Super Voting Stock: What You Should Know

Clients often ask us about super voting stock. Sometimes founders consider this at incorporation, out of concern that, as they grow their business and issue stock to investors, employees, and advisors, their voting power will be diluted. Later-stage private companies contemplating a potential IPO may also consider super voting stock as a way of ensuring continuity of voting control even as shares of the company’s stock are offered to the public.

How Super Voting Stock Works

The basic structure is for certain stockholders to receive a separate class or series of shares that have multiple votes per share. Often, the super voting shares convert into single vote shares if they are transferred, with some limited exceptions (such as estate planning transfers). To illustrate how super voting shares work, we will use the following simple cap table:

In the example above, while the founders hold 45% of the company’s outstanding stock, a sizable position, that is not enough to control a stockholder vote.  While they could put voting and drag-along agreements in place, those are unusual prior to a preferred stock funding round and founders would generally prefer not to have to enforce them against employees.  With super voting stock, Founder 1 and Founder 2 can issue themselves Series B Common Stock, each of which has multiple votes per share.    All other employees and service providers will get Series A Common Stock, with 1 vote per share.  This is commonly referred to as a “dual class” or “super-voting” common stock structure.  If in the above example the founders have 10 votes per share, the voting power will look like this:

Super Voting Stock at Incorporation

By issuing themselves super voting stock at incorporation, the founders can maintain voting control while still giving equity to employees.  The challenge arises when the time comes to raise money, especially from VCs and other institutional investors.  If things are going well, investors may agree to a high valuation and other company-friendly terms.  But early on, they are unlikely to invest in a structure where one or two unproven founders completely control the company’s destiny.  As a result, we often see super voting common stock structures unwound at the first round of VC financing, which adds time and expense to the transaction.  Having this structure in place in an early stage company may even scare off investors who don’t want to engage with what they may, rightly or wrongly, think is an arrogant founding team.  There are of course exceptions to this, typically with successful repeat founders.  When advising founders, we usually walk them through this scenario and the end result is that very few companies implement super voting stock structures when they are formed.

Super Voting Stock for Later-Stage Companies

There are a number of high-profile public tech companies with super voting stock. With few exceptions, those structures have been implemented later in the company’s lifecycle.  After the company has become successful and the founding team has proven themselves to be “visionaries,” investors may be more than willing, perhaps even enthusiastic, to implement super voting stock.

The most common way to implement super voting stock is to do so in advance of an IPO, sometimes a year or so before, but very often days before. The super voting shares are given to all pre-IPO holders and the single vote shares are sold to the public in the IPO.  When pre-IPO holders start selling their shares to the public, those shares automatically convert from Series B (super vote) shares to Series A (single vote) shares.  The result is that, as the shares that are sold convert from high-vote to low-vote stock, the largest pre-IPO holders who do not sell shares after the IPO will see their voting power increase, and thereby potentially control or significantly influence, any stockholder vote. Sometimes the structure will include a “sunset provision”, which ends the super voting structure after a set time period or upon certain events.

Implementing Super Voting Stock

When the Board and management team considers implementing super voting stock, they should very carefully consider their fiduciary duties and the justification for the structure.  While these super voting structures can be beneficial, they have also been the subject of significant investor scrutiny and stockholder litigation.  It is crucial that you consult experienced legal counsel before implementing super voting stock.