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An interesting issue here is if the 2-voting-class design is sustainable for new companies. The bottom of the article notes the issue with the legal docs "took

An interesting issue here is if the 2-voting-class design is sustainable for new companies. The bottom of the article notes the issue with the legal docs "took place in 2013." I wish the author would have spent more time grappling with 2-class voting (which TBH the major focus of the article) rather than Zuck's clerical error. The problem with 2-class voting is that it dilutes the inherent value of non-voting shares in a way that is not reflected in the price. Shares without voting power increase inflation, right? Furthermore, a lot of tech companies have put only a small number of shares on the open market (likely at the recommendation of banks who want demand to support the share price). I guess the company will gradually become more publicly available as employees sell. I'd be curious to know what portion of public companies have multi-class voting and which ones have only about 10% available as public shares. If these practices are new and rare... something to think about.

spacecowboy_lon 11y ago
Actually on the FTSE these dual class shares are disliked one even got kicked out of its index (the daily mail) I think the SEC should be much harder on this gaming of the system its undemocratic and is not in the publics best interest.
dantiberian 11y ago
Fortuitously, The Information published an article about multi class voting structures today. You can read it at http://go.theinformation.com/9e6aa6 http://go.theinformation.com/9e6aa6 (I think this should work for non subscribers).
forrestthewoods 11y ago
What makes you say it's not reflected in price?
- glesica 11y ago
  There are a ton of reasons for the price to be "wrong" if a particular practice is unusual or new. Markets only function as well as the people involved in them. If the people are all acting (unwittingly) on incomplete, incorrect, or insufficient information, then one would expect there to be risks that haven't been "priced in".
  - roel_v 11y ago
    Unknown risks are priced in. You just can't really tell how much you should discount because the risks are, well, unknown. If that DNA company from last week would have been public, with one class of shares, and I had bought shares two weeks ago - well, I price them with one of the components being 'there might be some colossal skeleton in the closet' (or take Enron two weeks before the SHTF). It's not like I 'priced it wrong', at least not in any common meaning of the term; because it would basically redefine 'correct pricing' to 'higher realized profit at some point' and would make the concept of 'price' something that can only be assessed ex post. It doesn't mean that the non (or lesser) voting shares are priced wrong; in fact, by definition, they are priced at what the market values them. Also, different classes of shares aren't exactly 'new' or 'unusual'. http://www.slideshare.net/nimishhalkar/a-brief-history-of-preference-shares http://www.slideshare.net/nimishhalkar/a-brief-history-of-pr... claims that the first preferential shares were issued in 1836 (yes, it's a different kind of 'preferential' than what we're talking about, but it's still a species of the genus 'share differentiation') E.g. they're a very common vehicle for structuring profit sharing in several civil law jurisdictions I happen to know of.
    - glesica 11y ago
      People like Warren Buffet talk about things being "mis-priced" all the time, that's how people like him make money. So yes, some risk might be priced in, but how much, and how accurately? In some cases, investors may have a very good idea of how much risk a venture entails, in other cases they may think they have a good idea but be completely wrong. The market price is, yes, the market price, that's a tautology. Whether the market price reflects a sustainable reality is an entirely different matter. The parenthetical in my original comment was important. If everyone thinks they know what is going on, and they're all wrong, then the price isn't a good reflection of reality.
nostrademons 11y ago
Dual-class voting structures have been around forever. Ford and Berkshire Hathaway are two prominent examples. Historically, they've been relatively rare, and the non-voting shares don't trade at much of a discount. It's rare that individual shareholders get to exercise their voting rights anyway. The interesting trend now is that so many tech companies have dual-class supervoting shares. It sends the message that a few titans of industry basically make all the decisions, and everybody else is along for the ride. Which is probably where we are, economically, right now, but seems disheartening.
- justincormack 11y ago
  They are not allowed in many countries eg most of Europe. Shares are considered common ownership by capital committed. Well other than debt which doesn't vote but gets to own the company if not paid back.
- Animats 11y ago
  The New York Stock Exchange, back when it had a Board of Governors, did not allow companies with more than one class of stock to trade on the NYSE.[1] That rule was in effect from 1928 to 1988. The NYSE gave it up because companies were listing on the NASDAQ instead, which allowed multiple classes of stock. Ford was grandfathered in. Berkshire Hathaway only created a second class of stock in 1996, and that was just because Buffett refused to split the stock, and the current price of $215,000 per share (up from $290 in 1980) was inconvenient for small investors. The Google and Facebook founder-for-life arrangements are unusual, and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced. [1] http://articles.latimes.com/1986-07-04/business/fi-648_1_voting-rights http://articles.latimes.com/1986-07-04/business/fi-648_1_vot...
  - forgetsusername 11y ago
    >and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced. That will be both the problem and solution. Eventually a situation will arise in which the shareholders get burned, and it will be restricted from that point on, either by fiat or refusal of common investors to partake in any offering with this sort of structure.

