Dual class shares.. a special privilege for the children of tech founders

Netizens have spent the past year obsessing over documenting Hollywood actors and social media stars who were born to rich and famous parents. Identifying the children of privileged celebrities, or “Sky Babies,” as they are called, is a popular topic on TikTok. This month, Fashionista published a list of “Nebo Babies Up and Coming”. Eve Jobs, model and daughter of Steve Jobs, and Bill Gates’ daughter Phoebe, influencer, activist and student at Stanford University, were also on the list.
But technology’s contribution to this “Baby Sky” trend is not limited to the emergence of influencers with famous surnames. Instead of helping their children, some founders are given the power to give them full powers for life.
The most interesting and prestigious fields of work have always been filled with children of celebrities. Justin Trudeau, Prime Minister of Canada, was one of them, as was former US President George Bush. Family businesses, including media groups, depend on them. Connections, wealth and knowledge of the field provide huge advantages.
Technology is one step ahead. WeWork founder Adam Neumann was more explicit than most when he told employees that he wanted his children to become the coworking company’s moral compass. But the collapse of WeWork put a stop to that. Given that all of Newman’s children were under the age of 10 at the time, they probably didn’t care. If WeWork had been listed when Newman wanted it, he would have had the means to one day hand the company over to his children.
The way it works is with so-called dual class shares. IPO tech founders love dual-class stocks. The structure means that even if they have a relatively small number of shares, they can retain majority voting rights. They can continue to run the company as they wish, regardless of shareholder sentiment.
Dual-class shares are the reason why no one can oust Mark Zuckerberg as CEO of Meta, no matter how low the stock price falls. His shares have more voting power than anyone else’s. From time to time, other shareholders vote to cancel the majority shares. And since only Zuckerberg’s vote counts, the vote never produces a result.
Venture capitalist Bill Gourley described the stock as an indicator of investment avoidance, giving entrepreneurs the power to ignore investors. However, investors have been so eager to buy fast-growing tech stocks that they have embraced this power differential. When social media company Snap went public, founder Evan Spiegel convinced the public to buy non-voting stock. Together with his co-founder, Spiegel still controls 99 percent of the voting power of the outstanding shares. Whatever they say is valid.
Unless the dual-class shares have a sunset clause that one day reverts them to ordinary shares, the power is permanent. Former Securities and Exchange Commissioner Robert Jackson wrote, “Asking investors to trust corporate ownership forever goes against our values ​​as Americans.” Or, as The New York Times put it, “You can’t kick out Mark Zuckerberg’s kids.”
Research by the Securities and Exchange Commission found that after seven or more years of listing, companies with permanent dual-class stock underperformed. However, the founders continue to strive for enjoyment. Jack Dorsey blames his inability to run Twitter the way he wants on not owning it. In the first half of 2022, 17 percent of companies that joined U.S. markets had unequal voting rights, according to the Council of Institutional Investors, which represents large pension funds. Half did not pass a sunset clause. If Elon Musk takes SpaceX public, expect him to support large, permanent voting rights. Perhaps one of his ten children is about to inherit.
Turning the tech industry into a family-run chain of companies doesn’t fit with its vision of itself as meritocratic. Long-term continuity of ownership can increase flexibility. But in public companies, the choice of family members to run things is viewed with suspicion.
The assumption is that relationships exceed potential, leading to the wrong people in important positions. Take for example Heather Cho, former airline CEO, daughter of the company’s chairman. Her 2014 attack on flight attendants who served her walnuts in a bag instead of a bowl sparked a debate about the power of “royal” families in Korean companies.
Technology is still a fairly young industry. Perhaps the children of successful founders do not intend to start new families. But if they start families, they should take note of the lessons they learned from the children of Hollywood celebrities. Talent and humility help avoid accusations of undeserved privilege. No one criticizes Billie Lourd, daughter of Carrie Fisher and granddaughter of Debbie Reynolds. Complaining turns you into a villain. Johnny Depp’s daughter, the model Lily-Rose, tried to answer the idea that her family played a big role in her success. The result was an article that went viral on the Internet titled “What do Heaven Babies mean? And why are they so easy to hate?”.