The Startup Governance Bubble
When speaking of startups, people tend to believe that they follow democratic rules of governance. They’re companies. They have founders, investors, a board, people vote, decisions are taken. All of this looks a lot like a small-scale democracy. At least that’s how it would work in any other company.
The truth is that startup are not normal companies. They’re dedicated to deliver high growth and high output. To achieve this, people believe that they need a pilot in control. Thus, the practice has arisen to grant super-voting to Silicon Valley founders, which can lead both to super-tight and efficient governance, or to “the ultimate job security” as Backchannel puts it.
Most part of the time, in most companies, one share equals one vote. But in many US startups, some shares are worth more votes than others. When an investor will control 1 vote, the founder will control 10 votes.
It’s called dual-class stock structure.
This is not new. Older companies have used this trick for centuries. Well-known companies such as Ford or Berkshire Hathaway allow founders, executives and family to control the majority shareholder voting power with a relatively small amount of total equity in the company. The dual class structure at Ford, for example, gives the Ford family control of 40% of the voting power while owning only about 4% of the company’s total equity. Berkshire Hathaway offers a B share with 1/30th the interest of its A-class shares, but 1/200th of the voting power.
Dual Class structures are so dangerous that many countries such as Germany, Russia, the UK and other commonwealth realms have laws/policies against multiple/non-voting stock. Continental Europe usually allow them under some limits.
The reason for their use in Silicon Valley is that there there is a history of CEOs being forced from their companies. Steve Jobs was famously ousted of Apple by John Sculley in 1985. Sean Parker got fired from Plaxo by its investors. Having these stories in mind, Google, Facebook, Zynga and others decided to follow a dual-class structure where their founder is in complete control of the company. Recently, Snap even issued a third class of shares that has zero voting control over the company.
In other words, startups are dictatures, not democracies. You’ve got one leader, usually male, usually white. The rest of the company obeys to him. His decisions are not open to discussion. In Silicon Valley parlance, being CEO amounts to being King these days.
And why not? As Peter Thiel explains, “We are biased toward the democratic/republican side of the spectrum. That’s what we’re used to from civics classes. But the truth is that startups and founders lean toward the dictatorial side because that structure works better for startups. It is more tyrant than mob because it should be. In some sense, startups can’t be democracies because none are. None are because it doesn’t work. If you try to submit everything to voting processes when you’re trying to do something new, you end up with bad, lowest common denominator type results.”
But this is all cool as long as the dictator is benevolent and efficient.
It’s different when the dictator is more versed in the Bro culture than in management or psychology.
And as scandals multiply in the Valley, investors, journalists and the public in general will begin to question the current state of things.
Supporters of dual-class governance feel that the structure allows strong leadership to put long-term interests first while seeing beyond the near-term financial situation. Opponents of dual class structures feel it allows a small group of privileged shareholders to maintain control, even when they’re not successful or innovative.
It will be interesting to see how investors will react when some will understand that they invested billions in people who got lucky but don’t have as much vision and management skills as they thought.
In other words, there might be a governance bubble in the making, something different from the 2001 bubble, or the 2007 financial crisis, but with no less impact.
Two good reads on this topic:
