Lyft Founders to Tighten Grip With Supervoting Shares in IPO

Exact details are unclear, but the men would have significant influence over major decisions at the company, ranging from the election of directors to whether to sell one day. In a move that appears to be aimed at shoring up its governance, Lyft is expected to appoint one of its existing board members as nonexecutive chairman, one of the people said. The founders’ move to consolidate their control is the latest illustration of the nearly unchecked power held by the founders of many of the fastest-growing technology startups. Some of the biggest public tech companies that have made their debuts in recent years, including Facebook Inc., Google parent Alphabet Inc. and Snap Inc., have supervoting structures that give their founders control. The issue has taken on increased import after Facebook and other companies with extra control for founders stumbled lately. In Facebook’s case, the company has come under increasing scrutiny for how it uses customers’ personal information and the influence it wields as gatekeeper to one of the world’s largest places to advertise online. Though it has rebounded recently, Facebook stock took a sharp hit after negative headlines led to questions about Chief Executive Mark Zuckerberg’s leadership and his controlling stake in the company. In 2017, Snap, whose two co-founders control about 90% of its voting power, sold shares to the public with no voting rights. Snap’s stock and its business have struggled since then. The shares are down nearly 50% and the company has suffered an exodus of senior executives. Public companies whose founders have supervoting shares are largely immune to the attacks from activist investors that have served to discipline much of corporate America. Unlike many of the other hot Silicon Valley startups, the Lyft co-founders had not put a supervoting structure in place while it was private company. Instead, they’ve held voting power in proportion to their economic stake. Founders of successful technology startups have been emboldened in recent years by ample amounts of private capital and a dearth of IPOs. That has enabled them to largely dictate terms to deal-hungry investors. Proponents of supervoting shares argue that they protect founders from unreasonable or shortsighted demands of investors that can hurt results in the long-term. But the structures have started to get pushback from governance experts and others. An investor backlash against Snap prompted the keepers of the S&P 500 to announce they would block newcomers with multiple classes of stock from joining the flagship index. The Council of Institutional Investors, a group representing pension funds, has called for companies to adopt “one share, one vote” structures since its founding in the 1980s. Last year it led a group of large asset managers including BlackRock Inc. to petition the New York Stock Exchange and Nasdaq to require companies with different share classes to get rid of them within seven years of going public. Some of Lyft’s existing investors are frustrated by the founders’ moves, because they will preclude the company from being included in some stock indexes, essentially eliminating large pools of public-market buyers, some of the people said. Such arrangements can also be seen as a corporate-governance risk and hurt valuations. So far, unhappiness with the structures has done little to dissuade company founders from putting them in place. Underwriters and lawyers say investors continue to clamor for access to fast-growing companies, making it difficult to advocate against the structures. In what’s widely expected to be one of the busiest years for IPOs on record, most large tech companies in the pipeline—which, besides Lyft, includes Slack Technologies Inc. and Pinterest Inc.—are likely to use dual-class structures when they go public. Having an activist on Lyft’s board doesn’t seem to have made much difference. In 2015, Lyft took $100 million from Carl Icahn at a valuation of $2.5 billion. At the time, Lyft added Jonathan Christodoro, then Mr. Icahn’s managing director, to its board. In its IPO, which could come as soon as the second quarter, Lyft’s valuation is expected to exceed $15.1 billion, where it was valued last year.

~source