3 ms·

Fairly interesting read. It's about their accumulated piles of cash, what investors think about it and founder-investor dynamics. The main comparison point and

by netcan 8y ago

Fairly interesting read. It's about their accumulated piles of cash, what investors think about it and founder-investor dynamics. The main comparison point and conclusion is interestingly straightforward: Google gets to keep their pile o' cash because founders still control voting rights. The economic analysis is traditional (principal-agent issues) but I think it undersells the differences from theory. Eg, investors are still happily buying "founder controlled" shares like Google and Tesla even though the principal-agent problem is huge on paper. Reminds me of musk said: spaceX can't have public investors because going to mars doesn't give you the best risk adjusted returns. Investors will want to launch satellites for cash, not risk everything to go to mars where there are no customers. The hitch is that these investors will still buy the shares even if the mission is "mars." They'll campaign for a more lucrative mission and eventually win. Perhaps these "founder control" arrangements are a way of creating kinds of "investment doctrines." Either way, their existence (beyond founders that simply own lots of shares) suggests that public shares create governance problems that aren't explainable via principal-agent or some other traditional economic explanation.

rsj_hn 8y ago
Either way, their existence (beyond founders that simply own lots of shares) suggests that public shares create governance problems that aren't explainable via principal-agent or some other traditional economic explanation. I'm not sure I'd phrase it this way. Suppose option A earns you 5% and option B earns you 6%. But you, as a founder, really prefer option A to option B. Then you better not take your company public, because your personal preference doesn't match the market preference. In your example, going to Mars earns less money than selling the satellites, and Musk really wants to go to Mars. I don't see this as a governance problem -- Musk's pleasure in going to Mars plus the returns from doing that exceed the public's pleasure from the returns only. So since this is a bit of a vanity project, it can't be publicly controlled and remain a Musk vanity project. That's not a governance problem, it's how governance is supposed to work. But then you say that investors are happily buying these shares? Well, it's an expected income stream, so the shares are being priced. Happiness has nothing to do with it. A 5% return is still worth something, even if the share price would go up should the strategy change. In no model would the price of the suboptimal income stream be zero. The real question here is what happens to the visionary iconoclast who knows that going to Mars will result in a higher return. For them, it's not a vanity project but some kind of private belief that is more accurate than the market belief. In that case, non-voting shares will outperform in the long run. We can say that Steve Jobs was such a visionary and maybe Musk is, too. But how much do you want to bet on that? And is that really an argument for one type of structure over another? That your average company is run by some visionary genius that is smarter than the market? Is that a governance problem? No, not at all.
- netcan 8y ago
  I'd say the tension between your first paragraph and your last gives us the grey area that I was talking about. Ultimately, the big difference between whiteboard and reality in the "A or B" scenarios is that the rates of return are not known. You can represent the scenario such that an investor has some working risk-weighted estimate but... Idk. I think a rocket company just doesn't lend to that type analysis, in practice. The long term comes down to belief in one way or another. Personally, I suspect that the reason for these arrangements in the face of traditional economic rationale is kinda meta. We already have a lot of large companies under traditional, often institutional shareholder control. This tends to yield a uniformity and leaves certain opportunities on the table, whichever strategies get reliably vetoed by a generic, institutional shareholder elected board.
  - rsj_hn 8y ago
    But my point is that public ownership generally calls for public beliefs about returns to drive the show. The gap of the visionaries can usually be handled by private ownership. Let the visionary obtain funding elsewhere if they cannot convince the public their plans are better. I don't see this as a governance problem but as kinda the definition of public versus private ownership.
    - netcan 8y ago
      if they cannot convince the public their plans are better I don't think we're very far apart. I just think that statement leaves some room that is (possibly) being filled by these "founder controlled" agreements. For one thing, they can convince investors. They do. Elon et al are great at getting people to invest. There's just no "enterprise grade" way of actually making that deal with the public. In any case, why can you sell shares that don't vote but not shares where you still go to mars, never pay dividends or whatever. If investors buy them, who loses? I wonder what would happen to Google's share price if founder control was suddenly ceded. Theoretically, it should go up, no? But, I suspect it mightn't. Market rationality is a relative term.
      - 8y ago
solotronics 8y ago
Could they not offer "Mars shares" which have no voting rights and up front state the explicit goal is to fund getting to Mars? I would buy this.
- netcan 8y ago
  Would you put your pension in it? Otherwise, it's just a donation to a private company. How about a share/bond where you get your money back with interest if spacex plants a lichen on mars by 2029. The only problem is this disincentivizes spaceX from actually doing it so we need speculators (elon's nemesis, the short trader) to flip the bet so you're aligned (long) on SpaceX's success. I'd buy some.
jboy55 8y ago
I have always wondered what the value of common shares really is in a founder controlled voting corporation. For example, SNAP, which is fairly pure, what does that share of common SNAP give me? It seems very much a baseball card. It gives me something that while other people see it as valuable it holds value and it also coincidentally refers to something popular in real life. In the end though, if the founders of SNAP wanted to sell SNAP, they'd sell their voting shares. If they wanted to pay dividends, they'd pay dividends to only the voting class. Why would they ever need to bother with including common, what could the common shareholder do, ask a question at the shareholder's meeting? Q: "In the buyout offer from Facebook, Facebook is buying the Preferred Series of shares only, leaving SNAP as a subsidiary of Facebook. Facebook is planning on a tight integration, one that will essentially turn the SNAP app to a rebranded Instagram. What does the common share holder get out of this deal?" A: "Well, the SNAP common shares still exist, they remain non-voting, non-dividend shares in the subsidiary. Next question." Q: "So, the founders get paid, but common doesn't get anything? As a common shareholder, I object and I don't agree to this buyout" A: "To answer your question, if you look at your shareholder agreement, as an owner of SNAP common, you get the right to ask a question. You will still retain that right to ask questions. As for your second statement, please ensure your spoken comments take the form of questions please." I think this goes for all founder controlled companies, but even more so when the class structure is used to move voting rights to just the founding shareholders.

