The Way To Go IPO

Upsurge in Dual Class Stock Ownership in the LSV150

Mark Lonergan, September 19th, 2020

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: 

    RankCompany (IPO year)CEO (Founders labelled with 'F')CEO Voting
    2019 Sales (M)Sales GrowthMkt Cap
    36Lyft (2019)Logan Green (F)23.97%$3,61668%$9.4 b
    59Dropbox (2018)Andrew Houston (F)46.6%$1,66119%$9.5 b
    71Pinterest (2019)Ben Silberman (F)24.77%$1,14351%$15.3 b
    88Bloom Energy (2018)KR Sridhar (F)10.77%$7866%$2.1 b
    92Zoom Video (2019)Eric Yuan (F)34.4%$663100%$75.8 b
    94Slack (2019)Stewart Butterfield (F)7.5%$63057%$18.8 b
    102Crowdstrike (2019)George Kurtz (F)22.42%$48193%$23.1 b
    125Eventbrite (2018)Julia Hartz (F)14.22%$32712%$793 m
    131Cloudflare (2019)Matthew Prince (F)23.0%$28749%$11.7 b
    133Zuora (2018)Tien Tzuo (F)35.5%$27617%$1.4 b
    13510x Genomics (2019)Serge Saxonov (F)6.4%$24668%$9.1 b
    146Fastly (2019)Artur Bergman (F)36.0%$20039%$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: 

    RankCompany (IPO year)CEO (Founders labelled with 'F')CEO Voting
    2019 Sales (M)Sales GrowthMkt Cap
    18Uber (2019)Dara Khosrowshahi* (denotes less than 1%)$14,14726%$58.4 b
    80Docusign (2018)Dan Springer1.75%$97439%$37.1 b
    113Medallia (2019)Leslie Stretch3.6%$40228%$4.2 b
    116Arlo Technologies (2018)Matthew McRae*$370-20%$217 m
    118Zscaler (2018)Jay Chaudry (F)21.0%$36048%$16.7 b
    120LiveRamp (2018)Scott Howe3.16%$35334%$3.0 b
    121Anaplan (2018)Frank Calderoni2.9%$34845%$6.3 b
    122Elastic (2018)Shay Bannon (F)10.6%$342190%$7.9 b
    127SVMK (2018)Zander Lurie2.5%$30721%$3.3 b
    130Upwork (2018)Hayden Brown*$30119%$1.7 b
    142Guardant Health (2018)Helmy Eltoukhy (F)4.8%$214137%$8.2 b
    149Livongo Health (2019)Zane Burke1.0%$170149%$11 b
    150PagerDuty (2019)Jennifer Tejada5.9%$16641%$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).

    Click below for a down­load­able PDF of the rank­ings suit­able for printing. 

    Down­load the Lon­er­gan SV150

    Mark Lonergan

    Founder & Managing Partner, Lonergan Partners

    Specialties: Board & CEO placements


    [email protected]

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