What is one common thing among the founders of famous companies like Google, Ford and Facebook that allows them to have complete control over the decision-making of their companies? The answer to this question is dual-class shares.
I know you are very confused about what dual-class shares are and what advantages and disadvantages they offer to the founders. Don't worry I will explain to you about dual-class voting shares in great detail without technical jargon. We will also talk about companies with dual-class stock structures.
What are Dual-Class Voting Shares?
In dual-class shares, the founders own a small portion of the company's total stock but they have the maximum voting power. For example, a company may issue class A and class B shares. Both these shares may have different voting power and dividend payments.
In this scenario, class A shares which have limited or no voting rights are offered to the general public while class B shares which have the maximum voting power are offered to the founders, executives, and family.
Why Dual-Class Voting Shares are Used?
Founders who want to enter the public equity markets for financing but want to gain full control over their company opt for dual-class stocks. Using this strategy founders can focus on their long-term vision. They don't have to worry about their investors who just want profits.
Famous Examples of Companies That Use Dual Class Structure
Alphabet subsidiary Google issued two classes of shares in 2004. Here, class A was offered to the general public which carried one vote per share. Although Class B which was offered to the founders carried 10 votes. Later, the company issued class C shares that had zero voting rights.
The Ford family has also issued two classes of shares: Class A and Class B. The family owns the class B shares which gives them 40% of voting power with just 5.0% of the total equity in the company.
Facebook also follows a dual-class common stock structure. Mark Zuckerberg and his close executives possess class B shares which carry 10 votes. Zuckerberg owns 75% of class B shares which allows him to control 58% of Facebook’s votes.
Advantages of Dual Class Shares
- The biggest advantage of dual-class voting shares is that the founders have complete control over the decision-making and functioning of the company.
- The company can still get public financing without worrying about giving too much voting power to its investors.
- Founders can focus on long-term growth. It protects the company from investors who only want to gain profits.
Disadvantages of Dual Class Shares
- Dual-class voting shares give unfair voting rights to their investors.
- Super voting rights in the hands of the founders and executives weaken the structure of the company.
- The structure of the company cannot be easily transformed into a single class.
- A study from the National Bureau of Economic Research provided strong evidence that the company which follow a dual-class structure face more debt than single-class shares.
- Shareholders can make bad decisions with few consequences.
As you can see dual-class voting shares allow the founders and insiders of the company to have complete control over the company with limited shares.
Almost every other founder wants to focus on the company's long-term goals and doesn't want to allow investors to control the decision-making of the company. That's why well-known founders are implementing a dual-class structure in their respective companies.
Although dual-class voting shares do have their own cons. The founders and investors should understand the benefits and consequences of dual-class voting shares.
What is a dual-class share?
In a dual-class stock structure, a company issues two classes of shares: Class A and Class B where one of the shares have more voting rights than the other one. For example, class A shares which are offered to the general public have one vote per share. While class B shares which are offered to the founders and insiders of the company can have 10 voting rights.
What are the benefits of Dual-class shares?
Since the founders have higher voting rights with a limited amount of stock they can have complete control over the decision-making of the company. They can focus on long-term goals. This protects the company investors who only aim to make profits.
Is it unfair or unethical for corporations to create classes of stock with unequal voting rights?
No, it is not unfair to issue stock with unequal voting right since the company before issuing its shares tells the general public and investors that they will be following the dual-class structure. Investors know all the terms and conditions and are under no obligation to buy the shares.