performs well .

Before WeWork’s original IPO plans famously imploded in fall 2019, Adam Neumann expected to have enough voting power 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 that much — it faced a compromise. It was, ‘I can stay in control or take a bunch of money and walk away’ and ‘Would I rather be poorer and stay in control or be richer and move on?’ and he decided, ‘I’ll take the money.’

I think Lyft’s founders have the same trade-off.

Meta is perhaps a better example of a company whose super-voting power has worried many, most recently when the company committed to Metaverse.

A few years ago, when Facebook was still Facebook, Mark Zuckerberg proposed doing what Larry Page and Sergey Brin had done at Google, but he got a lot of resistance and backed down rather than push through. Now, when he wants to sell stocks to diversify his portfolio, he casts a few votes. The way most of these super-voting stock companies are structured is that when they sell them, they automatically convert to sales of one share and one share, so someone buying them doesn’t have any receives additional votes.

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

The media industry is different from the tech industry. Forty years ago there was an analysis of two-tier companies, and back then a lot of the two-tier companies were media: the [Bancroft family, which previously owned the Wall Street Journal], the Sulzbergers with the New York Times. There were also many two-tier structures associated with gambling and liquor companies before tech companies got started [taking companies public with this structure in place]. But family businesses don’t exist in technology because the motivations are different; are two-class structures [solely] to keep founders in control. Tech companies also come and go pretty quickly. With tech you can be successful for years and then a new competitor comes along and suddenly . . .

So the bottom line, in your view, is that dual-tier stocks aren’t going away, regardless of whether shareholders don’t like them. You don’t like them enough to do anything about it. Is that right?

If there were concerns that deadlocked management was pursuing stupid policies for years, investors would demand bigger rebates. That may have been the case with Adam Neumann; His control wasn’t something that made investors excited about the company. But for most tech companies — of which I wouldn’t consider WeWork — because you have not only the founder but also employees on stock-based compensation, there’s a lot of implicit, if not explicit, pressure to maximize shareholder value rather than address it to subdue whims of the founder. I would be surprised if they disappeared.