Box’s long-awaited IPO may finally happen this week. But if you are an investor planning to buy its shares, there’s one thing to understand: it’s selling dual-class shares.
According to its S1, Box is offering two types of shares in its offering, Class A and Class B. The Class B stocks, mostly owned by management and directors, hold 10 votes per share, while Class A stocks only hold a single vote per share. That means even after selling nearly 10% of its shares through the IPO, Box’s Class B stock holders – or company insiders – will retain 98.8% of the voting power.
In other words, Box management and early investors will continue to hold a tight grip on the company, while public investors – no matter how much they invest – will pretty much have no influence over its decision-making.
Box duly acknowledges this in its S1, stating it as one of the risk factors: “The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our executive officers, employees and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control.”
Of course, this isn’t something completely new to Box. A few other tech companies, including Facebook, Linkedin, and Workday, all have similar dual-class structures. Google was one of the first tech companies to adopt this model when it went public in 2004. But its worth noting that the New York Stock Exchange didn’t even allow dual-stock companies before 1987. Prior to Google, it was mostly family-run media companies, like The Wall Street Journal or The New York Times, that had this model, all under the name of protecting editorial independence.
The reason companies want dual-class shares is simple: it protects them from takeover threats and short-term financial pressures. It allows them to keep their long-term strategy, which in Box’s case is to continue spending, staying unprofitable, until it reaches scale, it warned in its S1.
The dual-class structure has drawbacks for the company issuing them, too. Because of the lack of a “voting premium,” dual shares are often sold at a discount, undermining overall shareholder value. It also prevents shareholders from voting to replace underperforming management.
But then again, that doesn’t mean all CEOs are completely off the hook from poor management. Just ask Mark Pincus, the founder and ex-CEO of Zynga, who voluntarily stepped down after poor results – even when he had 70-to-1 voting power at Zynga.
Still, if you’re planning to invest in Box, it means you’re placing a huge bet on Box CEO Aaron Levie and his management team.