Super-Voting Shares: The Hidden Provision That Keeps Founders In Charge

Super-voting shares are the ultimate strategy startup founders use to secure their ownership from dilution. More than just dilution in the value of their stock, they need to ensure their control over the company’s decision-making.

As the company grows, you’ll issue shares and stock to investors as part of the fundraising terms and conditions. Voting rights and board seats are typically a part of the deal. That’s how investors seek to have a say in the operations and secure their high-risk investments.

You’ll set up option pools for employees, initially to compensate the founding team for accepting a lower salary. Down the line, you’ll include stock as part of the salary structure when you set out to hire top talent. Having an ownership stake in the company motivates them to work harder for its success.

Then again, you may consider offering stock as part compensation to consultants and advisors. Each time you offer stock, you risk dilution and loss of voting power that equity holders can claim. As the founder, you need some form of protection to ensure you remain in charge of directing operations.

This is where super-voting shares come in. Read ahead to understand how this stock works.

Understanding What Super-Voting Shares Are

Although forking over shares to co-founders and other stakeholders is an accepted process that company owners adopt, caution is advisable. When establishing the startup, you’ll ensure that you structure the equity to include super-voting shares–a unique class of shares.

Super-voting shares are quickly gaining traction in the startup ecosystem to address the intricacies of corporate governance. This approach ensures that voting rights are not uniform across all share classes, but grants founders greater control. It also safeguards your influence in the company.

When organizing the capital structure, you’ll include provisions for a dual-class system, which gives you more voting power than others. Not only will you secure control, but you’ll also add a layer of defense. You’ll get protection against getting kicked out of the company you built and nurtured.

Typically, shareholders receive voting rights in proportion to the size of their ownership stake in the company. This proportion is usually one vote per share. Shareholders owning a large percentage of the stock can thus exercise their votes to influence the company’s direction.

This direction need not be in its best interests, but may serve the shareholders’ goals. For instance, when they are looking for an exit by pushing for an early IPO. However, super-voting rights prevent this likelihood by allocating voting power that may not necessarily be in proportion to their stake.

Issuing Shares in Different Classes – Super-Voting Shares Structure

Founders can set up a separate class of shares (Class B) that allots them 10 or more votes per share. This class is unlisted and reserved only for the company’s founders. On the other hand, common stockholders owning Class A shares receive just one vote per share.

This strategy enables founders to maintain control over the company without needing to hold a majority stake. They can also leverage a stock split to issue more Class C shares or common stock that don’t carry voting rights.

Shareholders can trade Class A and Class C shares in the open market and benefit from fluctuations to make profits. However, Class B shares are not open for sale. As a result, key stakeholders owning these shares can influence the company’s direction as they see fit.

Case Studies of Top Companies

More publicly traded companies now prefer to have multiple share classes. They account for close to 7% of the stocks in the Russell 3000 index. Interestingly, around 25% of initial public offerings (IPO) in the first six months of 2021 had dual-class stocks. Historically, on average, close to 29.8% of IPOs featured dual-class stocks.

Alphabet Inc.

One of the best-known examples of a company utilizing the super-voting shares method is Alphabet, which went public in 2004. Alphabet has two stock ticker symbols, GOOGL and GOOG. GOOG represents Class C shares with no voting rights.

However, GOOGL shares are Class A, which carry proportionate voting rights. Alphabet created a third, separate class of unlisted stock, or Class B, which holds 10 votes per share. This class is reserved only for founders and is not publicly traded.

After executing the split, the company allotted an equal number of Class C shares to shareholders who owned Class A shares. But their voting rights did not increase with the fresh stock allotment. Essentially, Alphabet now has a triple-class stock structure.

The splitting strategy enabled the founders, Larry Page and Sergey Brin, to leverage public market liquidity. However, they effectively retained majority control over the company. GOOGL shares now trade at a premium compared to GOOG shares due to the lack of voting rights.

Berkshire Hathaway Inc.

Another example is Berkshire Hathaway Inc. Class A Berkshire stock (BRK.A) is valued at the same price as 1,500 Class B (BRK.B) shares. However. BRK.B stock awards voting rights equivalent to 10,000 shares.

Snap Inc.

Snapchat, also known as Snap Inc., is yet another company that has implemented a dual-class share structure. At the time of its IPO, it released Class A and Class B shares. The general public held Class A shares but did not get voting rights.

The company founders, Evan Spiegel and Robert Murphy, retained Class B stock, which carried 10 votes per share. As a result, they now have 88.5% of the voting power, which enables them to make the necessary decisions. However, they own less than 50% of the company’s total equity.

Why Issue Super-Voting Shares

Issuing super-voting shares ensures that the balance of power remains concentrated in the hands of a few founder-shareholders. You can continue running the company’s operations to achieve the initial mission statement you envisioned. You’ll also safeguard its interests while achieving its goals.

Your decisions can be crucial when electing board members and executing critical resolutions. By issuing super-voting shares, you’ll integrate an effective defense against potential hostile takeover threats that can arise in the future.

Third parties may purchase a high percentage of shares from the open market, but will have no voting power. Dual-class stock ensures they are unable to wrest control from the founders or destabilize the company with threats.

