Sunday, May 22, 2011

LinkedIn IPO - 'Votes' the matter?

Finally got down to reading the LinkedIn Prospectus and stumbled upon an interesting 'Risk Factor'



The dual class structure of our common stock as contained in our charter documents has the effect of concentrating voting control with those stockholders who held our stock prior to this offering, including our founders and our executive officers, employees and directors and their affiliates, and limiting your ability to influence corporate matters.

Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. Stockholders who hold shares of Class B common stock, including our founders, and our executive officers, employees and directors and their affiliates, will together hold approximately 99.1% of the voting power of our outstanding capital stock following this offering, and our co-founder and Chair, Reid Hoffman, will control approximately 20.1% of our outstanding shares of Class A and Class B common stock, representing approximately 21.7% of the voting power of our outstanding capital stock, following this offering, and therefore will have significant influence over the management and affairs of the company and over all matters requiring stockholder approval, including election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future.

...

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example,Mr. Hoffman retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future, control a majority of the combined voting power of our Class A and Class B common stock. As a board member, Mr. Hoffman owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Hoffman is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.


Why this makes sense is that an investor coming in an IPO, (generally) would care much lesser about the voting rights than the Pre IPO shareholders (the founding team and the VCs). And the best part is, all shareholders are rewarded with more voting rights if a Pre IPO shareholder goes for an exit (since her Class B shares get auto-converted to Class A, thus the percentage voting rights for the existing investors increase). In fact, a typical retail investor would probably not mind more 'control' in the hands of a proven management (the Class B shareholders). But would getting less voting rights be actually a 'good' thing for the small investor category? Not really, as technically the 'risk' of the 'control' being in the hands of a certain few also is not necessarily a good thing.

Come to think of it, the differential voting rights could be very useful for startups going for crowdfunding - since the 'crowd' would probably be okay with getting shares of much less voting rights and thus the founders can have more 'control' over the venture they have started. [Of course, this doesn't hold for angel and VC investors - who would want a say per share equal to that of the founders.] This seems even more appropriate for startups as against mature publicly traded firms, in the latter case the 'crowd' being okay with inferior voting rights could probably also imply that the individual investor is more concerned with making a quick buck rather than staying invested for the long term. In case of startups, since immediate exit opportunities may not be available in any case, there are more chances that the 'crowd' has come in with a long term view.

One of the major criticisms for dual class structures has been about the possibility of the superior voting right holders misusing their powers for corporate matters like executive compensation, mergers and executions, etc. However, in case of early stage startups [Pre Revenue, Pre Profits, or at best marginal profits], such issues would possibly be relatively less relevant as against mature publicly traded (and possibly billion dollar market cap) entities (where chances of greed taking over are higher).

Wonder how much is this tool being already used, but surely looks like tweaking the voting rights structure can give some flexibility that can benefit all parties.