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Charts that Count: how tech IPOs are making shares unequal

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If you think all stocks are created equal, well, you're wrong But why is that the case, and what, if anything, can be done about it? The reason all stocks are not made equal is because of something called dual class share systems

But before we explain that let's just go back and remember what a share is When a company goes public it sells shares to the broader public Well, when an investor buys a share in a company what they're really buying is an ownership stake And the way that an investor expresses that ownership is with a vote So let's say the investor doesn't think the CEO is doing very well

The company has been performing poorly Well, they can say, hey, we're going to vote this guy out so we can bring somebody new in to turn things around And that's when an investor gets one vote per each share they buy Now sometimes company management will say, actually, we don't want investors to have the ability to kick us out So what we're going to do is create these shares and we're going to sell them to investors, but they're not going to have any voting power

And instead they create a second class of shares which contain all the voting power and management keeps that for themselves And that's why we call it a dual class share system Now, going to this chart, the red line represents the percentage of tech IPOs in a given year that have the dual class share system And the blue line represents the percentage of IPOs in the non-tech sector that also have that dual class share system So these two lines are showing the same thing, but one is for the tech sector, and one is for the non-tech sector

And this data was put together by Professor Jay Ritter Now clearly you can see that the tech sector has had a significant pop in the percentage of companies going public that have a dual class share system So Facebook and Google famously have a dual class share system And when Lyft went public back in March it also had to dual class system So what's going on here? Well, it's this idea in Silicon Valley that the guy that founds the start-up that is a visionary, and he's a genius, and he wants to be able to run his own company, even if it goes public

And he doesn't want to give that power over to investors to kick him out, because he wants to be protected from this idea that short-sighted investors may not see his grand vision Well, investors are starting to get a little bit worried about this As more companies go public are tech companies, and as those tech companies prefer this dual class share system we're potentially raising the total number of companies out there that have the dual class share system Well, investors are saying, hey, maybe not such a good idea Some have asked the exchanges, which is where public companies list their shares, to ban the practise

So in Hong Kong they did this on the Hong Kong Exchange They banned dual class shares Well, guess what? They had to un-ban it, because they were worried that companies wouldn't want to list on an exchange that wouldn't allow them to do this But look, there is a potential compromise here, and it's called the sunset clause A sunset clause says, yes, go ahead, have your dual class share system when you go public, but let's put an expiration date on it

So either when the CEO steps down or after an arbitrary number of years, let's have this dual class system go back to the normal system so that investors aren't shut out forever Here's why I think that they might want this These shares that have no votes, they're still selling with investors People still want to buy them And that's because the companies that have them are still gaining

They're still performing well, and people want to get in on those gains But what happens when things start to go south? Well, you can't just kick out the CEO if you're the investors because you don't have any votes And so, if that's the case, then really it's just too bad, so sad

Source: Youtube

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