Founders' control of voting power can be a double-edged sword.
Snapchat became a breakthrough brand in technology because its interface innovated on the existing social media paradigm. But the structure of the message-erasing company’s impending IPO doesn’t look so different from many other players in the tech world.
Snap Inc., which is Snapchat’s parent company, may go public as soon as March with a stock structure that heavily favors its co-founders, Evan Spiegel and Bobby Murphy. The two plan to retain more than 70% of the voting power in the company, despite only owning about 45% of the stock, according to the Wall Street Journal.
Though the setup may rankle shareholders who are worried about their level of input when it comes to important company decisions, the issuance of dual-class stock is actually a pretty common thing among tech companies.
Google goog issued dual-class shares during its IPO, as did Facebook fb . In the years since, the two companies have taken it a step further, with Google introducing a third class of non-voting shares in 2014 and Facebook announcing a similar move last April. The moves allow the companies’ leadership to maintain control over the enterprise, even as they raise more cash by offering more stock.
When their founders maintain tight control, tech companies get more room to pursue innovative and outside-the-box projects, without fear of interference from investors who may have more of an eye for immediate profits than longer-term goals. Google has certainly benefitted from such autonomy from shareholders. Though the company has had its swing-and-misses, most notably the social network Google Plus, its philosophy of letting engineers and programmers tinker with their ideas has also produced hits such as Gmail, Google Drive, and countless others. Had investors with their eyes on the bottom line been breathing down the leadership’s back, many of the services Google provides may never have been developed, which more than likely would result in a less profitable company.
The benefit of autonomy to make important decisions goes further than simply being able to shape a product or company. In many cases, dual-class stocks save investors from their own rash and under-informed decisions. Had Snapchat been a public company with common stock shares, shareholders could have forced a sale when Facebook offered to buy the company for a paltry $3 billion in 2013, which would have been a drop in the bucket compared to the $25 billion it is estimated it may fetch when its stock hits the market.
But there’s another side to the founder-control coin. Too much unfettered power in the hands of a few can quickly steer a company in the wrong direction. Media conglomerate Viacom viab is an example of a publicly traded company that went into free-fall in part because Sumner Redstone maintained the lion’s share of control even as questions arose about his health, age (he’s now 93), and competence. And as Fortune’s Erin Griffith discusses in a recent feature, tight founder control has contributed to a wave of ethics and accountability problems at privately held tech startups.
Blood-testing company Theranos has seen its reputation and future prospects tank under founder and CEO Elizabeth Holmes, who holds “supervoting” shares of the privately held firm, as the company has been accused of misleading investors and customers about the accuracy of its testing equipment. At its height in 2014, the company was estimated to be worth $9 billion. In light of the recent scandal, which has prompted Theranos to cut nearly 500 jobs since October and dropped the company’s employee total to about 220, its valuation is now estimated at just $800 million.
Had Theranos been a public company with common stock shares and more evenly distributed voting rights, Holmes would have had to answer to investors about its financial results, which would have made obfuscation more difficult. Though it might never have been valued so highly in the first place by investors, Theranos would at the very least have maintained some sort of credibility. As it is now, it appears that Theranos is on its way out of business, with hundreds of millions of invested dollars going down the drain with it.
In the end, a founder’s power to make unilateral decisions cuts both ways. A founder with free rein can lead a company to soaring heights, or cause it to crash and burn. And even a competent, honest leadership team can still make mistakes, which is part of what makes it so hard for investors to choose which horse to back.