In general, dual class stock structures involve stock classes that are very different from each other. The dual class stock structure of a company gives the founders and executives, who are typically the first owners of the stock, more control over the company. The founders and executives have a much greater say in the company’s management and can increase their stock holdings as the company grows.
Such a structure also offers founders and executives greater power and control over the dividend payments. The founders and executives can decide when stock dividends are paid and how much the dividends are.
Dual class stock structures can involve a series of successive tranches. A tranche is the share of stock that a set of shares is entitled to. For example, a tranche may be the number of stock shares based on each shareholder’s percentage of ownership. A series of tranches may be created to ensure that the shares are only issued to those with a majority of the shares.
The more tranches created, the more power the founders and executives have over the company. After the initial tranche, which is created to ensure a majority of the shares are owned by the founders and executives, the voting power of the shares is determined by the percentage of the shares held.
Benefits of a Dual Class Stock Structure
A dual class stock structure allows founders and executives to maintain a high control over the company. The founders and executives can control the dividend payments, which can be a valuable benefit for the first owners of the stock. In addition, the founders and executives can control the voting power of the shares.
In the case of Google, Larry Page and Sergey Brin were able to maintain a majority of the voting power in the company despite the creation of the Class C shares.
Limitations
A dual class stock structure can benefit the founders and executives of a company as long as the structure is well managed. The founders and executives control the voting power of the shares and can affect the dividend payments. However, the founders and executives cannot control the value of the company in the long term.
These stocks are not appropriate for every company. In some cases, the benefits of such a stock structure may not outweigh the benefits of a traditional class structure. For example, if a company is managed by many founders and executives, a dual class stock structure may not be the best choice.
Some companies may not want to use these stock structure because it limits the amount of capital that the company can raise. In some cases, dual class stock structures have led to the dilution of existing shareholders.
Choosing the right Structure
In some cases, a company may choose to issue a dual class stock structure to encourage a high level of employee loyalty and increase the company’s value. A dual class stock structure may also be an effective way to bypass the general public, who are not likely to vote on important issues to the founders and executives of the company.
The stock structure of a company can be a controversial choice. The founders and executives of a company usually have the most control over the company. However, this control can be a double-edged sword. If the founders and executives do not manage the company properly, it can fall into debt and experience poor performance. On the other hand, the founders and executives can bring in new talent, resulting in innovation and growth for the company.
