Lyft Going Public: The Dual-Class Share Dilemma : The Indicator from Planet Money All shares of stock are not created equal. Stock can come in different classes now: Class A, Class B. Some of this stock comes with superpowers... and some of it comes with almost no power at all.
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Lyft Going Public: The Dual-Class Share Dilemma

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Lyft Going Public: The Dual-Class Share Dilemma

Lyft Going Public: The Dual-Class Share Dilemma

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(SOUNDBITE OF MUSIC)

STACEY VANEK SMITH, HOST:

Buying stock in a company - you are essentially buying a little piece of that company, a share of it. And you get certain privileges with that share of stock.

PADDY HIRSCH, HOST:

The company has to answer to you - sort of.

VANEK SMITH: Kind of.

HIRSCH: You get to vote on some of the company's actions and on who gets elected to a company's board of directors.

VANEK SMITH: And this makes sense. Right? I mean, the company took your money and now gives you a little bit of ownership. That way, if the company's going off the rails or some crazy CEO is making terrible decisions, the shareholders can step up, exercise their power and get him ousted. You know, as a shareholder, you paid for that power.

HIRSCH: But...

VANEK SMITH: But...

HIRSCH: But not always. See; these days, you have to read the fine print when you buy a stock. Actually, you should always read the fine print in everything. But...

VANEK SMITH: No one reads the fine print.

HIRSCH: Well, you should because these days, some stock comes with super powers.

VANEK SMITH: Oh.

HIRSCH: And some stock comes with almost no power at all.

VANEK SMITH: It all comes down to class.

HIRSCH: How very British of you, Stacey.

VANEK SMITH: (Laughter) This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

HIRSCH: And I'm Paddy Hirsch. Today on the show, different classes of stock - how they work, why they exist and the growing backlash against them.

VANEK SMITH: (Singing) Dun dun dun (ph).

(SOUNDBITE OF MUSIC)

VANEK SMITH: The rideshare company Lyft is getting ready to go public. You will soon be able to buy shares of Lyft. The company is busy filing all kinds of papers. And as part of that, they announced that they are planning to issue two kinds of common stock.

MATT LEVINE: They have class A and class B.

VANEK SMITH: Matt Levine is a columnist at Bloomberg Opinion.

LEVINE: As is often the case, the A is the worse class of...

VANEK SMITH: Really?

LEVINE: Oh, yeah.

VANEK SMITH: It's just a euphemism...

LEVINE: Yeah. Well...

VANEK SMITH: ...To make people feel better.

LEVINE: ..It's like class A is the normal one. And then class B is the weird one.

VANEK SMITH: The stock you buy on your E-Trade account? Class A stock - it's your plain vanilla stock. Class B stock - well, no difference really on the face of it - usually worth the same price, part of the same company but one key difference.

LEVINE: What it is is class A stock has one vote per share. And class B stock has 20 votes per share.

VANEK SMITH: In the case of Lyft, one share of class A stock gets you one vote. And one share of class B stock gets you 20 votes.

HIRSCH: Twenty votes - and that is today's INDICATOR - 20. That is the number of votes a single share of Lyft class B stock will get you.

VANEK SMITH: Who would get a B class stock?

LEVINE: The founders, usually.

HIRSCH: In the case of Lyft, co-founders Logan Green and John Zimmer - and nobody else.

VANEK SMITH: So what is up with these class B shares? Why would the founder of a company do this?

LEVINE: It used to be that the way you sold stock was, like, you had to give up voting control of your company. But it's not what he wants. Right? Like, he wants to keep control of his company. And it turns out the stock market is willing to give him money, you know, for stock without demanding control of his company, and so he takes it. Like, that's the deal he takes.

HIRSCH: So back in the day, you took your company public. You sold shares to the public. And there was this tradeoff. On the one hand, you get all this money.

VANEK SMITH: On the other hand, you give up some control of your company so if the shareholders, you know, did not like what you were doing, they could vote you out. You could be out on your ear. Also, if you wanted to do something fancy with the stock, they could stop you.

HIRSCH: So CEOs, especially tech CEOs, started using these class B shares to create stock with this super voting power, giving themselves a ton of votes so that they can maintain control of the company. They get all the money, and they keep all the power. It's like a win-win.

And in this situation, the power never trickles down to the people. If the founders sell their class B shares, the buyer of those shares does not get that 20-vote deal. The shares usually convert to Class A shares, a crummy single vote. So why would investors put up with this?

VANEK SMITH: I asked Matt Levine this question. And he said there were a couple of main reasons. The first is that these companies were just so hot. People wanted a piece of them so badly, an investor said OK. And they surrendered their usual rights.

