Lyft IPO rekindles debate on dual-class share structures
Prospect of ‘super-voting’ stake for co-founders at flotation stirs fears for investor rights
As Silicon Valley’s unicorns head to the public markets, questions are being raised over how the latest generation of hotly anticipated technology listings will treat their future shareholders.
The debate over dual-class share structures — in which founders and sometimes early investors are issued stock with extra voting rights — has been revived following reports that Lyft, the ride-hailing company, is preparing to create “super-voting” shares for its co-founders, as it plans to list on the Nasdaq as soon as next month. The share structure would give its co-founders, John Zimmer and Logan Green, voting rights greater than their economic stake of less than 10 per cent in the company but would fall short of handing them majority control, according to a person familiar with the discussions.
Trying to strike a balance between public ownership and maintaining founder control has become a hallmark of tech IPOs, causing varying degrees of hand wringing from investors who are afraid of missing out on high-profile investments but wary of a mechanism that limits their rights as owners. Most public companies trade a single class of shares, with one vote for each share.
“The principle of one-share, one-vote is a foundation of good corporate governance and equitable treatment of investors,” Kenneth Bertsch, executive director of the Council of Institutional Investors, wrote in a letter to outside members of Lyft’s board this month. The letter also pushed for the adoption of a seven-year “sunset” period that would ultimately revert the capital structure to one share one vote.
Lyft declined to comment.
If Lyft goes ahead with its plan to issue super-voting shares, it will mark yet another point of difference with its larger rival, Uber, which is gearing up for its own initial public offering this year.
Uber stripped extra voting rights from early investors, including co-founder Travis Kalanick, who was ousted as chief executive in 2017 after a run of scandals. The move was part of a package of corporate governance reforms agreed in the terms of a $9bn investment from SoftBank. Those changes will be an important part of its pitch to investors ahead of the listing, according to a person familiar with the company’s thinking.
Proponents of dual-class structures say they allow founders to focus on longer-term goals and insulate them from attacks by activist investors. They also argue that investors are free to choose whether or not to take a stake with reduced or no influence.
“Most companies want to create something that gives them protection as they grow over the first five to seven years of public company life,” said Will Connolly, head of technology equity capital markets at Goldman Sachs, at a conference this month.
Investors generally prefer a more egalitarian approach but have accepted the concept of super-voting shares because there are examples of companies with multiple share classes, such as Google parent Alphabet, where the common stock has performed well — keeping investors of all classes happy.
Mark Zuckerberg, Facebook’s chief executive, owns about 14 per cent of the company he founded but, thanks to a special class of shares carrying 10 votes each, controls 60 per cent of voting rights. His majority control has drawn criticism, as Facebook has come under pressure over privacy practices and its role in spreading disinformation.
Still, Facebook’s common stock has performed well since its 2012 IPO: the shares currently trade at about $160, compared with its initial pricing of $38, significantly outperforming the S&P 500 over the same period.
But critics have a potent example to point to when things go wrong: Snap’s 2017 IPO, and the Snapchat owner’s ensuing abysmal share performance.
Snap pushed the envelope of corporate governance standards by selling shares with zero voting rights — the first company to do so at its IPO. As a result, co-founders Evan Spiegel and Bobby Murphy control 97 per cent of votes. That move infuriated pension funds and other big institutional investors and resulted in large index providers tightening their rules on dual-class shares.
S&P Dow Jones Indices, for example, said a few months after the listing that companies with multiple share classes would not be able to join the benchmark S&P 500, although existing constituents with such structures — including Google, Berkshire Hathaway and Facebook — were allowed to remain.
The trajectory of Snap’s price over the past two years — from $17 at issue, putting a value of nearly $20bn on the company, to less than $10 a share now and $12bn of market cap — only underscores the risks.
But despite misgivings over Snap, dual-class listings are expected to remain common among the forthcoming class of newly public tech companies.
Wall Street bankers and some investors said that, depending on how proportional the super-voting rights are to the founders’ economic interest, investors are willing to look the other way when they decide they like the long-term prospects of the business in question.
“The vast majority of companies in the technology space that go public do so with a dual-class structure. There has been no observable price for having that structure, assuming it is reasonable,” Mr Connolly said.
“The market has spoken loudly when there are deviations” from that norm, he added.
Giving founders shares that carry 10 votes each is seen as fairly standard, whereas a higher ratio is likely to meet more investor resistance.
“Does the founder have 99 per cent of the vote? I would be hesitant to own that,” said Vince Rivers, senior portfolio manager at JO Hambro Capital Management, the £28bn UK-based asset manager. “If it is a third of vote, I would be more apt to own it if I liked it otherwise.”
Facebook backed down from its attempt to create a class of non-voting shares in 2017, which would have allowed Mr Zuckerberg to sell stock to fund his charitable efforts without ceding control, after an investor lawsuit.
Alphabet also faced investor pushback when it issued shares without voting rights in 2014 but went ahead with its plans. Today, its non-voting class C shares trade within 1 per cent of its class A shares, which have one vote, suggesting investors may see little difference in value.
“Sunset” clauses, whereby super-voting rights phase out over time, can also alleviate investor concerns. Stitch Fix and Eventbrite, tech companies that went public in 2017 and 2018, respectively, both put 10-year expirations on the extra votes given to their founders and early investors.
In addition to petitioning Lyft, the Council of Institutional Investors, representing asset managers including BlackRock and T Rowe Price, has also pushed the two main listing venues in the US, the New York Stock Exchange and Nasdaq, to adopt seven-year sunset provisions as part of their listing standards.
“In or view, this moderate step would substantially mitigate the adverse effects of misalignment, which only worsen over time,” CII told Lyft. “Seven years offers a figure both commonly chosen by recent IPO companies and supported by empirical studies of dual-class company performance.”