Before Buying Tech Stocks, Know Your Rights

In this segment from Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Dylan Lewis, host of Industry Focus: Tech, who focuses on key things investors should consider before taking a position in a tech company -- the first is voting rights.

A full transcript follows the video.

This video was recorded on June 27, 2017.

Alison Southwick: You have come here to share with us three things that our listeners need to know before they start investing in tech, and the first one is -- all right, you're going to have to bear with me because I kind of went down the pun road for this. Pun Street. I don't know.

Robert Brokamp: I can't wait.

Southwick: Yeah, they're going to be awful, but OK. The first one is that you've got to fight for your right to invest in tech stocks!

Brokamp: That was good.

Dylan Lewis: That was on note, I think.

Southwick: It was close enough. All right, it's all about knowing your rights when you're an investor in tech stocks.

Lewis: Yes, this is kind of what we were talking about a little bit before. It's relevant to that conversation we were having about share classes, but I think it's something that is worth reiterating, because we're seeing more and more instances of non-voting shares in the tech space.

This is something that became really popular because of something that happened a couple of years ago. Alphabet -- then Google at the time -- decided that they were going to have a stock split in 2012 and they announced it. The idea there was every shareholder would receive one share as a dividend for each share they owned, so it'd be a 2-for-1 split. The difference is the share stockholders received were non-voting shares. And they were holding shares that had one vote, most likely.

And so it was very controversial at the time. People were saying, "Well, you're consolidating power for the insiders that have super voting shares" that had, like, 10 votes, or something like that, "and you're giving founders like Larry Page and Sergey Brin the opportunity to maybe sell off some of their shares and also preserve their control of the company." There were some lawsuits along the way, and it's something that eventually passed, and we now know that they have two different voting-share classes.

But this is something that is going to continue to come up again and again. It's something that Facebook announced that they had intentions of doing, although it is unclear if it's something that will actually wind up happening. But it's certainly something to keep an eye on there.

And you look over at what happened when Snap IPO'd earlier in 2017. The company, from the get-go, issued non-voting shares. That's the first time that a major company has ever done that in its first public issuance.

So what you're seeing more and more is these share class structures that allow these founders, and very often these pretty young CEOs, to have total control over the business, and the reason that I think that's really important is as an investor, you have to buy into what that founder's vision of the company and direction for the company should be. And if you don't, you don't really have much recourse.

Southwick: It indicates that the founder is here to stay. They're not just looking to make a payday. They actually want to retain control of the company.

Lewis: Absolutely. It is not something that is necessarily a bad thing. I'm a Facebook shareholder. I want Mark Zuckerberg at the helm. I want him to be able to make the decisions that he thinks are going to put the company in a great position for the next 10, 20 years, because I know that's his vision. He's been really great in all the conference calls and all this commentary talking about this blueprint that he has. And so far he's been excellent in executing and the stock's done very well.

But you have to have the same buy-in and the same belief in where things should be going that the founder does, or that the CEO and the people that control most of the shares do, because they're going to be able to do pretty much whatever they want.

Brokamp: How much of this is due to trying to fend off activist investors? The big news, now, is Amazon buying Whole Foods. Before that happened, there was some of that going on with Whole Foods, in that outside investors were accumulating shares and trying to influence the company. I assume that if you're the founder of the company you'd prefer that not to happen. Is that part of it?

Lewis: I think that's a little bit of it. You see with, like, Carl Icahn and his stake in Apple (AAPL 5.98%), he was a very vocal activist shareholder. Granted, when you are as big as Apple is and you've been around as long, you don't have the same flexibility, so I think there are some founders that see the nuisance that activist investors can be and say, "I don't want to have to deal with that. I know the vision that I have for this."

I think also there's an element of it where this is their baby. This is the thing that they brought into being, have taken public, and they're growing into these massive valuations. And they don't want to have to cede control to anybody. So it's a little bit of this, a little bit of that.

Brokamp: Right. It always emphasizes to me that these are publicly traded companies and to a certain degree they're owned by the public, at least the people who own the shares. You were speaking about Apple, and if you haven't followed them from the beginning, you might not remember that at one point Steve Jobs got fired from Apple, because in the end, once you go public, it's no longer your company, even if you own the majority of the shares.

Lewis: Absolutely.

Southwick: And then they brought him, back because the company could have collapsed.

Lewis: Please, please, Steve!

Brokamp: The stock dropped, like, 20% in one day back in 2000. If you talked to someone back then and said, "By the way, Apple in several years is going to be the biggest company in the world," people wouldn't have believed you.

Lewis: Oh, they would have laughed at you.