Snap, the parent company of the popular photo app Snapchat, raised a staggering $3.4 billion in March 2017. Even by the standards of Silicon Valley, where companies routinely seek to keep founders in control after they go public, Snap’s multi-class stock offering was the first of its kind in which the only shares it sold the public carried no voting rights.
But for every action, there is a reaction. After Snap’s IPO, S&P Dow Jones said it would ban companies with multi-class stock structures from its major indexes. The FTSE Russell and MSCI also took actions to discourage companies from such a system. Proxy advisors Glass Lewis and Institutional Shareholder Services have long supported the one share, one vote principle.
We’re now starting to see some impact, especially among unicorns. In 2017, a record six companies went public with time-based “sunset” provisions that will eventually convert their multi-class stock into a single common class, according to data from the Council of Institutional Investors. These companies include former tech unicorns MuleSoft, Okta, and Stitch Fix.
|Company||IPO Year||Sunset Trigger|
|Castlight Health||2014||10 years|
|Pure Storage||2015||10 years|
|Stitch Fix||2017||10 years|
|Hamilton Lane||2017||10 years|
|Altair Engineering||2017||12 years|
In the first four months of 2018, 5 out of the 8 tech unicorns (Zscaler, DocuSign, Spotify, Carbon Black, Ceredian HCM Holding) that have gone public or will soon only offer common shares with one vote a piece. Two others (Zuora, Smartsheet) said they will eventually eliminate multi-classes. Only Dropbox kept its multi-class system intact.
The vast majority of publicly traded companies offer only one class of share. But in Silicon Valley, hugely successful companies like Facebook and Google popularized the multi-class system: for example, one “B” share could be worth 5 or 10 votes while one “A” share was good for one vote.
The idea was to shield founders like Mark Zuckerberg and Sergey Brin and Larry Page from Wall Street pressure by giving them the B shares. The super voting class of stock would ensure the founders would run things as they see fit even as their companies went public.
Over the years, other tech firms followed suit, including Square, Box, Zynga, Fitbit, Go Pro, and Blue Apron. But many of these companies have struggled: Zynga, Go Pro, Fitbit and Blue Apron all trade below $6 per share.
Snap, though, has been a particular disappointment for investors. More than one year into its life as a public company, its shares trade below its $17 per share IPO price. The company lost a $350 million last year and monthly user growth has been erratic.
In July 2017, S&P Dow Jones released a statement that said it would no longer include companies with multi-class stock in benchmark indexes like S&P 500, S&P MidCap 400 and S&P SmallCap 600.
Institutional investors often design mutual funds that mirror the indexes. Theoretically, a company excluded from the indexes means they might lose out of billions of dollars in investor cash. But some experts wonder if S&P Dow Jones would stick to its position should a hugely successful multi-class share company grows to the size of Facebook or Google, both of whom are members of the S&P 500.
“The strength of the indices’ ban will be tested when a recently public multi-class company achieves significant growth and would otherwise be eligible to be included in an index,” according to post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
“Will some of the largest index-based funds, which may conceptually prefer equal voting rights for all shareholders, be satisfied with being left out of a company’s shareholders’ base?” wrote the post’s authors, Pamela Marcogliese and Elizabeth Bieber, attorneys with Cleary Gottieb Stein & Hamilton law firm.
More companies are trying to preempt that scenario. 2017 was a record year for companies that went public with a plan to eliminate their multi-class structure. The mean sunset was 9.5 years, compared to 10.3 years in 2016, according to the Council of Institutional Investors.
And a growing number of unicorns have adopted single class systems from the get-go, including Cloudera, Carbon Black, Redfin, Zscaler, and Casa Systems.
The big question is what the 200 or so unicorns in the IPO pipeline plan to do.
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