Class Warfare In New Tech Stocks: How Founders And Early Investors Continue To Retain Control After An IPO

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 |  Includes: GOOG, GRPN, TRIP, ZNGA
by: SQ Bluesky

A recent trend in equity structure, especially of tech firms, is the differentiation of voting rights between Class A and B shares. Here's the bottom line: As a retail investor, you may want to be wary of buying shares of recent IPOs.

We did a quick analysis on a few of the popular names in the new technology stocks, comparing them to some of the older technology companies, and found an increasing preference for newer companies to issue different classes of shares with more votes per share for Class B, and in one instance, Class C shares, versus the lowly Class A shares available to the retail investor.

Certainly this should not, in itself, deter investors from buying shares of any of these companies. However your analysis should definitely take this dynamic into account. Ultimately your investment objectives and fundamental analysis of a stock should determine whether you invest in it or not.

Here's a table of some new and some old technology firms and the classes of shares they have, along with the voting rights for each share.

Votes per class of share

Company Name

Stock Symbol

Class A

Class B

Class C

Kayak.com

KYAK

1

10

-

Palo Alto Networks, lnc

PANW

1

-

-

Yelp, Inc

YELP

1

10

-

Netflix, lnc

NFLX

1

-

-

Zynga, Inc

ZNGA

1

7

70

Groupon, Inc

GRPN

1

150

-

TripAdvisor, Inc

TRIP

1

10

-

LinkedIn, Corp

LNKD

1

10

-

Yahoo! Inc

YHOO

1

-

-

Facebook, Inc

FB

1

10

-

Google, Inc

GOOG

1

10

-

Apple, Inc.

AAPL

1

-

-

International Business Machines, Corp

IBM

1

-

-

Microsoft, Corp

MSFT

1

-

-

Amazon.com Inc.

AMZN

1

-

-

Pandora Media, Inc.

P

1

-

-

Click to enlarge

The impact of this difference in voting rights is not insignificant. For example, at Google Inc, this seemingly slight difference in the voting rights between Class A and Class B shareholders with 10 votes for class B shares to the 1 vote for class A shares, translates to the 20% of shares that Class B shareholders own, representing 71% of the voting power for the entire company. Click to enlarge

Google is a moderate case of this discrepancy in voting rights. Zynga and TripAdvisor have 7 and 10 votes for Class B shares, respectively. Zynga even has a Class C, which enjoys 70 votes per share.

Click to enlarge

This means that Zynga's Class C shareholders own 3% of the total shares, but have 28% of the voting rights. Nice to be a Class C shareholder.

Click to enlarge

Also, for Trip Advisor, the 10% of Class B shares have 51% of voting power.

But the most incredible equity structure we've found so far is Groupon. While the company's Class A shareholders have one vote per share, Class B shareholders have 150 votes per share.

Click to enlarge

Why does any of this matter? The intelligent investor, who wants to take into consideration more than just the rise and fall of stock prices each day, should be wary of completely ceding control to Class B and C shareholders. For some, a benevolent dictatorship may be a good thing, but please invest with your "eyes wide open," fully aware that even if you buy 20% of the stock, you may not get 20% control… or any control at all. Buyer beware.

For more examples of the differnce between shares and voting power go to: http://imgur.com/a/TyBfj#0

Disclosure: I am long FB, GOOG. One or more of our employees have long positions in FB and GOOG. The company itself does not hold any positions in any equities.