by netcan 8y ago

rsj_hn 8y ago

Either way, their existence (beyond founders that simply own lots of shares) suggests that public shares create governance problems that aren't explainable via principal-agent or some other traditional economic explanation. I'm not sure I'd phrase it this way. Suppose option A earns you 5% and option B earns you 6%. But you, as a founder, really prefer option A to option B. Then you better not take your company public, because your personal preference doesn't match the market preference. In your example, going to Mars earns less money than selling the satellites, and Musk really wants to go to Mars. I don't see this as a governance problem -- Musk's pleasure in going to Mars plus the returns from doing that exceed the public's pleasure from the returns only. So since this is a bit of a vanity project, it can't be publicly controlled and remain a Musk vanity project. That's not a governance problem, it's how governance is supposed to work. But then you say that investors are happily buying these shares? Well, it's an expected income stream, so the shares are being priced. Happiness has nothing to do with it. A 5% return is still worth something, even if the share price would go up should the strategy change. In no model would the price of the suboptimal income stream be zero. The real question here is what happens to the visionary iconoclast who knows that going to Mars will result in a higher return. For them, it's not a vanity project but some kind of private belief that is more accurate than the market belief. In that case, non-voting shares will outperform in the long run. We can say that Steve Jobs was such a visionary and maybe Musk is, too. But how much do you want to bet on that? And is that really an argument for one type of structure over another? That your average company is run by some visionary genius that is smarter than the market? Is that a governance problem? No, not at all.

netcan 8y ago
I'd say the tension between your first paragraph and your last gives us the grey area that I was talking about. Ultimately, the big difference between whiteboard and reality in the "A or B" scenarios is that the rates of return are not known. You can represent the scenario such that an investor has some working risk-weighted estimate but... Idk. I think a rocket company just doesn't lend to that type analysis, in practice. The long term comes down to belief in one way or another. Personally, I suspect that the reason for these arrangements in the face of traditional economic rationale is kinda meta. We already have a lot of large companies under traditional, often institutional shareholder control. This tends to yield a uniformity and leaves certain opportunities on the table, whichever strategies get reliably vetoed by a generic, institutional shareholder elected board.
- rsj_hn 8y ago
  But my point is that public ownership generally calls for public beliefs about returns to drive the show. The gap of the visionaries can usually be handled by private ownership. Let the visionary obtain funding elsewhere if they cannot convince the public their plans are better. I don't see this as a governance problem but as kinda the definition of public versus private ownership.
  - netcan 8y ago
    if they cannot convince the public their plans are better I don't think we're very far apart. I just think that statement leaves some room that is (possibly) being filled by these "founder controlled" agreements. For one thing, they can convince investors. They do. Elon et al are great at getting people to invest. There's just no "enterprise grade" way of actually making that deal with the public. In any case, why can you sell shares that don't vote but not shares where you still go to mars, never pay dividends or whatever. If investors buy them, who loses? I wonder what would happen to Google's share price if founder control was suddenly ceded. Theoretically, it should go up, no? But, I suspect it mightn't. Market rationality is a relative term.
    - 8y ago

solotronics 8y ago

Could they not offer "Mars shares" which have no voting rights and up front state the explicit goal is to fund getting to Mars? I would buy this.

netcan 8y ago
Would you put your pension in it? Otherwise, it's just a donation to a private company. How about a share/bond where you get your money back with interest if spacex plants a lichen on mars by 2029. The only problem is this disincentivizes spaceX from actually doing it so we need speculators (elon's nemesis, the short trader) to flip the bet so you're aligned (long) on SpaceX's success. I'd buy some.

jboy55 8y ago

I have always wondered what the value of common shares really is in a founder controlled voting corporation. For example, SNAP, which is fairly pure, what does that share of common SNAP give me? It seems very much a baseball card. It gives me something that while other people see it as valuable it holds value and it also coincidentally refers to something popular in real life. In the end though, if the founders of SNAP wanted to sell SNAP, they'd sell their voting shares. If they wanted to pay dividends, they'd pay dividends to only the voting class. Why would they ever need to bother with including common, what could the common shareholder do, ask a question at the shareholder's meeting? Q: "In the buyout offer from Facebook, Facebook is buying the Preferred Series of shares only, leaving SNAP as a subsidiary of Facebook. Facebook is planning on a tight integration, one that will essentially turn the SNAP app to a rebranded Instagram. What does the common share holder get out of this deal?" A: "Well, the SNAP common shares still exist, they remain non-voting, non-dividend shares in the subsidiary. Next question." Q: "So, the founders get paid, but common doesn't get anything? As a common shareholder, I object and I don't agree to this buyout" A: "To answer your question, if you look at your shareholder agreement, as an owner of SNAP common, you get the right to ask a question. You will still retain that right to ask questions. As for your second statement, please ensure your spoken comments take the form of questions please." I think this goes for all founder controlled companies, but even more so when the class structure is used to move voting rights to just the founding shareholders.