Since Snap's outrageous voting structure went live, it seems like every other tech company is snatching away more and more voting power from its shareholders. But the practice actually dates back long before Snap even existed.
In this Industry Focus: Tech clip, host Dylan Lewis and Motley Fool contributor Evan Niu explain how the tech industry became so littered with non-voting share classes, what it means when new companies are careful to state that they "may never be profitable," what Dropbox's voting class structure will look like after it goes public, and more.
A full transcript follows the video.
This video was recorded on March 2, 2018.
Dylan Lewis: We have a few questions here. Michael asked, "Can you talk about the tech IPO trend of non-voting shares and 'may never be profitable?' Seems like Snap started it, and Dropbox and Spotify are running at it like me after an ice cream truck." Do you want to start that one off?
Evan Niu: I would say that the broader trend about tech IPOs not giving public investors a whole lot of vote or say in the business really started back 15 or 20 years ago with Google. Google is probably the best example, poster boy of doing this where they gave their insiders a huge amount of control, and public investors really didn't get much vote.
And that trend has unfortunately been accelerating over the past 15 to 20 years. It's now commonplace, it's more like the rule than the exception these days, which is a bad thing in terms of corporate governance, but what can you do. Snap was really unique in the sense that they gave public investors zero votes, which is just adding insult to injury. Whereas most companies, it's very common these days for insiders to have these super voting shares to where they can still maintain majority voting control. While public investors do technically get a say and a vote, they shouldn't have any illusions that they have majority voting. It's kind of a technicality.
And just to clarify for Dropbox, Dropbox's public investors will get one vote per share. The Class B shares that insiders hold have 10 votes per share. So, same thing there, they're going to have consolidated voting power. But, public investors will get one vote.
Lewis: And there are some non-voting shares that will be in the mix for Dropbox. There are going to be some Class Cs pending authorization, or maybe they have been authorized already.
Niu: Right. The Class C shares, they're basically creating the share class. There are no Class C outstanding shares, and there won't be any after the offering. Dropbox says they're basically reserving this class for future issuance to give to employees for stock compensation, potentially maybe like currency in acquisitions if they want to do that. But, as of right now, after the offering, there will not be any class shares outstanding immediately.
Lewis: And as for that language, "may never be profitable," Evan, my read on that is, that's legalese that you're going to see in a lot of filings. I've noticed that a couple of outlets have run with it a bit because Dropbox is such a big issuance, but I don't think there's anything particular to read in there specific to this company.
Niu: Right. That's pretty generic, boilerplate legalese that a lot of companies use. I wouldn't worry too much about it. Any time you look at risk factor legalese, companies kind of go overboard. You know how lawyers get with liability. [laughs] They want a tight ship so there's no legal liability. That's overly broad, in my opinion.