As the calamities amass at Uber, many people — including me — have called for new leadership. Usually, the job of hiring and firing a CEO falls to a company’s board of directors. Yet in a March 21 phone call with the press, board member Arianna Huffington said that Uber’s board had not even discussed the matter. They had no reason to. At Uber, like at many of tech’s hottest startups, the board has little influence over who fills the top job. The only person who can decide Uber needs a new CEO is its cofounder and current CEO, Travis Kalanick.
That’s due in part to the dual-class share structure that savvy tech founders have come to embrace in recent years. Essentially, in one class, a share carries one vote; in the other class, shares come with ten votes each or more. These super-voting shares allow founders and some early investors to maintain control over decisions the company makes, even if their ownership in the company is significantly reduced. Founders increasingly pair this strategy with smart management techniques when setting up a board to guarantee control in perpetuity.
According to Uber’s articles of incorporation, the company has 11 board seats, nine of which carry super-voting shares. As of now, the company has filled only seven of those spots. Two outside investors hold super-voting seats. The others fall to Kalanick and two of his allies: Garrett Camp, a cofounder who is a non-executive chairman of the board, and early employee Ryan Graves. Kalanick has chosen to leave four super-voting seats empty, according to The Information. Were board members to counter Kalanick, he could simply fill the empty seats.
This degree of control is not uncommon for the unicorn startup in 2017 — but it is a new phenomenon in tech companies generally. Less than two decades ago, founders were more likely to find themselves at the mercy of their investors and other board members. Conventional wisdom held that startup CEOs should make way for a professional CEO as a company grew. When investors negotiated investments, founders gave up portions of their stakes within companies, and by the final rounds, they often no longer controlled the board. Founders who were not performing could get the boot. Thus in 1985 when Steve Jobs clashed with John Sculley, Sculley brought the disagreement to the board, which authorized him to fire Jobs.
Alphabet *née-*Google’s founders, Larry Page and Sergey Brin, were the first to introduce dual-class share structures to tech, shortly before the search giant’s 2004 initial public offering. Many other industries had embraced the idea over the years to help founders maintain control over their companies. The Ford family, for example, controls 40 percent of shareholder voting while owning roughly 4 percent of the company. It’s a popular technique among media companies like Comcast, News Corp and The New York Times. Page, Brin, and then-CEO Eric Schmidt felt that doing so would give them the authority to make big bets even as their ownership stake in the company shrank.
The more recent era of obsession with total founder control may have Sean Parker to thank for its rise. The Napster founder was a trusted advisor to Mark Zuckerberg in his earliest days as an entrepreneur. Parker had learned the hard way about losing control of a company: In addition to Napster, he cofounded the online address book Plaxo, and then was fired by his investors. It left him emotionally scarred, and he set about ensuring this didn’t happen to Zuckerberg. When the Facebook founder took his first infusion of venture capital in 2005, Parker made sure Zuckerberg maintained control of two of the five board seats; Parker got one. When Parker later left the company, he passed his seat to Zuckerberg, giving the young founder a vice grip on Facebook’s future. What’s more, before Facebook went public, Zuckerberg followed Alphabet’s lead, setting up a dual-class share structure that allowed him 60 percent of the vote at the company, despite the fact that at the time it went public, he owned just more than a quarter of the shares.
This trend was amplified when Andreessen Horowitz exploded onto the investing scene in Silicon Valley. In July 2009, when Marc Andreessen introduced the firm that he and Ben Horowitz were launching, he wrote: “We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but most of the great companies in our industry were run by a founder for a long period of time, often decades, and we believe that pattern will continue.” It was great marketing that made the firm popular initially among young founders in a crowded marketplace: The message was, “We don’t intend to fire you.”
By then, it was commonplace for internet startups from Groupon to Zillow to set up similar dual-class structures in the run-up to their initial public offerings. In 2011, when social-gaming company Zynga went public, founder Mark Pincus took it to the extreme, establishing a second class of shares in which every share commanded 70 votes, prompting the Wall Street Journal to dub his shares “extra-super-voting.”
Startup founders have been able to do this partly because money has been easier to come by in recent years. As interest rates fell, investors came rushing to Silicon Valley to stash their cash in startups, which held the prospect of greater returns. Prominent investors like Russian billionaire Yuri Milner made sizable investments without taking board seats, redefining what it meant for investors to be “founder-friendly.” Founders of the most in-demand companies therefore have had more negotiating power. They’ve often used it to establish firmer control earlier and earlier.
There is perhaps no greater example of this than Snap, the Los Angeles-based company founded by Stanford buddies Evan Spiegel and Bobby Murphy. The two cofounders have complete voting control over Snap. Spiegel and Murphy designated super-voting shares that left them with about 70 percent of the votes, with early investors controlling the remaining 30 percent. (Were they to disagree today, they’d land in a deadlock. Therefore, Snap granted a performance stock award to Spiegel to be paid out over three years. After this, Spiegel will have total control.)
Spiegel and Murphy took control one step further. When the company went public on March 2, it issued a third class of shares that had no voting rights at all. There’s precedent for this third class: Both Alphabet and Facebook issued non-voting shares several years after they went public. But in each case, the company made some voting shares available. Maybe public shareholders couldn’t sway the company’s decisions, but they could weigh in. By contrast, right from the start, Snap gave public investors no say whatsoever. Meanwhile, Spiegel and Murphy, as Berkeley law professor Steven Davidoff Solomon points out, control the company forever.
There’s little doubt that total founder control can lead to more radical innovation. The road to failure in Silicon Valley is littered with companies that were cut off from their irascible-but-visionary founders. (Look at the fate of BitTorrent, whose founder Bram Cohen had no authority over the company he birthed. Consider that Apple took off when Jobs returned.) And it allows founders to make longterm decisions for their companies without the inevitable distraction that public markets bring.
Not surprisingly, this trend is not well-loved among many defenders of good corporate governance. It concentrates power in a way that can, in its extreme, be damaging to consumers and regular-jill investors. Detractors complain that it can insulate bad managers from the discipline of the market, causing the company to lose value over time.
Which brings us back to Uber. At this very moment, the company is facing a jumble of crises stemming from poor leadership. Kalanick has allowed for a toxic bro culture to emerge in which a female engineer came forward with a damning account of sexual harassment and discrimination. He has been caught on video berating an Uber driver. On his watch, Google’s self-driving car unit sued Uber, alleging that the company had stolen its ideas. It was revealed that Uber used software to evade regulators. Several senior executives have left. Yet thanks to the powerful control Kalanick has established over his board, he is the only leader who can decide how to reverse the company’s epic string of errors.
Ultimately, that’s the challenge with super-votes: The argument for allowing a small set of founders complete control over their boards is the same one to be made for enabling benevolent dictatorships. Benevolence, however, does not come with a permanent guarantee.
