Dual Class Structure
Dual class common stock structures are a way for founders of Delaware startups to retain voting control
Dual class common stock structures are a way for founders of Delaware startups to retain voting control over their companies even after they raise capital from investors or go public. In this blog post, we will explain what dual class common stock structures are, how they work, and what are some of the benefits and drawbacks of using them.
What are dual class common stock structures?
Dual class common stock structures are arrangements where a company issues two classes of common stock: Class A and Class B. Class A shares have one vote per share, while Class B shares have multiple votes per share, usually 10. The founders and key employees typically hold Class B shares, while the investors and public shareholders hold Class A shares. This way, the founders can maintain a majority of the voting power even if they own a minority of the equity.
How do dual class common stock structures work?
To implement a dual class common stock structure, a Delaware startup needs to amend its certificate of incorporation and bylaws to create the two classes of common stock and specify their rights and preferences. The company also needs to obtain the consent of its existing shareholders and board of directors, as well as comply with any contractual obligations it may have with its investors or lenders. The company can then issue Class B shares to its founders and key employees, either by converting their existing shares or by granting them new shares. The company can also issue Class A shares to its investors or public shareholders through fundraising rounds or an initial public offering (IPO).
What are some of the benefits and drawbacks of using dual class common stock structures?
One of the main benefits of using dual class common stock structures is that they allow the founders to pursue their long-term vision and strategy for the company without being influenced by short-term market pressures or shareholder activism. The founders can also protect the company from hostile takeovers or unwanted mergers and acquisitions. Additionally, dual class common stock structures can incentivize the founders and key employees to stay with the company and align their interests with the company's growth and success.
However, dual class common stock structures also have some drawbacks and risks. One of them is that they can reduce the accountability and transparency of the founders and board of directors, as they have less incentive to listen to the feedback or concerns of the other shareholders. Another drawback is that they can create a perception of unfairness or inequality among the shareholders, as they have different rights and privileges. Moreover, dual class common stock structures can limit the liquidity and valuation of the company's shares, as some investors or markets may discount or avoid them due to their lower voting power or governance standards.