Lyft and the Case for Founder-Led Companies

Lyft IPO: Supervoting Shares and Success

The Lyft IPO is off to a hot start, already being oversubscribed. Per Bloomberg, "Based on early commitments, Lyft executives and bankers see demand far exceeding the number of available shares, making it likely that the company will surpass the $23 billion valuation it’s seeking, said the people... if excessive demand continues, the company could decide to sell more shares or price them above the original range of $62 to $68 a share."

This demand seems to be in spite of the controversial Lyft's dual-class share structure, which will allow co-founders Logan Green and John Zimmer "to own just under 5 percent of the company’s stock but control 49 percent of the company’s votes.” Many institutional investors aren't too happy about this, yet the IPO remains oversubscribed.

However, upon further examination, we can make the argument that the demand may be because of this share structure.

Dual-class share structures are especially suitable for modern tech startups. This is because tech startups have almost inherently a powerful and active founding team. This should come as no surprise — in a small company looking to scale and change the world quickly (move fast and break things to take Facebook's once-favored slogan), a powerful and active founding team is key. Here's some more evidence: We all know the CEOs of companies that started off as tech startups such as Tesla (Musk), Amazon (Bezos), Microsoft (Gates), Apple (Jobs/Cook), Facebook (Zuck), Google (Brin/Page), and Snap (Spiegel), but does anyone as readily know the CEOs of equally large companies that did not start off as tech startups, like CVS, General Mills, Boeing, Exxon Mobil, or AT&T? The level name recognition is drastically different. And just another note — those tech CEOs also are big fans of share structures that allow them to retain control of their respective companies. Spiegel and Snap gave new shareholders zero votes. At Google, Page and Brin get "10 votes per share, public shareholders one vote per share and another class of shareholders, mostly the public and employees, zero votes." The Zucc owns 14 percent shares but 60 percent of its votes. There's a striking reason for all that.

In the world of tech startups, powerful, innovative founders provide "undeniable upside" to their companies. It takes a special type of personality (and it almost always is a strong one) to go from Zero to One and scale. Peter Thiel, one of the most successful venture investors in the world (first investor into Facebook) and a successful founder in his own right (co-founded Paypal), noted that "it’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager." When we get to the stage of looking at companies that reach the IPO stage like Lyft, the "dangerous" ones are filtered out by survivorship bias and so, when we are looking at hyper-successful tech startups that come to IPO, they are overwhelmingly founder-led, representing that "powerful" part of Thiel's quote.

It's that "powerful" leadership from a "distinctive individual" that has helped give the company "undeniable upside" and success. So it follows that that leadership should be allowed to continue as the company just starts to reach more mature stages as it IPOs. The way that this leadership is allowed to continue is through dual-class shares. It keeps the so-far hyper-successful captains in charge of the ship. 

And the results speak for themselves. Facebook, Google, Apple, and Tesla are some of the best-performing stocks in the US over the past decade. The growth of the S&P 500 in the past two years was powered hugely by tech stocks. We've seen some ridiculous headlines like "Amazon, Netflix and Microsoft together this year are responsible for 71 percent of S&P 500 returns" and "Tech stocks contributed 98% of the S&P 500’s 2018 gain." Based on this, one could even say that these founder-led tech companies are literally the heart and soul of the US economy.

There's research too. A study showed that dual-class shares have a "significant positive impact on innovation" and "have a 7% premium over single-class firms." Anchor Capital Advisors has a whole thesis on this, providing arguments and evidence of how founder-led companies have "better-aligned management incentives," stronger cultures, more focus long-term commitments, greater innovation, and more.

Studies have further shown that "the equity performance of founder-led public companies significantly outperformed benchmarks from 1998 to 2010 and dominated their peers in risk and return metrics, including rate of return, sharpe ratio, sortino ratio, alpha, active premium, information ratio, and up capture ratio."

And so, as we see in the case of the hot-topic Lyft IPO, the dual-class share structure doesn't seem to worry many people at all (unless you're an activist fund or a blood-sucking vampire squid who now finds your tentacles blocked from company management). On the contrary, investors may take it as a sign of confidence based on a plethora of empirical evidence that this kind of founder-led structure will provide them better returns. We all put our faith in Logan Green and John Zimmer, and it seems like they deserve it.