Snowflake announced earlier this month that it would give up its dual-class shareholder structure, a corporate governance setup that often gives founders and executives superior voting rights, typically involving 10 times as many votes for their own shares as others receive. The mechanism can enable founders to maintain control despite later dilution and may sometimes even grant ironclad control to an individual in perpetuity.
For many companies, these supervoting shares represent a highly powerful tool, allowing founders to have their cake and eat it, too — to go public and receive the advantages of being a public company while limiting the power of external shareholders to influence how they run the company once it floats.
Some founders and their investors argue that these preferred shares protect them from the short-term whims of the market, but the perspective isn’t universally accepted. Dual-class shares are a controversial governance structure, and some wonder if they are setting up an unfair playing field by allowing a cabal to wield outsized power.
Why would Snowflake give up such a powerful tool a mere six months after it went public? We decided to look at the notion of dual-class shares and why Snowflake may have been willing to let them go.
Snowflake’s decision
If one of the primary purposes of dual-class shares is to consolidate CEO power, then perhaps Snowflake felt they weren’t necessary, given the history of CEO-shuffling at the company. While Snowflake’s founders are still part of the organization, they hired Sutter Hill investor Mike Speiser to be their first CEO, followed by former Microsoft exec Bob Muglia before finally bringing in veteran CEO Frank Slootman to take their company public.
Without an all-powerful CEO founder in place, perhaps the company felt that supervoting shares weren’t necessary. Regardless, Snowflake CFO Mike Scarpelli framed the move as a decision that works for all parties when he announced that his company would abandon the special shares during its earnings call earlier this month.
“Today, we announced that on March 1st, 2021, our Class B shareholders in accordance with our governing documents converted all of our Class B common stock to Class A common stock, eliminating the dual-class structure of our common stock and ensuring that each share has an equal vote. We view this as operationally beneficial to the company and our shareholders,” Scarpelli said during the call.
In the dual-class shares debate, the big exchanges should get off the sidelines
It’s difficult to know why the company would give up this powerful mechanism, but Casey Aylward, an investor at Costanoa Ventures, says that having an experienced CEO like Slootman may boost market confidence that the company can handle itself without a privileged voting structure in place.
“The Snowflake move is an indication that the board and founders together believe the company is mature enough to manage for the long term and have good governance that is accountable to all shareholders,” Aylward told TechCrunch. “It also helps that Frank Slootman is a three-time, world-class CEO that the board has total confidence in. This is also easier once the company gets through release of initial lockup so you can see in whose hands the shares end up.”
Storm Ventures partner Frederik Groce speculates that the move could be aimed at gaining market credibility, especially when Slootman already enjoys the board’s confidence. “The CEO and chairman is not a founder, and likely to be effective in his role wants to be able to be credibly seen by the markets as setting the vision and direction of the company alongside the board of directors and the broader executive team, something that might not be true in the previous structure,” he said.
Never gonna give you up
The concept of having dual-class shares should be very recognizable to anyone in the startup game. Preferred shares go to investors, while founders and employees often have to make do with common stock. The standard preferred-common divide, however, can be more focused on economic rights over outright voting control.
Hot startups, however, can demand more founder control through different share classes as they raise successive, later-stage rounds. How much control founders can assert often devolves to a question of leverage; in today’s founder-friendly market, dual-class setups have become more common. Then why did Snowflake give it up?
One reason could be that the practice has caught the attention of some major indices. For instance, the S&P 500 decided to block the admission of dual-class companies in its index. It was a big deal because many companies would love to be part of the cohort of companies, a key basket that many ETFs track.
Other possible reasons for ditching supervoting stock include the possibility of becoming more attractive to investors more generally; those betting their capital on a company’s future may be more interested in selecting companies where they can have some say. Imagine asking venture capitalists to put their funds into startups without taking board seats or receiving some portion of voting power, for example.
And there’s the simple chance that the person or persons elevated by supervoting stock as part of a dual-class setup could make poor decisions. It’s considered rude today in Silicon Valley to ever question founders. But not all founders should be in place for life, and many aren’t ready to run a company from inception through its public life. Nearly every operator is expected to have a period of time in a company’s life where they are the most effective. Founders are no different.
Given those possible benefits, are investors making demands against handing founders concrete, enduring voting control? Storm’s Groce says every case is unique, but he’s seeing a movement away from dual-class in the companies his firm invests in. And that may be in line with what we are seeing with Snowflake’s decision.
“As a general trend, we’ve seen movement away from this dual-class structure because it creates unique governance-related challenges, something every venture investor as a board member has to think about. We aren’t seeing these structures very often in enterprise software businesses, meaning if you want to look ‘standard’ in the eyes of investors — both private- and public-market investors — removing dual-class structures might make sense,” Groce said.
But not every VC is seeing that. Soma Somasegar, managing director at Madrona Ventures, says he sees the practice flourishing, especially among later-stage companies. “I would say that over the last five years we are definitely seeing more dual-class shares. It’s rare to see it in early stages of a company. You typically don’t see this feature put in until the mid- or later stages,” he said.
It’s worth noting that some experienced operators are opposed to the setup. In a recent book on the IPO process, “The IPO Playbook”, former Salesforce CFO and present-day Yext CFO Steve Cakebread wrote that “when founders take control of the voting shares, it becomes a problem for the long-term health of the company.” He added that founders “took their money off the table by selling shares,” and so they should lose “the right to control the long-term outcome of the company.”
Price of giving up power
While we see many high-growth companies doing away with traditional governance to the possible detriment of their business, if the business hits a financial speed bump, giving up that power could have real consequences.
Consider Box. In 2016, a year after the company went public at $14, it rapidly appreciated to more than $23. Later, its stock slipped to $10 per share. A Wall Street Journal article suggested the company could be ripe for a takeover bid at the time, and with a normal governance setup, that could very well have happened.
Having concentrated voting power possibly gave Box breathing room. But in 2018, the company decided to give up its dual-class structure. And the next year, activist investor Starboard Value took a 7.5% stake in the company. Today, the investing group is angling for control of Box’s board. Dual-class shares might have protected Box from the external meddling.
But should a company be able to maintain infinite protection from outside-investor input?
Groce says that it’s something that should be under discussion across the industry. “I do think a continued debate and conversation about sunsetting these structures as founders become less active within a business is a debate worth continuing to have, particularly when those businesses become publicly traded assets.”
However you look at it, Snowflake decided it was the best way for them to go. Whether other public companies join them remains to be seen, but for now, it seems like Snowflake is an outlier rather than a trendsetter.
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