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
The business legacy of Steve Jobs transforms smart mobile devices with Internet connectivity and digital content.
Becky Berkman

2020-03-19 13:39:00 Thursday ET

The business legacy of Steve Jobs transforms smart mobile devices with Internet connectivity and digital content.

The business legacy and sensitivity of Steve Jobs can transform smart mobile devices with Internet connectivity, music and video content curation, and digit

+See More
Top 4 U.S. richest people are self-made billionaires: Gates, Buffet, Bloomberg, and Zuckerberg.
Dan Rochefort

2017-08-01 09:40:00 Tuesday ET

Top 4 U.S. richest people are self-made billionaires: Gates, Buffet, Bloomberg, and Zuckerberg.

In American states, all of the Top 4 richest people are self-made billionaires: Bill Gates in Washington, Warren Buffett in Nebraska, Michael Bloomberg in N

+See More
Mark Zuckerberg develops Facebook as a social network platform to help empower global connections among family and friends.
Amy Hamilton

2020-02-12 09:31:00 Wednesday ET

Mark Zuckerberg develops Facebook as a social network platform to help empower global connections among family and friends.

Mark Zuckerberg develops Facebook as a social network platform to help empower global connections among family and friends. David Kirkpatrick (2011) T

+See More
Agile lean enterprises remain flexible and capable of reinvention in light of new megatrends such as digitization and servitization.
Amy Hamilton

2020-10-20 09:36:00 Tuesday ET

Agile lean enterprises remain flexible and capable of reinvention in light of new megatrends such as digitization and servitization.

Agile lean enterprises remain flexible and capable of reinvention in light of new megatrends such as digitization and servitization. Shane Cragun and Kat

+See More
Top money managers George Soros and Warren Buffett reveal their current stock and bond positions.
Dan Rochefort

2018-05-10 07:37:00 Thursday ET

Top money managers George Soros and Warren Buffett reveal their current stock and bond positions.

Top money managers George Soros and Warren Buffett reveal their current stock and bond positions in their recent corporate disclosures as of mid-2018. Georg

+See More
Federal Reserve delivers a second interest rate hike to 1.75%-2% and then expects more rate increases in late-2018.
Charlene Vos

2018-06-08 13:35:00 Friday ET

Federal Reserve delivers a second interest rate hike to 1.75%-2% and then expects more rate increases in late-2018.

The Federal Reserve delivers a second interest rate hike to 1.75%-2% and then expects subsequent rate increases in September and December 2018 to dampen inf

+See More