Class A and Class B Share Structures
Capitalizing on a new company can be a challenging process. The founders may lose control of their intellectual property if too much equity is distributed. On the other hand, if insufficient funding is secured, there’s a higher likelihood that the company may fail from lacking resources.
What Is Dual Class?
The creation of two distinct classes of equity shares is one common strategy for selling stock during the startup stage of a business. One class of shareholders (often “Class A” shareholders) receives excessive voting influence under a dual-class system. So, by selling stock to a concentrated voting block of owners whose judgment is trusted, founders can maintain control over their businesses. Class B shareholders, who nonetheless provide the money necessary for a company to succeed but have fewer voting rights, can buy additional shares. This enables the company’s founders to maintain control over management and overall strategy.
Of course, employing a dual-class shareholder structure could have drawbacks, just like anything else in life. Without any limitations on future decision-making powers, some critics contend that Class A shareholders can grow to be so powerful that their poor actions may harm the company. This is crucial. Disputes with these Class A stockholders are another possibility for founders. With their significant voting rights, Class A shareholders frequently win in disagreements with the company’s founders when they have differing views about the direction the business should take. Sometimes the founders’ management roles may even be subject to a vote for removal by the Class A shareholders.
Why Use a Dual-Class Structure?
In what circumstances thus should founders designate a dual-class shareholder structure? When deciding exactly who should have additional voting rights, exercise extreme caution. To guarantee that family members maintain control over the company, several family businesses grant additional voting rights to family members. The Ford family has kept 40% of the voting rights in Ford Motor Company while owning only 4% of the equity.
Additionally, some supporters argue that founders will have a clearer vision for a company’s long-term success. Frequently, shareholders are more focused on their quarterly payouts than on strategies for the business’s long-term growth. The company’s focus can be shifted from short-term profits to the sustained success of the company for years to come when founders and trusted managers retain a larger percentage of voting rights.