How dual-class shares protect founders and worry investors

HostMost of us think that if we buy a slice of a company, we get a small say in how things are run. But these days, that's not always the case. There's a setup where some people get to stay in charge no matter how much of the company they sell off to the public. I wanted to look into why this is happening and why it makes some people so uneasy. How does someone keep all the power even when they don't own most of the business anymore?

GuestIt comes down to a simple trick with the stock itself. In a normal setup, one share equals one vote. If you own more than half the shares, you run the show. But many big tech firms use what they call dual class shares. Basically, they make two kinds of stock. One kind is for the public, like you and me. Those give you one vote each. But the other kind is just for the founders and maybe a few early backers. Those might give the founder ten votes for every single share they hold. It means they can sell off almost all the actual ownership of the firm to get cash, but because their special shares carry so much weight, they still hold all the cards. They can never be outvoted. It's like owning ten percent of a house but getting to decide what color to paint all the rooms and who gets to live there, while the people who paid for the other ninety percent just have to watch.

HostThat sounds like a dream deal for a founder, but why would an investor ever agree to that? It feels like you're giving up your right to have a say before you even start.

GuestWell, the pitch from the founders is that they need this shield to think big. They argue that the stock market is way too focused on the next three months. They worry that if they try to build something bold that takes ten years to finish, regular investors will get scared if the profits don't show up right away. If they had a normal setup, those nervous investors could team up and fire the founder to try and get a quick win. By holding onto these super votes, the founder can ignore the noise and stay focused on their long game. They say it's the only way to protect the spark that made the company special in the first place. For a long time, people were happy to go along with it because these founders were seen as geniuses who could do no wrong. If the stock price is going up, most people don't mind being in the back seat.

HostBut that assumes the founder is always right. What happens if they start making bad calls or lose their touch? It seems like there's no way to fix a sinking ship if the captain can't be removed.

GuestThat's exactly what keeps investors up at night. The wall the founder builds to keep out the noise also keeps out any kind of help or correction. If a normal boss is doing a poor job, the owners can gather their votes and pick someone better to run things. But with this lopsided setup, the owners are stuck. They put up the money and they take the hit if the stock price drops, but they have no way to change the path the company is taking. We have seen cases where founders spend billions of dollars on side projects that never make money, or they get caught up in scandals that hurt the brand. In a regular company, that person would be gone in a week. Here, they can stay as long as they want. It creates this weird world where the people who own the most of the business have the least power to protect their money.

HostSo why not just avoid these stocks? If the rules are so tilted to one side, you would think people would just put their money somewhere else where they actually have a vote.

GuestYou would think so, but it's not that easy. Many of these companies are the biggest and most successful names in the world. If you want to own a piece of the future of the web or social media, you often have to play by these rules. Plus, many people don't choose their stocks one by one. Their money is in big funds that track the whole market. If a massive company has these lopsided shares, those funds have to buy them anyway to keep up with the rest of the market. This gives the founders even more leverage. They know that people want or need to own their stock, so they feel they can set whatever rules they want. It has led to a bit of a standoff where big groups that represent workers and retirees are trying to change the rules of the stock exchanges to stop this from happening.

HostIf the founders won't give up control on their own, is there any middle ground? Or are we just stuck with these forever-bosses?

GuestThere's a push for something called a sunset clause. The idea is that these super votes should've an expiration date. Maybe the founder gets ten years of total control to get the business off the ground. After that time is up, or if the founder leaves or passes away, the special shares turn into regular shares. It's a way to say that you get to be the boss without anyone getting in your way while the company is young, but once it's a giant part of the economy, you have to answer to the people who own it just like everyone else. Some companies are starting to add these rules, but the founders who already have total power aren't exactly rushing to hand it back. The biggest question left is whether we'll see more of these setups end because of a plan, or if it'll take a massive crash to show that no one should've that much power forever.

HostThat small slice of a company usually comes with a voice, but it turns out the person holding the megaphone might have a very different set of rules than the rest of us.