{"id":1588,"date":"2020-01-14T00:00:00","date_gmt":"2020-01-14T00:00:00","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/blog\/dual-class-single-class-share-stock-structure\/"},"modified":"2021-03-05T06:56:30","modified_gmt":"2021-03-05T06:56:30","slug":"dual-class-single-class-share-stock-structure","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/dual-class-single-class-share-stock-structure\/","title":{"rendered":"How dual-class companies and single-class companies compare"},"content":{"rendered":"\r\n

\u201cWe created a monster.\u201d<\/p>\r\n\r\n\r\n\r\n

That\u2019s how SoftBank CEO Masayoshi Son, whose company had invested billions into WeWork, described the situation at the company in November.<\/p>\r\n\r\n\r\n\r\n

Over the last several months, various instances of questionable corporate governance on the part of the WeWork CEO Adam Neumann had emerged: from patenting the phrase \u201cThe We Company\u201d and selling it back to WeWork for $5.9 million to making extended family members top executives in the company.<\/p>\r\n\r\n\r\n\r\n

But the real monster, arguably, wasn\u2019t Neumann. It was WeWork\u2019s dual-class share structure<\/strong>.\u00a0<\/p>\r\n\r\n\r\n\r\n

A common arrangement among companies going public today, this structure gave the company\u2019s regular shareholders one type of stock and its co-founder Adam Neumann another\u2014one with 20 times the voting power. This gave him virtually complete control of the company\u2019s direction.<\/p>\r\n\r\n\r\n\r\n

The dual-class share structure was popularized by Google and has since been used by companies from Facebook to Dropbox to help founders maintain control of their companies. But not everyone is a fan. Some of the world\u2019s most prominent asset managers and investor groups recommend restricting companies from using dual-class shares entirely<\/a>.<\/p>\r\n\r\n\r\n\r\n

To better understand the relative merits of companies with dual-class versus single-class stock, we reviewed the IPO valuations and market performance of the 50 highest-valued VC funded companies to go public in the last decade, segmented by whether they have dual- or single-class stock.<\/p>\r\n\r\n\r\n\r\n

Of course, it\u2019s impossible to show a causal link between a company\u2019s share structure and its performance on the market or its valuation. But the research we\u2019ve looked at suggests the hype around founder control might not be all it\u2019s cracked up to be.

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Download the venture report<\/h3>\r\n

[marketo-form marketo_id=”2857″]<\/p>\r\n<\/div>\r\n\r\n\r\n\r\n


Valuation at IPO<\/h2>\r\n\r\n\r\n\r\n

For all IPOs prior to 2019, dual-class companies tended to debut at higher post-money valuations than single-class companies, with 10 achieving a range between $2.7 to $80+ billion\u2014Facebook, Snap, Groupon, Dropbox, Zynga, Workday, Fitbit, GoPro, Square and Pure Storage. Conversely, five single-class stock companies achieved post-money valuations of at least $2.5 billion at the time they went public: Twitter, Lending Club, Docusign, Palo Alto Networks, and Arista Networks.<\/p>\r\n\r\n\r\n\r\n

Average market capitalization<\/h2>\r\n\r\n\r\n\r\n

When we looked at the average performance of companies since IPO\u2014across the entire company population\u2014we found greater average growth among dual-class companies, but also a greater number of companies that have lost value since their IPO, with a third of dual-class companies performing below their offering price as of the end of 2019.<\/p>\r\n\r\n\r\n\r\n

Among single-class companies, we saw slightly fewer losses, but also fewer with substantial gains. Of the dual-class companies we examined, eight businesses have lost value since their IPO. Three have surpassed 100% growth: Okta, MongoDB, and Roku. One\u2014Roku\u2014has grown by nearly 200%.<\/p>\r\n\r\n\r\n\r\n

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Our findings here align with research showing that companies with more aggressive growth models and unstable profits can often be better served by dual-class stock structures<\/a>.<\/p>\r\n\r\n\r\n\r\n

Of the single-class companies we examined, valuations for six have since dipped from their postings at IPO: Lending Club, NantHealth, Leaf Group, Gogo, Casa Systems, and OnDeck Capital.<\/p>\r\n\r\n\r\n\r\n

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Growth was more modest among single-class companies. Only one company surpassed 100% growth, tax compliance software vendor Avalara.<\/p>\r\n\r\n\r\n\r\n

