The latest round of tech IPOs has featured multi-class stock structures that give company founders a lot of control. But big investors have become less tolerant of that setup, which disempowers other shareholders. As a result, some of those investors are now pushing back for the next round of tech IPOs, sources tell Quartz.
Multi-class stock structures for Facebook and Groupon, for example, gave the founders exponentially more voting power than other investors, which makes it difficult for those other shareholders to push for change in the company. Zynga instituted a triple-class structure, giving founder Mark Pincus 70 times more voting power than other investors. Big investors like BlackRock, T Rowe Price and Fidelity, who typically have a lot of sway in how companies go public, tolerated those structures because they considered the founders vital to the companies’ success. The multi-class shares also offered the founders some protection from takeovers once the companies went public.
But the tide is turning now that those investors are having to stomach drops in the companies’ share prices, sources say. Shares of Facebook, which priced its IPO at $38 per share, were trading above $30 at the beginning of this year, but have since fallen to around $24. Groupon’s shares recently bounced back, but only after the board ousted co-founder and CEO Andrew Mason in late February. Earlier this month, Pincus announced Zynga was laying off 18% of its staff; its shares are down by 73% since its IPO.
Some large investors have told bankers, venture capital firms and private companies that they will oppose multi-class stock structures in future IPOs, sources add. The shift could affect companies like Twitter, Dropbox and Box, which are expected to be part of the next wave of highly anticipated IPOs (though it’s too early to say whether they would pursue a dual-class stock structure).
That said, it’s easy to blame dual-class stock structures when a company heads south. It’s worth noting that LinkedIn and Yelp also have dual-class structures, but their shares have risen since their market debuts. LinkedIn’s stock is up by 300% since its IPO. Yelp has jumped by about 112%.