With the September 2020 IPO of San Mateo based Snowflake, the Bay Area boasts yet another example of dual class stock ownership (DCSO), an increasingly popular stock strategy among Silicon Valley tech IPOS.
A DCSO public company has two types of shares: one held by regular stockholders, and another held by founders and pre-public insiders, with a super-vote multiplier of 10 times the voting rights of the regular stockholders' shares. This structure gives the pre-public insiders unassailable control over the board of the company, perhaps for generations to come.
DCSO was popularized by Google (LSV#2) which used this IPO stock strategy in 2004. Many of the Silicon Valley’s most well-known tech companies use this structure, including Facebook (LSV#4), Zoom (LSV#92), and recent IPO Snowflake. Today, 29 companies in the Lonergan SV150 (LSV150) have dual class stock structures. When we started tracking this metric in 2015, there were only 11.
A Silicon Valley Founder Phenomenon?
There are 53 companies in the LSV150 rankings who are led by founder CEOs, a surprising statistic in itself. Of these, 48% use dual classes of stock, and their CEO-founders enjoy an average voting power of 32%. Conversely, at the remaining CEO-founder led companies in our list with single classes of stock, the CEO-founders enjoy an average voting power of just 7%. That spread represents a significant difference in control over the composition of the board.
A Popular Choice for Large Tech IPOs since 2018
There has been something of a recent upsurge in this trend. Looking at the 25 companies on the LSV150 whose IPOs have happened since 2018, just shy of half have used dual class stock structures. All of these recent DCSO companies are led by CEO-founders, as shown in the table below.
Conversely, at the recent LSV ranked IPOs using single classes of stock, only 13% of the CEOs are called company founders.
Recent Dual Class IPOs in the LSV150 (2018 onward)
The average voting power of the CEOs in this group is 23.8%. All twelve new IPOs are shown below:
| Rank | Company (IPO year) | CEO (Founders labelled with 'F') | CEO Voting Power | 2019 Sales (M) | Sales Growth | Mkt Cap |
|---|---|---|---|---|---|---|
| 36 | Lyft (2019) | Logan Green (F) | 23.97% | $3,616 | 68% | $9.4 b |
| 59 | Dropbox (2018) | Andrew Houston (F) | 46.6% | $1,661 | 19% | $9.5 b |
| 71 | Pinterest (2019) | Ben Silberman (F) | 24.77% | $1,143 | 51% | $15.3 b |
| 88 | Bloom Energy (2018) | KR Sridhar (F) | 10.77% | $786 | 6% | $2.1 b |
| 92 | Zoom Video (2019) | Eric Yuan (F) | 34.4% | $663 | 100% | $75.8 b |
| 94 | Slack (2019) | Stewart Butterfield (F) | 7.5% | $630 | 57% | $18.8 b |
| 102 | Crowdstrike (2019) | George Kurtz (F) | 22.42% | $481 | 93% | $23.1 b |
| 125 | Eventbrite (2018) | Julia Hartz (F) | 14.22% | $327 | 12% | $793 m |
| 131 | Cloudflare (2019) | Matthew Prince (F) | 23.0% | $287 | 49% | $11.7 b |
| 133 | Zuora (2018) | Tien Tzuo (F) | 35.5% | $276 | 17% | $1.4 b |
| 135 | 10x Genomics (2019) | Serge Saxonov (F) | 6.4% | $246 | 68% | $9.1 b |
| 146 | Fastly (2019) | Artur Bergman (F) | 36.0% | $200 | 39% | $8.8 b |
Market cap reflects value on July 20, 2020. All proxies used are most recent, and dated from October 2019 to the present.
Recent Single Stock Class IPOs in the LSV150 (2018 onward)
The average voting power of the CEOs in this list is 4.8%. All thirteen new IPOs are listed below:
| Rank | Company (IPO year) | CEO (Founders labelled with 'F') | CEO Voting Power | 2019 Sales (M) | Sales Growth | Mkt Cap |
|---|---|---|---|---|---|---|
| 18 | Uber (2019) | Dara Khosrowshahi | * (denotes less than 1%) | $14,147 | 26% | $58.4 b |
| 80 | Docusign (2018) | Dan Springer | 1.75% | $974 | 39% | $37.1 b |
| 113 | Medallia (2019) | Leslie Stretch | 3.6% | $402 | 28% | $4.2 b |
| 116 | Arlo Technologies (2018) | Matthew McRae | * | $370 | -20% | $217 m |
| 118 | Zscaler (2018) | Jay Chaudry (F) | 21.0% | $360 | 48% | $16.7 b |
| 120 | LiveRamp (2018) | Scott Howe | 3.16% | $353 | 34% | $3.0 b |
| 121 | Anaplan (2018) | Frank Calderoni | 2.9% | $348 | 45% | $6.3 b |
| 122 | Elastic (2018) | Shay Bannon (F) | 10.6% | $342 | 190% | $7.9 b |
| 127 | SVMK (2018) | Zander Lurie | 2.5% | $307 | 21% | $3.3 b |
| 130 | Upwork (2018) | Hayden Brown | * | $301 | 19% | $1.7 b |
| 142 | Guardant Health (2018) | Helmy Eltoukhy (F) | 4.8% | $214 | 137% | $8.2 b |
| 149 | Livongo Health (2019) | Zane Burke | 1.0% | $170 | 149% | $11 b |
| 150 | PagerDuty (2019) | Jennifer Tejada | 5.9% | $166 | 41% | $2.13 b |
Market cap reflects value on July 20, 2020. All proxies used are most recent, and dated from October 2019 to the present. Voting power of less than 1% is assumed to be 0% in the calculation of the average.
Is this a Silicon Valley tech company issue only? No — IPOs across all markets and geographies have been known to use multiple class stock structures, but by contrast Carta reports that only 7% of the Russell 3000 utilize a dual class stock structure.
No Clear Consensus
In defense of dual class stock structures, CEO-founders argue that short-term accountability to stockholders compromises pursuit of their long-term vision. It isn’t easy to determine if stockholders are better off without more of a vote. But investors have not been shy in buying into this structure. The market capitalization of the 29 dual stock structure companies in the LSV150 is $2.29 Trillion, or 30% of the market cap (as of July 20, 2020) of the entire list of 150 companies.
The structure has been under increasing criticism. For example, in a post from the Harvard Law School Forum on Corporate Governance, Kosmas Papadopoulos of Institutional Shareholder Services says that “companies with dual-class share structures face more governance challenges compared to other companies, as they are more likely to exhibit more problematic corporate governance practices.”
Some companies may be listening to these concerns. Two LSV150 ranked companies that went IPO in the last five years with dual class stock structures have since relinquished that structure: those companies are Box (LSV#91) and Pure Storage (LSV#60).
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