Investors are queuing up for Groupon and Zynga. Although the companies are planning to sell very thin slices of stock at the outset, however, that doesn’t mean their founders are taking any chances over control.
In fact, both are breaking new ground in stacking votes in favour of the established insiders through a two-tiered structure that may be more audacious than any seen before.
Two-tiered structures are hardly new. Google has one that left two thirds of voting power in the hands of Eric Schmidt, Sergey Brin and Larry Page. A shareholder proposal that put the structure up for a vote in 2006 was defeated. (No wonder.)
Having two tiers is also popular in the media. The New York Times and News Corp may not agree on much, but they both like keeping the true voting power in the hands of those on the inside.
But the chutzpah of these two new cases takes voting inequality to new heights. Zynga founder and CEO Mark Pincus will get 70 votes per share, compared with the one per share of ordinary investors (including institutions). Groupon goes even further: its founders get 150 votes per share.
Governance experts have long seen such dual structures as a danger. The founders raise money from the public capital markets and then can continue to treat the companies as they wish, knowing that investors are unlikely to mount an effective challenge given the disparity in power.
Given the mood of investors, however, you have to wonder whether this is a smart move. Groupon in particular has received flack for obfuscating its numbers. It’s even tossing mud into the daily sales numbers it has posted for some time.
Henry Blodget, one time bad boy of tech stock touting, has written that he wouldn’t touch Groupon’s stock at the IPO price with a 50-foot pole, just based on the current operating fundamentals.
Pumping up the control of insiders could make potential investors concerned about putting money into a company where insiders might continue to treat it as their own.