Long-term market capitalization<\/h2>\r\n\r\n\r\n\r\n

To keep our focus on the long term and post-IPO fluctuations, we also decided to exclusively analyze companies that have been public for at least four years. We found that over this period, 13 single-class companies demonstrated gains, while just four lost value: Lending Club, Leaf Group, Gogo, and OnDeck Capital.<\/p>\r\n\r\n\r\n\r\n

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For dual-class companies, performance over a four-year period was much more hit-or-miss. Among the dual-class companies we reviewed, seven gained value since their IPO. Five lost value during that period: Groupon, Zynga, FitBit, GoPro, and Castlight Health.<\/p>\r\n\r\n\r\n\r\n

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These findings comport with those of the literature on dual-class stocks \u2014 researchers have found that they tend to underperform<\/a> single-class stocks. An SEC study<\/a> found that companies with dual-class stock trade at a \u201cperpetual discount.\u201d\u00a0<\/p>\r\n\r\n\r\n\r\n

Long-term vision vs. short-term accountability<\/h2>\r\n\r\n\r\n\r\n

Dual-class share structures, the thinking goes, protect innovative and forward-thinking founders from the short-term pressures of Wall Street.<\/p>\r\n\r\n\r\n\r\n

\u201c[I] have voting control of the company, and that\u2019s something I focused on early on …\u201d Mark Zuckerberg said in recently leaked audio<\/a>. \u201cWithout that, there were several points where I would\u2019ve been fired.\u201d<\/p>\r\n\r\n\r\n\r\n

According to Google\u2019s founders Larry Page and Sergey Brin, their goal to \u201cfocus on the long term\u201d was always incompatible<\/a> \u201cwith the short-term sway of shareholders\u2026 more worried about quarterly profits.\u201d<\/p>\r\n\r\n\r\n\r\n

But they also create a power balance that diminishes the influence of shareholders. The Investor Stewardship Group, whose 50 members oversee $22 trillion in assets, is one organization<\/a> that has called for a ban on dual-class stock\u2014State Street, the world\u2019s third-biggest asset manager, is another.<\/p>\r\n\r\n\r\n\r\n

Of course, if dual-class structures were<\/em> inherently worse than single-class, investors wouldn\u2019t buy into the companies that use them. Still, there is a persistent mythos around the idea of the dual-class structure, a line of thinking that founders need to maintain control at all costs.\u00a0<\/p>\r\n\r\n\r\n\r\n

When it comes to performance on the public markets, we\u2019ve seen some evidence that dual-class structures can be beneficial for some kinds of businesses. We\u2019ve also seen evidence of single-class structures outperforming those companies in the long run.\u00a0<\/p>\r\n\r\n\r\n\r\n

In the end, our conclusion is that founders weighing the decision to go single-class or dual-class should think about their unique business, its needs, and its situation\u2014not Zuckerberg or Google.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n

Note: A version of this article first appeared in PitchBook\u2019s Q4 2019 Venture Monitor.<\/a> All company financial and market capitalization data referenced in this article was sourced from <\/em>PitchBook<\/em><\/a> and <\/em>Morningstar<\/em><\/a>. Company selection was based on valuation at the time of IPO and includes only companies headquartered in the US that have been public for at least a year. Companies that did not accept venture funding were also excluded.<\/em><\/p>\r\n\r\n\r\n\r\n

DISCLOSURES: Any opinions, analyses, and conclusions or recommendations expressed in this article are those of the author(s) alone and do not necessarily reflect the views of eShares, Inc. dba Carta, Inc. (\u2018Carta\u201d) and they may not have been reviewed, approved, or otherwise endorsed by Carta.\u00a0 This article is not intended as a substitute for professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.\u00a0 Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This article is not to be construed as legal, financial or tax advice and is for informational purposes only.\u00a0 This article is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.<\/p>\r\n\r\n\r\n\r\n

This article contains links to articles or other information that may be contained on third-party websites. The inclusion of any hyperlink is not and does not imply any endorsement, approval, investigation, or verification by Carta, and Carta does not endorse or accept responsibility for the content, or the use of such third-party websites. Carta assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided on such third-party websites. All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement.<\/p>\r\n","protected":false},"excerpt":{"rendered":"

We look at how dual-class and single-class share structure affects company valuation and market performance.<\/p>\n","protected":false},"author":72,"featured_media":1733,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[42,87],"tags":[56,30],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/1588"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/72"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=1588"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/1588\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/1733"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=1588"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=1588"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=1588"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}