The co-founders of Lyft Inc. used to own more of their company.
But over the years, as the ride-hailing app secured financing to fight for market share against rival Uber Technologies Inc., the founders’ ownership stakes were diluted, and now they own less than 10 per cent of company stock.
But no matter: When Lyft starts trading on Friday, Logan Green and John Zimmer will have a near-majority share of voting power, thanks to their “super-voting shares.”
In today’s Silicon Valley, that is hardly surprising. Lyft is emblematic of two major trends in the tech IPO landscape: Its founders will have considerable power because of a dual-class share structure, and the company is nowhere near profitability.
Put another way, regular investors have limited power to influence a company whose path to profitability is anything but a given.
The risk is right up front, in the company’s IPO prospectus: “The dual class structure of our common stock has the effect of concentrating voting power with our co-founders, which will limit your ability to influence the outcome of important transactions, including a change in control.”
Mr. Green and Mr. Zimmer – who are the company’s chief executive officer and president, respectively – will have 20 votes per share, compared with a single vote for everyone else, affording them an outsize influence over company decisions.
It’s a trend that’s picked up steam in Silicon Valley. In 2018, 13 of 38 tech IPOs on U.S. markets, or 34 per cent, had dual-class structures, according to data from Jay Ritter, a University of Florida professor who researches initial public offerings. (His data focus on major U.S. exchanges and IPOs priced above US$5 a share, among other conditions.) In 2017, 13 of 30 IPOs (43 per cent) had such structures, the highest proportion in data going back to 1980.
Several Canadian tech firms have also gone this route, including Lightspeed POS Inc. and Shopify Inc.
It’s not merely a tech situation, either. Companies in other sectors have used dual-class structures for decades. (Warren Buffett’s Berkshire Hathaway Inc. is one notable example.) If anything, the tech sector was slower to do so.
Today, many of the world’s largest tech companies have dual-class share structures, including Alphabet Inc. and Facebook Inc. Proponents argue it allows key executives to focus on a company’s long-term strategy without being dogged by quarterly shareholder scrutiny. In the case of Alphabet and Facebook, those companies have undoubtedly delivered for investors, with returns since inception that greatly exceed the S&P 500.
But they’ve also made super-voting shares “acceptable, in terms of investor complacency,” Mr. Ritter said. “Their success has made investors less skeptical about the dual-class structure.”
To that end, when dual-class companies go public, investors haven’t punished them with severe discounts in valuation, Mr. Ritter added. Likewise, investors have shown great appetite for unprofitable companies. Among tech companies that went public in 2018, 84 per cent were unprofitable over the most recent 12 months in their IPO filings, according to Mr. Ritter’s data, the highest proportion since 2000.
Lyft fits neatly into that trend, too. The company lost nearly US$1-billion in 2018 on just more than US$2-billion in revenue, and it will likely continue spending big as it competes with Uber.
That’s not an inherent problem. Certainly, many investors expect – or even embrace – tech companies that focus on growth. It’s not as if investors shied away from Amazon.com Inc. as it spent years investing in the company in lieu of turning profits.
In Lyft’s case, interest is palpable. The company’s IPO was quickly oversubscribed, and Lyft priced shares on Thursday at US$72, well above the initial target range of US$62 to US$68. That values Lyft at greater than US$20-billion, “an eye wateringly high valuation if there ever was one,” Michael Hewson, chief market analyst at CMC Markets, said in a client note.
But Mr. Hewson drew an unfavourable link between Lyft and another dual-class company: Snap Inc. The co-founders of the social-media company, which went public in 2017, own roughly 96 per cent of voting rights. Meanwhile, Snap shares have dwindled to below the IPO price. But regular investors have little recourse, given their shares have no voting rights.
“There is no reason to suppose that Lyft will be any different if it can’t start turning a profit, a goal that still seems some way off,” said Mr. Hewson, noting we could “see investors nursing heavy losses months from now if management lose the confidence of the markets.
“Call me old fashioned but I always like companies I invest in to be profitable, and the business model for these types of companies seem rather difficult to measure. Of course that probably won’t stop investors tripping over themselves and piling into the shares in the opening weeks.”
That said, if voting rights are a make-or-break issue, investors have another option: Uber.
The ride-hailing behemoth is expected to go public later this year, but will do so without dual-class shares. Before closing a multibillion-dollar investment in 2018, the company approved some major governance changes, including a “one share, one vote” structure that stripped its controversial founder, Travis Kalanick, of some voting power.
Given that, many investors may choose to ride with Uber.
Matt Lundy