Meaning
An equity arrangement issues two or more categories of stock with different voting rights to investors. Under a system of dual class shares, one set of holders typically possesses significantly more influence over corporate decisions than another. This structure is common in technology firms where founders wish to retain control while raising capital from the public.
Voting Power
Concentration of authority occurs when a small group of insiders holds high-vote stock while common investors hold low-vote stock. Many firms using dual class shares assign ten votes per share to the founding class and only one vote to the public class.
Market Pricing
Investors often apply a discount to the price of non-voting or low-vote equity compared to its high-vote counterpart. When a company issues dual class shares, the lack of influence for public holders is factored into the initial offering price. This gap reflects the risk that the interests of the controlling group might diverge from those of the minority shareholders.
Ownership Control
Protection against hostile takeovers is a primary motivation for implementing this capital structure. By maintaining a majority of the voting rights through dual class shares, the original owners can block any unwanted acquisition attempt. This control remains effective even if the founders own a small minority of the total economic value of the corporation.
The structure prioritizes the vision of the founders over the immediate demands of the broader market.
