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.

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