Marc Andreessen comes not to bury dual-class stock structures, but to praise them:
A dual-class stock structure means that a company has two different classes of common stock. Each class of stock has the same economic ownership of the company, yet different voting rights.In a typical scenario, Class A shares have a single vote per share, whereas Class B shares have 10 votes per share, for any shareholder vote.
Using this mechanism, for example, the Class B shareholders might only own 20% of the company in economic terms but have a clear majority voting position relative to the Class A shareholders.
In short, Class A shareholders have shares labeled with the earlier letter in the alphabet, but Class B shareholders control the company — in stark contrast to the more normal single-class stock structure which is more classically democratic: “one share, one vote”. Since Class B shareholders will typically be some set of founding management or founding investors in the company, in practice the presence of a dual-class stock structure means that the founders control the company and can overrule all other shareholders on a wide range of issues, including if and when to sell the company.
Both public and private companies can have dual-class stock structures, but the controversy around dual-class stock structures is usually confined to public companies, due to the presence of public shareholders. And so I will focus purely on public companies.
I used to be an absolutist against dual-class stock structures — I used to believe that dual-class stock structures were obviously a bad idea, that the democratic single-class approach of “one share, one vote” was more fair to public investors and more likely to lead to a healthy company in the long run, since total founder control of a public company can allow the founders to overrule normal market forces and the interests of their public shareholders.
And in fact, practically all investor advocates and shareholder activists agree with that stance — dual-class stock structures are at the top of the list of techniques that entrenched managers can use to foil the normal market discipline of a public stock, and to frustrate outside public shareholders who can easily become disenfranchised even when they have majority ownership of a company… with a long-run outcome similar to the kind of insularity and inbreeding you find in royal families. These days, the New York Times Company has of course become the poster child for entrenched bad management operating against the interests of their public shareholders due to its dual-class stock structure — how could anyone possibly be in favor of that?
And on the face of it, a dual-class stock structure simply seems unfair — how can someone own part of something but have a tenth of the rights of someone else who owns the same amount?
After 15 years in the technology industry, though, I have done a complete 180-degree turn on the topic — with some caveats.
I come not to bury dual-class stock structures, but to praise them.I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:
- The key leaders of the company — typically the founders — who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.
- The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.
- The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.
- All public shareholders understand what they are getting into up front — no bait and switch.
The key to the whole thing is shared goals — particularly the shared goal of long-term value creation, particularly the creation of a long-term franchise, the kind of franchise that can require 10 years or longer to build.
With such goals, I now believe the interests of public shareholders will often be better served by ceding voting control to the founders and key leaders of the company.
This is a provocative statement, so let me back it up.
In practice, the world at large, the markets in which companies operate, and Wall Street in particular, throw up all kinds of short- and medium-term noise in the face of every public company, all the time.