John Melloy’s article entitled “The Dictators of Silicon Valley: Facebook, Google Stripping Shareholder of Power” highlights an interesting trend among tech companies that have gone public in the past several years – implementing dual-class voting structures. The general idea behind these dual-class voting structures is to keep control in the hands of the individuals (usually the founders) who supposedly know what is best for the company and to shield a company from potential public company shareholder activism and hostile takeovers. Control is maintained by either giving the founder shares more votes per share than the shares issued to the public (or issuing non-voting shares to the public) – for example, founders would hold Class B common stock entitled to 10 votes per share, while the general public would hold Class A common stock entitled to one vote per share.

While this trend is not new – for example, Berkshire Hathaway has had a dual-class stock structure for as long as I can remember – Google’s implementation of a dual-class voting structure in their 2004 IPO has brought the concept into the mainstream – at least for internet/social media companies that have recently gone public, such as LinkedIn, Zynga, etc.

I generally only see dual-class voting structures implemented for public companies. That said, on occasion I have seen startups attempt a dual-class structure – typically where the founder is coming off a big prior win and has the leverage to demand control or where the founder was previously burned by the loss of control. However, even in those rare situations, as a startup looks to take venture capital, its ability to maintain a dual-class structure will be severely limited given the control rights that most institutional investors require. Further, the “founder knows best” argument may not get far with the venture capitalists who likely also have strong expertise in the company’s industry.

It will be interesting to see if this dual-class trend spreads further into the private-company context, particularly in light of recent efforts to facilitate crowdfunding access to capital. In a situation where a startup is seeking capital from a myriad of small investors, I can see how the same concerns about a fragmented public company shareholder base, which drive companies like Facebook and Google to limit the general public’s control, might become more analogous to private companies.

A similar discussion regarding dual-class voting structures can be found in The Economist’s article entitled “The cost of control; the trouble with non-voting shares,” and here is our prior post discussing various other mechanisms to create shareholder control for certain groups.