NEWSLETTER
Yesterday, ride-sharing company Lyft said its two co-founders, John Zimmer and Logan Green, will step down from running the company’s day-to-day operations, though they will keep their board seats. According to a related regulatory document, they actually need to stay on as “service providers” to receive their original stock award agreements. (If Lyft is sold or they are fired from the board, they will see a “100% acceleration” of these “time-based” acquisition terms.)
Like many founders who have used multi-class voting structures in recent years to cement their control, their original prize money was quite generous. When Lyft went public in 2019, its dual-class share structure provided Green and Zimmer with super voting shares that entitled them to 20 votes per share in perpetuity, which means not only 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 maintain control.
It all seemed a bit extreme, even as 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 nickname Mr. IPO, suggests that if anything, Lyft’s trajectory could make shareholders even less nervous about dual action structures.
For one thing, with the possible exception of the founders of Google, who came up with a completely new share class in 2012 to preserve their power: the founders lose full control of power when they sell their shares, which then convert to a one-vote-per-share structure. Green, for example, still controls 20% of shareholder voting rights in Lyft, while Zimmer now controls 12% of the company’s voting rights, he told the WSJ yesterday.
Plus, Ritter says, even tech companies with dual-class shares are policed by shareholders who make it clear what they will and will not tolerate. Again, just look at Lyft, whose shares were trading 86% below their offer price today, in a clear sign that investors, at least for now, have lost confidence in the team.
We spoke to Ritter last night about why stakeholders aren’t likely to push too hard against super-voting stocks, even though now seems like the time to do so. Excerpts from that conversation, below, have been lightly edited for length and clarity.
TC: Majority voting power for founders has gone mainstream over the past twelve years, as VCs and even exchanges did their best to appear founder-friendly. According to his own research, between 2012 and last year, the percentage of publicly traded tech companies with dual-class shares skyrocketed from 15% to 46%. Should we expect this to turn around now that the market has tightened and money isn’t flowing as freely to founders?
JR: The bargaining power of founders versus VCs has changed in the last year, that’s true, and public market investors have never been enthusiastic about founders owning super voting stock. But as long as things are going well, there’s no pressure on managers to give up super-voting shares. One of the reasons that US investors have not been overly concerned with dual-class structures is that, on average, companies with dual-class structures have delivered on shareholders. It’s only when stock prices go down that people start to wonder: Should we have this?
Isn’t that what we’re currently seeing?
With a general recession, even if a company is running according to plan, stocks have fallen in many cases.
Therefore, he expects investors and public shareholders to remain satisfied with this issue despite the market.
In recent years, there haven’t been many examples where entrenched management is doing the wrong thing. There have been cases where an activist hedge fund says, “We don’t think you’re following the right strategy.” But one reason for complacency is that there are checks and balances. It 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 is also true, especially in tech companies where employees get so much stock-based compensation, is that CEOs will be happier when their stocks are up, but they also know their employees will be happier when the stock is up. good.
Before WeWork’s original IPO plans imploded in the fall of 2019, Adam Neumann hoped to have so much voting control over the company that he could pass it on to future Neumann generations.
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: It faced compensation. It was, “I can stay in control or take a bunch of money and walk away” and “Would you rather be poorer and be in control or richer and move on?” and he decided: “I’ll keep the money.”
I think the founders of Lyft have the same compensation.
Meta is perhaps a better example of a company whose CEO voting power has concerned many, most recently when the company has leaned into the metaverse.
Several years ago, when Facebook was still Facebook, Mark Zuckerberg proposed to do what Larry Page and Sergey Brin had done at Google, but he received much criticism and receded instead of pushing it. Now if you want to sell stocks to diversify your portfolio, you give up some votes. The way most of these companies with super voting shares are structured is that if they sell them, they automatically become sales of one share, so someone who buys them doesn’t get any extra 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 technology industry. Forty years ago, there were reviews of dual-class companies, and at the 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 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; Dual class structures are [solely] meant to keep the founders in control. Also, tech companies come and go pretty quickly. With technology, you can be successful for years and then a new competitor comes along and all of a sudden. . .
So, in his view, the bottom line is that dual class shares are not going away, no matter how much shareholders don’t like them. They don’t dislike them enough to do anything about it. Alright?
If there were concerns that entrenched management would pursue stupid policies for years, investors would demand deeper discounts. That could have been the case with Adam Neumann; Control of him was not something that investors were 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 the employees with equity-linked compensation, there is a lot of implicit, if not explicit, pressure to maximize profit. shareholder value instead of bowing to the whims of the founders. I would be surprised if they disappeared.
