Tech founders giving up control over their firms

For years, control was a way to protect themselves from pesky investors

For more than a decade, some of the best known technology companies, including Google, Facebook and Snap, have sold shares to the public while maintaining a corporate structure that allowed their founders to keep tight control over their companies.

For Silicon Valley entrepreneurs, it was a way to protect themselves from pesky investors interested in short-term gains, even as shareholder advocates blasted the arrangements for creating unaccountable leaders. Now Zynga, a once high-flying maker of popular internet games such as FarmVille and Words With Friends, has taken the unusual step of scrapping its founder-friendly structure — a change that could make it easier for the company to sell itself down the line. The founder-empowered structure at the heart of many tech companies is known as a multiclass stock structure, under which those who started the company own a certain class of stock that gives them outsize voting power even after it goes public.

At Zynga, Mark Pincus, the company’s founder, has now converted some of his shares that carry more voting clout — known as Class B and C shares — into common Class A shares. The conversion reduces his overall voting power at Zynga to about 10 percent from about 70 percent. Mr. Pincus will not see any change in his economic interest in the company from the conversion.

The change comes as Mr Pincus and his wife, Alison Gelb Pincus, are going through a divorce.

Dual-class voting structures have been around for decades and have been especially popular at media companies, such as News Corporation and The New York Times Company.

Many prominent tech companies have turned to them as well, starting with the initial public offering of Google in 2004. Since then, Facebook, Zynga, Snap and a variety of others have followed suit with similar structures. As a result, shareholder meetings for some of the world’s most valuable companies — including Facebook and Alphabet, the holding company that now owns Google — are mostly for show. Shareholders propose and vote on resolutions even though the founders have the only votes that matter.

The vast majority of companies that go public have a single class of stock, where one share equals one vote. About 81 percent of companies that went public last year had single-class arrangements, according to the Council of Institutional Investors, a nonprofit association of pension funds and other large investors.

Charles Elson, a corporate governance professor at the University of Delaware, said that in his 20 years of tracking issues around multiclass stock structures, Mr Pincus was the first public company executive he could recall who voluntarily reduced his voting power so dramatically.

Multiclass structures are bad for ordinary investors because they make founders unaccountable, he added. “If a CEO does a poor job, he’s not going to fire himself,” he said. “The problems it creates far outweigh any benefits.”

Some recent studies, however, have suggested that companies with multiclass structures have outperformed companies with a single stock class. A report last month by the lawyer David Berger and Prof Laurie Simon Hodrick of Columbia Business School concluded that there are benefits to multiclass structures, including limiting pressure from institutional investors, which own the majority of public shares. The authors said that calls to limit multiclass structures were premature.

In response to some of the criticism of multiclass structures, more companies are going public with provisions that automatically convert their shares to a single class after a period of time, anywhere from five to 20 years.

Mr Pincus said Zynga’s multiclass share structure provided his company with “air cover” during several difficult years after it went public at the end of 2011. The company originally made games that people played on Facebook through desktop web browsers, but its business was upended by the surge of mobile gaming on smartphones.

Zynga gradually focused on mobile games, but its stock has languished even as it has mounted a turnaround under a new chief executive, Frank Gibeau. The company’s shares closed at $3.64 on Wednesday, far below the $10 public offering price. Zynga also announced it had swung to a profit of $5.6 million in the first quarter from a loss of $9.5 million a year ago.

Mr Pincus said he intended to devote more time to investing in startups. Giving up his control of Zynga, Mr Pincus said, will “create more space between me and the company whenever I go launch new products.”