Before companies go public or have an IPO or Initial Public Offering, the company has needed money to grow. Private investors take either shares or debt to covert to shares or preferred shares to convert to shares after the IPO, whatever the combination, private investors take a piece of the company. This piece generally comes from the President and CEO and they have less. To compensate, many tech companies management is keeping the super voting shares or 20 votes per one that an non management investor can have. In one hand, the super voting shares keep management in place and they feel and actually do have control over the company’s directions without having 50% plus one of the shares. In an recent article Matt Lundy wrote about the issue.
For Lyft IPO prospectus discusses risk, the dual class structure of our common stock has the effect of concentrating voting power with our co-founders, which will limit the average shareholder’s ability to influence the outcome of important transactions including a change in control.
In 2018, 13 of 38 tech IPOs or 34% had dual class structures, according to Jay Ritter of the University of Florida. In 2017 the number was 13 of 30 or 43%.
The people who favor dual class share structures argue it allows key executives to focus on long-term strategy without the concern of quarterly results.
The reality is shareholders of Lyft were not buying Lyft for profits, but for growth. If the company has both, there will be few complaints. If the company has growth, but continues to lose money, then people will wonder when it will lose less money.
Linking to dividend paying stocks, when an investor buys a stock as long as their goals are met, then whether the company has dual class of shareholders or not, matters less. If an investor bought shares for the dividend, then as long as the dividend is paid, the investor might be a long term holder. It is when the company loses money and growth is slowed that shareholders will want new management to reverse the changes.
There are more questions than answers, till the next time – to raising questions.