Dual-class stock = enlightened dictatorship

by Mathew on May 6, 2008 · 16 comments

I like Marc Andreessen a lot. I think he writes some deep and thoughtful posts at his blog, and as more than one person has pointed out, his analysis of the Microsoft-Yahoo brouhaha has been second to none (except maybe Kara Swisher at All Things Digital). And his latest post on dual-class shares is likewise deep and thoughtful — and I also happen to think it is wrong. I must admit, he is such a persuasive bugger that he almost had me nodding along in agreement there for awhile. But I wrote about some of the reasons why I think he’s wrong the last time he brought the idea up, and I stand by that post.

Try this: Read through Marc’s excellent argument, but whenever he says “dual-class shares,” insert the word “dictatorship” in there instead, and I think you will see what I mean. In effect, Marc is arguing that dual-class shares are a fantastic way of running a technology company — provided nothing goes wrong. That is, if the ones with the voting control are also majority shareholders, and if they have a long-term vision for the company, and if shareholders go in with their eyes open, and if the founders don’t suddenly become… well, dictators.

I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:

* The key leaders of the company — typically the founders — who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.

* The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.

* The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.

* All public shareholders understand what they are getting into up front — no bait and switch.

This seems to me to be the equivalent of the old saying about how Mussolini was bad, but at least he “made the trains run on time.” In other words, on the whole the complete centralization of power in the hands of a dictator was for the best. I would never compare Larry Page or Sergey Brin — or even Jerry Yang and David Filo — to an evil dictator, but my point is that just as a benevolent dictatorship is seen by some as the best political structure for a country (“best” meaning the most efficient), so dual-class shares might seem like the best share structure for a company, right up until something goes wrong.

As I said in my previous post, dual-class shares are an attempt to get around Darwin’s Law as it applies to the marketplace. Multiple-voting shares protect incompetent, complacent or simply unsuccessful companies that should be taken over and either remade or dismantled. If your company is agile enough and creative enough, it shouldn’t need them. And if you don’t want to bow to the whims of the marketplace, then there’s a simple solution that Marc ignores: Don’t go public.

  • http://radio.weblogs.com/0127028/ Brian Sullivan

    Is the “Don't go Public” option really an option? I think in the US anyway once you get to a certain number of individuals holding shares — like when you give key employees shares you end up having to report as a public company with none of the benefits.

    If I recall this drove Google (and maybe Yahoo) public (or was a significant factor in the decision).

    I am not totally sure I understand this dual class share option as it relates to public companies anyway. Doesn't fiduciary duty still apply?

  • http://www.mathewingram.com/work mathewi

    Brian, you are right about the public reporting aspect, in which as
    you get larger you eventually have to start filing public financial
    statements — although of course that assumes you have issued shares
    to lots of people, which isn't always necessary either. And that was
    part of the impetus for Google to do an IPO, although the desire of
    their backers to get some liquidity was also a factor.

    As for fiduciary duty, I'm not a lawyer so I don't know the exact
    details — but I assume that having voting control simply makes it
    easier to do certain things, and then it's up to the non-voting or
    restricted shareholders to make a case for why it might be harmful to
    them (in the same way that eBay is arguing in its case against
    Craigslist).

  • http://broadcasting-brain.com Mark Dykeman

    Mathew, I would reword your core argument to say: “multiple-voting shares protect incompetent, complacent or simply unsuccessful owner/managers that should be replaced, but cannot be.” It seems like you're attributing personality or sentience to an organization, but perhaps we're saying the same thing anyway.

    Another thought: your concern about centralization of power, though a good one, is virtually inescapable from a practical point of view because a large class of shareholders cannot direct the day-to-day operations of a corporation. You can still have decentralized decision making and activity, but standards, strategy, and overall direction has to occur from a central source. At best, boards are part coach, part watchdog, and part referee. They can throw incompetent management out of the game, guide them, or reprimand them, but they really can't play the game themselves.

    Having said that… I would be wary of investing heavily in a company with such a control and ownership structure. If I had confidence in the individuals involved, I'd be OK with it, but it would take significant trust.

    Now I've got to go check my mutual funds….

  • http://www.mathewingram.com/work mathewi

    Thanks, Mark. I think your wording would work as well.

  • http://gotads.blogspot.com John K

    I had similar thoughts – didn't express it as well as “dictatorship”, but I think the “commitments” that Andreessen pre-supposes would be totally un-enforceable.

    http://gotads.blogspot.com/2008/05/andreessen-l

  • bbluesman

    Dude I love your writing but if you mention Kara Swisher, Mike Arrington or Louis gray one more time I think I'll scream. Kthxbai!

  • http://www.mathewingram.com/work mathewi

    Come on — I hardly mention Louis Gray at all :-)

  • bbluesman

    haha! I mean I don't mind links to them or whoever but just get tired of seeing the same names over and over. My gag reflexometer starts going wild.

  • Markus

    Is there a single powerful web company without a dictator/dictators at the top ?

    Microsoft
    Oracle
    Apple
    Google ?

    Visionary people are people who do what everyone else thinks is impossible. What group of common share holders want to let someone go off and do what is “impossible”

  • http://www.mathewingram.com/work mathewi

    A strong, visionary leader is one thing, Markus — someone with
    complete dominance through absolute voting control is another.

  • http://gotads.blogspot.com John K

    I had similar thoughts – didn't express it as well as “dictatorship”, but I think the “commitments” that Andreessen pre-supposes would be totally un-enforceable.

    http://gotads.blogspot.com/2008/05/andreessen-l

  • bbluesman

    Dude I love your writing but if you mention Kara Swisher, Mike Arrington or Louis gray one more time I think I'll scream. Kthxbai!

  • http://www.mathewingram.com/work mathewi

    Come on — I hardly mention Louis Gray at all :-)

  • bbluesman

    haha! I mean I don't mind links to them or whoever but just get tired of seeing the same names over and over. My gag reflexometer starts going wild.

  • Markus

    Is there a single powerful web company without a dictator/dictators at the top ?

    Microsoft
    Oracle
    Apple
    Google ?

    Visionary people are people who do what everyone else thinks is impossible. What group of common share holders want to let someone go off and do what is “impossible”

  • http://www.mathewingram.com/work mathewi

    A strong, visionary leader is one thing, Markus — someone with
    complete dominance through absolute voting control is another.

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