An alarming trend is occurring in a growing number of technology initial public offerings (IPO). Just prior to selling shares to an unsuspecting public, founders have been turning the tables. Instead of selling you the same shares that insiders hold, a newly constructed class of stock is substituted instead. These shares seem in most aspects to be the same with one important distinction. Your vote doesn’t count.
How could this happen? Doesn’t the Securities and Exchange Commission (SEC), the stock exchange or some other watchdog group protect public shareholders? Actually, they don’t protect you from this practice. In fact, US Stock Exchanges have been specifically promoting this practice to ensure that US stock markets remain competitive.
The only proscription required by US securities law is that these companies disclose this practice. If you read the fine print of the prospectus (S-1) from last year’s blockbuster IPO of SnapChat (SNAP), you’ll find this language:
This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support. Conversely, this concentrated control could allow our co- founders to consummate a transaction that our other stockholders do not support. In addition, our co-founders may make long- term strategic investment decisions and take risks that may not be successful and may seriously harm our business.
Translated into plain English, despite being a shareholder, you get no vote. Management gets to make decisions without regard to shareholder desires.
While plenty of shareholders lined up to purchase SNAP’s IPO shares, I’d bet that many don’t have any idea of what rights they are missing. And those who do understand, probably don’t care about such an insignificant thing as a vote… that is until they do! A rising tide does float all boats (and increases the wealth of all shareholders). But when the tide goes out, we will clearly see who is wearing a bathing suit.
No other recent IPO has such an egregious unbalance in voting power between insiders and the public as SNAP’s did. But even with just the 10x the voting rights of the public for the founders of Google, Facebook or more recently Lyft, this imbalance will lead to majority voting control by just over 5% of the insider shareholders.
In defense of the founders who foist this distinction on its public shareholders, their stated intent is that theirs is the long view and that only the unique perspective of the founder will be capable of directing the company along the proper course. Again translated, this means these founders think you are not as smart as they, and that if you had equal influence, you would cause the company to do something that would reduce its value.
I understand that public shareholders are often shortsighted. However, I also know that most founders have never run large public companies. While their prowess as founders in a company capable of attracting public interest is clearly proven, their mettle as CEOs has not been tested. Yet you, as a shareholder, are being told that despite this lack of experience, you need to suspend your disbelief. The founder’s decisions may not be questioned. There are leaders in countries around the globe that act in the same manner. We call these leaders dictators.
This is America! No one is being forced to purchase shares in the IPO of one of these currently high-flying companies. You might wonder why anyone does? When it comes to investing, the public has a short memory. Greed fogs most lens. Today’s profits disguise the issues that will arise when things go awry.
Recently there have been protests by shareholders of Facebook asking for Mark Zuckerberg’s resignation in light of privacy violations of its customers. They forgot they gave up that right when they bought their shares.
Unbalanced voting rights are fine when things are going well. When this changes, and it will, shareholders will have no one to blame but themselves.