HIRSCH: But there was another reason. A lot of investors started to see it as a plus. When Facebook went public, CEO Mark Zuckerberg and a tiny group of insiders got a ton of these class B superhero shares, which essentially meant that Mark Zuckerberg had complete control of Facebook. And when the company went public, the wimpy class A shares traded really, really well. They were super popular. But Mark Zuckerberg's outsized power also ended up paying off for investors.

LEVINE: Facebook is a good example of the success of this. Mark Zuckerberg did a lot of moves that were kind of - that kind of looked like, you know, weird corporate governance. Like, he just went and bought, you know, Instagram or whatever with, like, relatively little oversight. It just sort of felt like a sort of company that was not, like, run by best principles of corporate governance necessarily. And it turned out to be wildly successful for shareholders, and they made boatloads of money - right? - because he actually was good at it.

VANEK SMITH: Matt says a lot of investors - especially investors in tech companies, you know, with these celebrity genius inventor CEO types - actually started to really like the fact that shares of stock came with no voting muscle. It became kind of like a selling point. Like, don't worry. No schlubby, small-minded investor is going to step in and thwart, you know, the genius's vision.

LEVINE: The pitch is - this is actually - adds value.

VANEK SMITH: It's protecting your investment in a way.

LEVINE: Yeah, this is protecting your investment because, like, what you're really signing up for is Mark Zuckerberg. And the only way to make sure that you're getting Mark Zuckerberg is to give Mark Zuckerberg all the votes.

HIRSCH: Google, LinkedIn, Groupon - they all did it. But when Snapchat went public, Matt says that was kind of the peak for class B shares.

LEVINE: Snapchat has an even weirder version where public shareholders have no votes at all. And...

VANEK SMITH: Whoa.

LEVINE: ...Only the founders have any votes.

HIRSCH: Hey - why not? Let the suckers buy the shares and not get any voting rights.

VANEK SMITH: That - Snapchat.

This moment, though, is when the markets kind of struck back at the whole class B shares idea. The keepers of some of these big indexes like the S&P 500 decided enough was enough. They said, we are not going to list companies that have so-called dual-class shares, and they excluded Snapchat.

Now, this was a big deal because of index funds. Now, those are funds that are pegged to an entire index, for instance, the S&P 500. So if the S&P 500 goes up, the index fund goes up. And if you have money in a 401(k), a lot of that is probably in index funds. We are talking trillions of dollars. And these index funds will not invest in your company if it's not listed on the index. So getting excluded from an index like the S&P 500 means that you are leaving a lot of money on the table.

But the indexes were like, OK. Listen. We turned a blind eye to Facebook and Google. But Snapchat? You've gone too far. You want the money? You cannot keep all the power, too. This is a breakdown of the whole system. You want to take people's money? You have to answer to them.

HIRSCH: And when Matt Levine heard this, he thought - well, this is it. Dual-class shares are over. Their time has come to an end.

LEVINE: If you'd asked me a year ago, I would have said - well, the fact that the indexes are cracking down is, like, a really bad signs for the continuing viability of this. But nope, turns out it's not (laughter).

HIRSCH: Along comes Lyft. It decides no index funds for us, but so be it. This probably means that Lyft won't ever make it onto the S&P 500 index. But they did this anyway. They said, we want control so much that we're willing to give up this. A lot of money.

VANEK SMITH: A lot of money.

HIRSCH: The dual-share model - class A and class B shares - not dead yet.

LEVINE: This is extremely popular and becoming even more popular among tech founders. It's extremely unpopular and becoming more unpopular among big public investors.

By my best detection (ph), that's why the indexes are coming down - because the public - because it's becoming more popular, public investors are, like, every tech company that comes to market wants that dual-class stock. And it's terrible, and we hate it. Hence, we've got to do something about it. When it was like one or two - when it was, like, Facebook, it's like fine; whatever. When it's every company, it becomes frustrating for public investors.

VANEK SMITH: But if your stock is hot enough and if you are enough of a cult of genius techie type, you might just be able to have your company go public and control it, too. And in fact, there has been such crazy demand for shares of Lyft even though they're not available yet...

HIRSCH: And the company's not making money.

VANEK SMITH: ...And the company is actually losing money - in spite of the fact it doesn't make anything - that there's speculation that when the company goes public, it will actually exceed the $23 billion valuation that it put on itself - $23 billion (laughter).

HIRSCH: I think this is called having your cake...

VANEK SMITH: Oh - and eating it, too?

HIRSCH: ...And eating it, too.

VANEK SMITH: Yeah.

HIRSCH: Yes.

(SOUNDBITE OF MUSIC)

VANEK SMITH: This episode of THE INDICATOR is produced by Darius Rafieyan. Our intern and fact-checker is Willa Rubin. And THE INDICATOR is a production of NPR.

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