We Don't Need No Stinkin' Governance

The use of special share classes to give company founders disproportionate voting rights isn’t exactly new.Google did it. Facebook has them. They’re pretty common. Given enough time, of course, and smart people tend to figure out how to exploit the system.

That’s what we’re seeing now.

Mark Pincus had a special class of shares created at Zynga, and he’s the only person who owns the stock in it. This privileged position gives him 70X voting rights for some of his shares – and 38.5 per cent of the company’s votes.

And now, we’re seeing Groupon head in this direction.

While there isn’t a third tier of shares at Groupon, the founders are getting more than enough muscle thanks to the current two-tier structure. For each founder’s share there are 150 votes (10X voting rights for this class of stock tends to be more common, according to the Wall Street Journal). So, with this bump, the three founders of Groupon control around 58 per cent of the votes.

The good news is that these folks aren’t selling any of their stock at the planned IPO, but it remains a governance nightmare waiting to happen.

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Source: WSJ

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