Blog Article | Thomas Lee
Posted: May 1, 2018

One year after Snap IPO, unicorns eschew multi-class shares in favor of single class stock

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.

Time-Based Approaches to Dual-Class Stock
Company IPO Year Sunset Trigger
MuleSoft 2017 5 years
Mindbody 2015 7 years
Apptio 2016 7 years
Twilio 2016 7 years
Smartsheet 2018 7 years
Castlight Health 2014 10 years
Pure Storage 2015 10 years
Stitch Fix 2017 10 years
Alteryx 2017 10 years
Hamilton Lane 2017 10 years
Okta 2017 10 years
Zuora 2018 10 years
Altair Engineering 2017 12 years
Fitbit 2015 12 years
Nutanix 2016 17 years
Source: Council of Institutional Investors

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.

Small minority of U.S. public companies offer multiple classes of stock
Small minority of U.S. public companies offer multiple classes of stock
Source: Council of Institutional Investors
More than a quarter of companies with multi-class stock will convert to a single class by a specific time
More than a quarter of companies with multi-class stock will convert to a single class by a specific time
Source: 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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Thomas Lee
Article Author

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.

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DISCLAIMER: This blog does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The information contained in this blog has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

None of the information contained in this blog represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Copyright © SharesPost, Inc. 2018. All rights reserved.

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