spacecowboy_lon 11y ago

Actually on the FTSE these dual class shares are disliked one even got kicked out of its index (the daily mail) I think the SEC should be much harder on this gaming of the system its undemocratic and is not in the publics best interest.

dantiberian 11y ago

Fortuitously, The Information published an article about multi class voting structures today. You can read it at http://go.theinformation.com/9e6aa6 http://go.theinformation.com/9e6aa6 (I think this should work for non subscribers).

forrestthewoods 11y ago

What makes you say it's not reflected in price?

glesica 11y ago
There are a ton of reasons for the price to be "wrong" if a particular practice is unusual or new. Markets only function as well as the people involved in them. If the people are all acting (unwittingly) on incomplete, incorrect, or insufficient information, then one would expect there to be risks that haven't been "priced in".
- roel_v 11y ago
  Unknown risks are priced in. You just can't really tell how much you should discount because the risks are, well, unknown. If that DNA company from last week would have been public, with one class of shares, and I had bought shares two weeks ago - well, I price them with one of the components being 'there might be some colossal skeleton in the closet' (or take Enron two weeks before the SHTF). It's not like I 'priced it wrong', at least not in any common meaning of the term; because it would basically redefine 'correct pricing' to 'higher realized profit at some point' and would make the concept of 'price' something that can only be assessed ex post. It doesn't mean that the non (or lesser) voting shares are priced wrong; in fact, by definition, they are priced at what the market values them. Also, different classes of shares aren't exactly 'new' or 'unusual'. http://www.slideshare.net/nimishhalkar/a-brief-history-of-preference-shares http://www.slideshare.net/nimishhalkar/a-brief-history-of-pr... claims that the first preferential shares were issued in 1836 (yes, it's a different kind of 'preferential' than what we're talking about, but it's still a species of the genus 'share differentiation') E.g. they're a very common vehicle for structuring profit sharing in several civil law jurisdictions I happen to know of.
  - glesica 11y ago
    People like Warren Buffet talk about things being "mis-priced" all the time, that's how people like him make money. So yes, some risk might be priced in, but how much, and how accurately? In some cases, investors may have a very good idea of how much risk a venture entails, in other cases they may think they have a good idea but be completely wrong. The market price is, yes, the market price, that's a tautology. Whether the market price reflects a sustainable reality is an entirely different matter. The parenthetical in my original comment was important. If everyone thinks they know what is going on, and they're all wrong, then the price isn't a good reflection of reality.

nostrademons 11y ago

Dual-class voting structures have been around forever. Ford and Berkshire Hathaway are two prominent examples. Historically, they've been relatively rare, and the non-voting shares don't trade at much of a discount. It's rare that individual shareholders get to exercise their voting rights anyway. The interesting trend now is that so many tech companies have dual-class supervoting shares. It sends the message that a few titans of industry basically make all the decisions, and everybody else is along for the ride. Which is probably where we are, economically, right now, but seems disheartening.

justincormack 11y ago
They are not allowed in many countries eg most of Europe. Shares are considered common ownership by capital committed. Well other than debt which doesn't vote but gets to own the company if not paid back.
Animats 11y ago
The New York Stock Exchange, back when it had a Board of Governors, did not allow companies with more than one class of stock to trade on the NYSE.[1] That rule was in effect from 1928 to 1988. The NYSE gave it up because companies were listing on the NASDAQ instead, which allowed multiple classes of stock. Ford was grandfathered in. Berkshire Hathaway only created a second class of stock in 1996, and that was just because Buffett refused to split the stock, and the current price of $215,000 per share (up from $290 in 1980) was inconvenient for small investors. The Google and Facebook founder-for-life arrangements are unusual, and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced. [1] http://articles.latimes.com/1986-07-04/business/fi-648_1_voting-rights http://articles.latimes.com/1986-07-04/business/fi-648_1_vot...
- forgetsusername 11y ago
  >and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced. That will be both the problem and solution. Eventually a situation will arise in which the shareholders get burned, and it will be restricted from that point on, either by fiat or refusal of common investors to partake in any offering with this sort of structure.