A recent report at the Wall Street Journal [1] has raised concerns over the style of IPO that ride-hailing app Lyft is planning to launch later this year – focusing in particular on how it could impact upon the firm’s organisational leadership.
According to the 12 February piece, the primary Uber competitor is looking to proceed with a dual-class share structure that would provide the founders, who together own a stake of less than 10%, with de facto control over the company’s direction – thanks to an elite class of shares that will grant them ‘supervoting’ rights.
While precise details of the IPO have yet to emerge, WSJ sources suggest that the scheme will leave company president John Zimmer and chief executive Logan Green with “significant influence … ranging from the election of directors to whether to sell one day”.
The report notes: “The founders’ move to consolidate their control is the latest illustration of the nearly unchecked power held by the founders of many of the fastest-growing technology startups. Some of the biggest public tech companies that have made their debuts in recent years – including Facebook Inc, Google parent Alphabet Inc and Snap Inc – have supervoting structures that give their founders control.”
However, it notes, this doesn’t always work to the advantage of the firms concerned. “In 2017,” the report explains, “Snap, whose two co-founders control about 90% of its voting power, sold shares to the public with no voting rights. Snap’s stock and its business have struggled since then. The shares are down nearly 50% and the company has suffered an exodus of senior executives.”
Reflecting on the WSJ report in an opinion piece, Inc.com San Francisco bureau chief Jeff Bercovici asserts that dual-class share structures “invite abuse”. [2] Indeed, he makes a direct comparison between Lyft, which has positioned itself as “ridesharing’s good-guy player”, and its greatest commercial rival – pointing out that Uber founder Travis Kalanick’s “grip on board seats wielding supervoting shares … kept him in the job long enough to do the damage Lyft adeptly exploited”.
By way of contrast, Bercovici mentions the Long-Term Stock Exchange project, [3] which is campaigning for a system of ‘tenure voting’, under which stockholders’ voting rights increase the longer they hold on to their shares.
At present, the UK Financial Conduct Authority (FCA) prohibits dual-class offerings for the premium index of the London Stock Exchange, but permits them for standard listings. However, the regulator has faced calls in recent years to liberalise those rules in order to make London a more attractive venue for heavyweight IPOs.
Do the risks of these share structures outweigh their potential benefits?
The Institute of Leadership & Management head of research, policy and standards Kate Cooper says: “There’s quite an irony in this trend when one considers the rationale behind the limited liability partnership (LLP) model. That organisational template was devised in recognition of a separation of ownership and control – ensuring that owners’ interests would be strictly and proportionally limited to the amount they had invested in the firm.
“What we have here with dual-class share structures is a bringing together of ownership and control – because the elite-class shares with greater voting rights are being set aside for the enjoyment of founders or owners. It’s not a group of investors who are seeking to carve out for themselves a range of special privileges. It’s an effort by management to safeguard their autonomy and their ability to run the firm as they see fit.”
On that basis, Cooper says, it is “understandable” why these share structures are proving popular. She explains: “You need the investment of capital to support whatever growth strategy your firm has developed. But at the same time, you want to have a direct influence upon that strategy, along with the day-to-day running of the firm. If all its shareholdings are equal, you could encounter situations in which your plans and underlying vision for the firm are derailed by backers – even if those plans are eminently reasonable. In that light, the attraction of dual-class shares speaks for itself.
“However,” she adds, “if the increased control and influence of the founder(s) is perceived among the broader investment base as a risk, then there should clearly be a stark pricing differential between one class of shares and the other. This would ensure that those who wield the greatest influence take on a commensurate financial burden – otherwise those individuals are merely deflecting risk away from themselves and situating it among the people who have the least say.”
For further insights on the themes raised in this blog, check out the Institute’s resources on developing strategy