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The current rising star of tech startups, the parent company of the messaging app Snapchat, is apparently planning to issue shares with no voting rights when it goes public this year.
The move, which was reported by The Wall Street Journal, would give the co-founders, Evan Spiegel and Bobby Murphy, viselike control of the company, Snap.
It's another sign of how the balance of power has tilted to tech founders. But Snap may have gone too far.
The details of Snap's share-class structure may show a slightly more nuanced picture when they are eventually disclosed. The company filed with the Securities and Exchange Commission confidentially, with the goal of having its shares traded as soon as March, The New York Times reported in November. The filing will be disclosed sometime before the company begins pitching its share offering. Until then, we won't know for sure how lacking in power Snap shareholders will be.
![Snapchat CEO Evan Spiegel](/content/dam/images/g/r/w/u/r/e/image.imgtype.afrArticleInline.620x0.png/1485413810735.jpg)
Still, a total disenfranchisement of public shareholders has been a long time coming among technology companies.
When Apple and Microsoft went public decades ago, they had the traditional corporate structure of one share, one vote. Google started the trend of making public shareholders lesser citizens in 2004, when it issued to public shareholders shares having one vote while the founders and insiders held shares with 10 votes.
That has become the norm among new tech companies, as Facebook, Zynga and Groupon (among others) followed, as well as nontech companies such as Shake Shack. The typical structure was to give 10 votes per share to the Class A stock held by the founders and one vote to the public, though some companies went even further: Zynga's class A had 70 votes per share. (Twitter, however, was a noticeable exception and instead adopted a more traditional one-share, one-vote structure.)
But Sergey Brin and Larry Page of Google, as well as other tech founders, soon discovered a problem. Even with all of those high-vote shares, they might lose control if they sold their stock to fund their charities or other ventures. As a result, Google, Zillow and even Under Armour have created no-vote shares to issue to employees and for future offerings.
This is having your cake and eating it, too.
Facebook is trying to put into effect a similar no-vote share structure, as is IAC/InterActive Corp., though those two companies have been met with resistance and litigation from shareholders challenging this move.
Snap could go public with a Google-like structure and then issue no-vote shares later. But why deal with all those pesky shareholders who may challenge such a conversion?
Instead, Snap is apparently going to make sure that the public has no vote and hence never the opportunity to have a say in the company's governance. While public shareholders will be totally disenfranchised, Spiegel and Murphy are reportedly going to have 70 per cent of the total vote despite owning only 40 per cent of Snap.
The discrepancy is not bad compared with other companies. At Facebook, for example, Mark Zuckerberg currently casts 53.8 per cent of Facebook's votes while owning 15 per cent of the company.
Snap's rationale for wanting its co-founders to have this power has not been explained. But from news media reports and otherwise, we can figure out the gist. Snap is likely to argue that Spiegel, 26, is a visionary who knows how to sell to teenagers and 20-somethings. He is the one who can lead the company to join the superpower ranks of Facebook and Google, justifying Snap's valuation of over $20 billion.
Indeed, that appears to be why Snapchat changed its name to Snap, so it could mimic the big boys like Google and be an umbrella company for other innovative and presumably lucrative products. Spiegel, the argument goes, needs total control over the company to ensure that this ambitious vision is executed.
There are warning signs that the hype over Snap's initial public offering is going to be extreme. Already the company is indicating that it will focus not on revenues or profits, but on alternative metrics like user engagement.
We've seen these gimmicks before. Groupon and Zynga were big users of these alternatives, for which I coined the names Grouponomics and Zyngametrics.
Yet is there any doubt that Snap's initial public offering will be a stunning success? After all, how can you miss out on the Next Big Thing, like, say, Myspace, Zynga, Groupon or perhaps Theranos? Oh, Snap.
Sarcasm aside, few big social media players come to market, so investors will be sure to gobble up Snap shares.
And risks and governance problems will be ignored in the rush not to miss out. The euphoria over Snap is noticeable even among banks, which are providing the company with a loan of $1.4 billion more than Snap's entire expected 2017 revenue. So much for sober and prudent banking.
When you think about it, this emphasis on vision in technology is tiresome. It drives money to companies but often seems hype to build up the egos of founders who often get lucky. I mean, were messages that disappear "visionary" five years ago?
Couldn't it be easier to say that instead of a visionary, Spiegel will be a multibillionaire with total control of a company and a track record of only a few years?
Without picking on Spiegel and Murphy, this type of corporate power concentration in one or two people has too much chance of going wrong especially someone who might be around for 70 years and is running a company with so much uncertainty in its future. Their vision may change or just go bad, but shareholders who own part of the company are stuck as are the employees and consumers of the company who then are kept in this scenario.
And studies show that in the end these companies destroy value more than they create.
Even Google was criticised for overspending on investment, something shareholder pressure pushed back on and caused the company to change. Shareholders can provide some measure of check on these issues, but Snap would be saying: We won't care.
Defenders of such a class-share structure point to the ability to look at the long term while arguing that the market will price any governance defects. Shareholders will pay less for Snap's shares because of these risks.
This assumes a rational market, but it is hard not to see that people may be discounting the risks in the rush to buy the next hot tech stock. And while there may be real benefits to this structure in preserving a singular mission, given the early trajectory of Snap, it seems too risky.
Perhaps the supporters are right. But the real test of this structure will come if the institutional investment firms who have the greatest influence in the stock market, like Vanguard and BlackRock, idly stand by.
For them, this test is a last stand: If they do not do something, it will highlight that in some ways their talk about shareholder power is sometimes cheap. Indeed, T. Rowe Price, which is already a private investor in Snap, is reportedly going to oppose Snap's no-vote corporate governance, stating that "we want our clients to have the vote they deserve."
But I doubt that the institutions will do much more than complain, instead leaving Snap with corporate governance that mimics its disappearing messages, leaving nothing there.
Steven Davidoff Solomon is a professor of law at the University of California, Berkeley
The New York Times