Depending on perspective, this share structure can be either an upside or a downside for potential investors. You’ll tailor the pitch to align with the targeted investor’s objectives and funding criteria.

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Limitations to Issuing Super-Voting Shares – Regulatory Compliance

Major stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq, have passed regulations governing super-voting shares. Their objective is to protect the interests of shareholders from any corporate actions that the company founders may take.

The regulations aim to impose restrictions on issuing super-voting shares that can disproportionately impact existing shareholder rights. Nasdaq Listing Rule 5640 and Section 313 of the NYSE Listed Company Manual permit certain exceptions, subject to specific criteria.

Company founders must also obtain approval from the relevant stock exchange before issuing super-voting shares. Regulatory compliance, regard for stakeholder satisfaction, and transparency are crucial for securing approval. Here are some of the exceptions included in the rules:

Section 313(b)

Section 313(b) allows companies to issue and list non-voting common stock (Class C) contingent on certain conditions. Companies must institute specific guardrails for investors purchasing this class.

Aside from consulting and getting approval from the NYSE, companies must provide financial information and maintain the pre-determined level of reserves. They must also establish scrutiny and supervision from independent third parties.

Section 303A.08 and 312.03

Sections 303A.08 and 312.03 outline the exceptions to the requirement of securing shareholder approval when issuing stock. Approval is specifically critical when companies want to issue stock with anti-dilution price protection features. Or, if the stock can trigger a change of control.

If the company issues stock to third parties and that stock exceeds 19.9% of the outstanding shares, the rules apply. If a single investor or a group of investors purchases a substantial percentage of shares, they require the approval of existing shareholders.

However, certain exceptions apply in specific situations, such as when the company issues a small number of shares. Or, when the shares are already traded on the stock exchange. Companies can also move forward with issuing super-voting shares if they ensure shareholders understand the rules.

Before taking any action, you’ll consult with the relevant stock exchange and secure permission.

Advantages of Super-Voting Shares

Issuing super-voting shares has multiple advantages for founders. You can raise additional capital when you need it without worrying about ceding control, even if you’re offering board seats. Making decisions is streamlined since you don’t need approval from the broader shareholder base.

This strategy also enables you to limit the influence that third parties have over the company. You can implement strategies that ensure its long-term sustainability and scalability.

The hurdles Apple Inc. (AAPL) encountered in 1985, following Steve Jobs’ departure, were a result of internal power struggles within the boardroom. Jobs’ return to the company in 1997 is nothing short of historical and made waves in the industry.

Typically, investors backing IPOs and purchasing shares after an IPO have complete confidence in the founder and their capabilities. Companies disclose voting and decision-making rights in their security filings and prospectuses, allowing investors to make informed choices when investing.

If investors choose to provide capital, they are well aware that this will result in a disparity in voting power. Ultimately, they are only concerned with the company’s long-term success and growth. Their final goal is to sell the stock at a premium and make substantial returns.

With or without voting rights, shares are traded in the open stock exchange, and investors only bank on their performance. As long as the founder is running the company’s operations efficiently and the stock is appreciating steadily, voting rights are immaterial.

Multiple-class stock is also beneficial for lead investors who have provided the company with capital at its startup stage. These investors have carried the maximum risk and thus want assured returns and a say in the company’s decisions. Founders often offer them super-voting shares as collateral.

Downsides of Super-Voting Shares

Although super-voting shares have multiple advantages for founders, critics have their concerns about their impact on shareholder rights. The concentration of power and controlling rights in the hands of a few people invariably leads to abuse.

The risks arising from a lack of transparency and accountability, as well as the absence of external supervision, are concerning factors. Critics also fear that the imbalance of power can disadvantage shareholders in the event of a conflict of interest.

Shareholders risk losing value without proper governance and oversight. Yet another downside is that super-voting shares can lead to the entrenchment of managers, which is detrimental to shareholders. To address this issue, the Council of Institutional Investors has proposed legislation.

According to the suggested regulation, companies registered in the US must implement the sunset clause. This clause automatically merges the different stock classes in a company within a period of up to seven years.

Each class of shareholders must approve an extension for the class segregation to continue beyond this time frame. As the founder, you should be aware of the challenges super-voting shares in the cap table pose when raising capital.

Investors may hesitate to offer funding to a company if one or more unproven founders have complete and undisputed control. Contemporary investors are also mentors and advisors committed to the company’s long-term success. A potentially rigid management approach can be a hurdle.

They may rethink the investment, considering that they may not have a say if the company is floundering. The inability to provide direction raises their risks.

Before We Wrap Up!

When implementing the provision of super-voting shares, you’ll carefully weigh the pros and cons. Be aware of its potential implications on not just your rights as a founder, but also shareholder interests. You’ll create a balance by establishing robust governance practices.

That’s how you’ll remain compliant with the regulations established by the New York Stock Exchange (NYSE) and the Nasdaq. Issuing this stock typically involves multiple complexities, which is why you’ll need the assistance of an expert legal team.

Use the super-voting shares approach strategically to ensure the company achieves success and its long-term goals. At the same time, you’ll reassure investors and shareholders with accountability, complete transparency, and open communication lines.

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