Lyft seeks to go public with a dual-class stock ownership structure that allows the co-founders to retain significant influence.

Amy Hamilton

2019-03-11 10:32:00 Mon ET

Lyft seeks to go public with a dual-class stock ownership structure that allows the co-founders to retain significant influence over the rideshare tech unicorn. Within the dual-class structure, Class A shares follow the one-share-one-vote rule for new investors, whereas, Class B shares empower the co-founders John Zimmer and Logan Green and their executive managers to have 20 votes per share. The co-founders may end up owning more than 27% of equity stakes with near-majority control. This dual-class stock ownership structure has become prevalent among U.S. public corporations such as CBS, Comcast, Facebook, Ford, Google, News Corp, Nike, Snap, and Viacom etc. The co-founders keep significant influence over most matters that require shareholder approval, such as director nominations and elections and major corporate transactions from M&A deals and capital investment projects to R&D expenditures and other asset sales.

Harvard law professor Lucian Bebchuk criticizes the dual-class capital structure. The average costs of a lifetime lock on control tend to be especially large when the co-founders are young at the time of the IPO. The costs of inferior leadership can substantially increase when the co-founders cannot address dynamic changes in the business environment. This concern further aggravates when the dual-class structure enables a transfer of founder control to an heir who might be unfit to lead the company. Many dual-class structures allow controllers to reduce their fraction of equity capital over time without relinquishing control, and controllers often do so to diversify their stock portfolios to fund other investment projects.

When the wedge between the interests of controllers and public minority investors grows over time, the agency costs of a dual-class structure are likely to increase. Corporate controllers with a thin fraction of equity capital have perverse incentives to keep an inefficient dual-class structure. The reason is that the controllers would capture only a fraction of corporate efficiency gains (which would be shared by all shareholders), but would fully bear the costs of forgoing private benefits of control that arise from the dual-class structure.

Bebchuk proposes a *sunset provision* that stipulates the eventual expiration of dual-class structures after a specific period of time such as 10 years or 15 years. This provision empowers co-founders to retain their lock on corporate control with minimal short-term market pressure in the early-IPO stage of their entrepreneurial efforts; meanwhile, the dual-class structure should eventually converge toward the more efficient first-class structure.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

U.S. tech titans increasingly hire PhD economists to help solve business problems.

Monica McNeil

2019-03-19 12:35:00 Tuesday ET

U.S. tech titans increasingly hire PhD economists to help solve business problems.

U.S. tech titans increasingly hire PhD economists to help solve business problems. These key tech titans include Facebook, Amazon, Microsoft, Google, Apple,

+See More

President Trump allows most JFK files to be released to the general public.

James Campbell

2017-09-25 09:42:00 Monday ET

President Trump allows most JFK files to be released to the general public.

President Trump has allowed most JFK files to be released to the general public. This batch of documents reveals many details of the assassination of Presid

+See More

Capital market liberalization and globalization connect global financial markets to allow an ocean of money to flow through them.

Becky Berkman

2018-06-17 10:35:00 Sunday ET

Capital market liberalization and globalization connect global financial markets to allow an ocean of money to flow through them.

In the past decades, capital market liberalization and globalization have combined to connect global financial markets to allow an ocean of money to flow th

+See More

Government intervention remains a major influence over global trade, finance, and technology.

Amy Hamilton

2023-08-31 10:22:00 Thursday ET

Government intervention remains a major influence over global trade, finance, and technology.

Government intervention remains a major influence over global trade, finance, and technology. Nowadays, many governments tend to eschew common ownership

+See More

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum.

Daphne Basel

2018-05-05 07:33:00 Saturday ET

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum.

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum in May 2018 despite the new GA

+See More

Our proprietary alpha investment model outperforms most stock market indices from 2017 to 2021.

Apple Boston

2021-02-02 14:24:00 Tuesday ET

Our proprietary alpha investment model outperforms most stock market indices from 2017 to 2021.

Our proprietary alpha investment model outperforms the major stock market benchmarks such as S&P 500, MSCI, Dow Jones, and Nasdaq. We implement

+See More