There has been a lot of attention — to say the least — paid to Facebook’s long-awaited public stock offering, which could put a valuation on the company as high as $100 billion. For the first time, average investors will get a chance to own a piece of the massive social network and its multibillion-dollar revenue stream. But in a very important way, Facebook still remains a private company. Why? Because it is controlled by CEO Mark Zuckerberg through a special class of stock that gives him super-voting rights, and he also controls the board. In other words, you may own stock in the company, but you have virtually no say in what happens to it.
As described in the Facebook prospectus, when new shareholders buy stock in the company, once it is publicly traded they will get class A shares, which carry a single vote each. Mark Zuckerberg and the rest of the early investors in the company own class B shares, which have 10 votes each. The co-founder and CEO has about 28 percent of this class of stock; but he also has voting agreements with a number of other Facebook insiders and co-founders that give him about 57 percent of the votes in the company.
Zuckerberg retains control forever, even after his death
And what happens when other holders of the class B super-voting stock decide to sell their shares, as some early investors will no doubt do when the company starts trading publicly? At that point, they are automatically converted to class A shares, which means Zuckerberg’s control over the voting structure effectively remains the same. And the Facebook founder even has the right to transfer control of the company to a handpicked successor after his death.
Facebook is far from the only tech superstar to choose this kind of tiered structure: Larry Page and Sergey Brin retained control of Google after it went public by owning super-voting shares that gave them 10 votes per share, although the two have said they will be selling some large chunks of their stock over the next couple of years, which will reduce their control. Zynga also has super-voting shares that give founder and CEO Mark Pincus 10 votes per share, just as LinkedIn’s and Groupon’s founders have votes that come with 150 votes each.
So are multiple-voting shares good or bad? That depends on whether you believe that giving a 27-year-old entrepreneur almost complete control over the fate of a $100-billion company is a good thing or not. In terms of what is called “corporate governance,” multiple-voting shares are seen as a large risk factor, in part because of what some corporate raiders like Conrad Black have done to their companies by controlling them so completely.
Is giving the CEO ultimate control good or bad?
In Silicon Valley in particular, where entrepreneurs are seen as a special breed, retaining control over your company is viewed as a positive thing. Zuckerberg has been congratulated by many insiders for managing to keep an iron grip on the company through multiple rounds of financing. And this perspective is understandable for entrepreneurs, many of whom are afraid that their successful company will be taken over by VCs or others who don’t have its best interests at heart, as Apple was early in its history.
But when you are a public company, retaining that much control not just only the votes but also over the board of directors — Zuckerberg has the right to nominate a majority of the board as a result of voting agreements with other shareholders and founders — can be a dangerous thing. Although Steve Jobs didn’t control his board in the same way Zuckerberg does, Apple’s board of directors was criticized for keeping the details of Jobs’ illness hidden from investors and also for approving the repricing of options in a way that arguably went against the interests of common shareholders.
Did the kind of control that Steve Jobs wielded over Apple ultimately result in some incredible, world-changing products? Sure it did. And shareholders who have seen their investment multiply a hundredfold are likely unconcerned about any of the board or option irregularities. But does the end always justify the means?
Selling shares to the public is supposed to come with a certain amount of responsibility to those shareholders, and they should have the ability to hold a CEO and a board accountable if decisions are made that go against their interests. But controlling almost 60 percent of the votes and a majority of the board means Zuckerberg gets to fundamentally do whatever he wants with Facebook — and public shareholders are just along for the ride. Investors should be aware of that before they decide to buy a ticket.