Nasir and Matt talk about Google's new class of stock that has no voting rights, as well as how to bring on investors without losing equity in the company.
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business.
This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: And welcome to Episode 28.
MATT: Yeah, we’re really getting up there in the numbers. This is impressive now.
NASIR: Very good. I’m really excited for this episode today. We’re talking about classes of stock with Google.
MATT: Yeah, I’m just going to get right into this. So, this is with Google Stock and it’s kind of interesting.
You can have classes of stock as a corporation – at least as Google has it here. This is their new C class that just got issued. But the thing here is the shareholders for this class of stock are going to have zero voting rights at the annual shareholders’ meetings.
NASIR: Yeah, I mean, pretty much no rights. I assume maybe they get dividends at the least, right? But they really strip down any kind of benefit of actually owning the stock other than just the speculation of the ownership of the company and buying and selling the actual stock.
MATT: You know, the dividends is a good point. I don’t know if it even mentions that in here but, yeah, I would think they’d have to get dividends at least or else…
NASIR: I don’t know if Google issues dividends or not.
MATT: Yeah, that’s true as well.
But, anyway, this class is not voting and, you know, thinking about it more macro, if the people that had Class A shares, for example, or B, I mean, their votes really don’t matter in the whole scheme of things, especially when the main people have I think here 55.7 percent. So, they have the majority. They can still do whatever they want to do. But I guess I get the point of having these as non-voting just because they don’t want to dilute that 55.7 percent anymore but as long as they kept the majority, I don’t see what the big deal is.
NASIR: From what I was reading, the reason is that the Class A stock which is a voting stock – well, both Class A and B are voting stock – Class B is really the one that matters because each share is worth ten votes and you can do that. You can have different classes where you want to retain control. And so, even if you don’t own a majority of the company – even though, in this case, they do – your vote is the one that matters. Class A stock must be used by Google to issue to basically their employees for a stock option and things like that. You know, it makes sense. If they want to keep doing that, eventually, they’re going to be diluted to a point where they don’t have control. I guess, in theory, that’s the perspective that they’re coming with so that they don’t have to worry about this kind of issue.
But I think it’s an important lesson for other companies because different classes of stock is not only in corporations. You can have different voting rights and different levels of interest and other entities as well – whether it’s a limited partnership or LLC.
To me, it’s a main point of how to retain control and to give different rights to maybe investors or non-investors or founding partners versus later employees.
MATT: The question of the week here that’s coming up actually kind of deals with this as well but I did want to touch on a couple more things.
I thought it was funny how the shareholders tried to stop this or object to it and they voted. They got 180 million votes in favor of a resolution that was going to call for equal voting rights which is by far the most they’re had – is it triple the amount of any other measure that was voted on? But they said the majority has 551 million votes so not even close to reaching that.
NASIR: And that was just between two people – Larry Page and I forgot the other responder’s name.
MATT: That was pretty funny but, basically, the point I was making earlier was that, at the end of the day, an individual’s vote doesn’t really matter that much anyway. So, even though it’s nice to have that option, I’d much rather have an A class than C but maybe it’s people getting upset over something that’s not that significant.
NASIR: Well, what’s confusing too is that the stock symbol to trade for C is going to be the normal GOOG, right? And then, for Class A stocks, it’s a different symbol, right?
MATT: Yeah, that’s a little confusing.
NASIR: That’s not uncommon too for the public stock exchange.
But this reminds me of something else, too. We deal with this issue with our clients all the time and I personally am a big proponent of control. I really don’t like when you have like three or four people get together and they share things equally or they give everything to their employees and so forth. I don’t mind giving stock for equity incentive to employees. I understand that’s how you recruit talent. But, listen, these guys – Larry Page and his co-founder – from the very beginning, they knew that they wanted to retain control and that’s why they set this up in such a way. That’s how I would run my business and I would expect anyone else to do the same but it requires planning from the very beginning.
MATT: Yeah, we all know that you’re a control freak so that’s not surprising anyone.
NASIR: Oh, yeah.
MATT: If you owned Google, would you even let people search? I don’t know. How would that work?
NASIR: Yeah, I’d want to approve every kind of search that goes through Google.
MATT: All right. Well, let’s get to the question of the day.
“I want to provide some sort of benefit to a potential investor but I don’t want to give up any equity. Are there other options?”
This comes from an app development company in Texas.
I guess, first things first, well, I guess you’d still be giving up equity if you issued different classes of stock. Maybe that’s not the best option.
NASIR: No, yeah, I mean, it’s kind of hard to raise money without giving up equity. Besides a loan. Obviously, there is a promissory note and a potential investor really has to find some kind of upside to it. You could sell future profits, for example, in the sense that they don’t necessarily own equity but they may get a percentage of your collections and so forth. That’s an alternative that may be viable but I think that’s difficult. It seems like, if you don’t want to give up equity, there are other ways to raise money – friends and family, you could borrow some from banks and so forth. Obviously, if you’re a startup, that might be very difficult but there’s a lot of options for you, especially in the app development world. I think the investor is going to expect some equity for their investment. That’s pretty much standard.
MATT: The profit-sharing idea is good. I guess my suggestion would be – even though this isn’t kind of what they’re saying they want to avoid is giving out the equity – is just do what Google just did here with the different classes of stock.
MATT: Maybe the person who wrote this doesn’t really understand that you can do something like this where you can give out these shares but make it non-voting so they don’t really have a say in the decisions.
NASIR: Exactly. I think the real reason people don’t want to give up equity is because they’re concerned that they’ll lose control. It’s difficult and so forth. And it’s true. Once you’ve sold the equity of your company, the transaction material that goes along with that is complicated. Maybe, if you were doing it on your own for now as far as on the legal end, by this time, you really have to get an attorney because you don’t want to make any mistakes in this so I can understand that but there are a lot of options to limit control. Even in the divided and profit-sharing aspect, in a member’s agreement or a shareholder’s agreement, you can specify how dividends are going to be paid out and so forth. That’s all negotiable.
MATT: That sounds like what this person was asking. By the way, their question was they said they don’t want to give up any equity. I think that’s more they don’t want to give up any more control than they’ve already maybe given up.
MATT: I think that’s the right word they were looking for. If not, I guess they can let us know, but that’s my guess based on how the question was written.
Okay. Well, that’s our show for today.
Thank you for joining us again.
Send in your questions to email@example.com and we’ll answer them live on-air – well, live as in we’ll record it and then publish it later live.
MATT: Yeah, depending on when it is. It’s a little delayed, I suppose – varying degrees. But it’s live when we record it.
NASIR: Exactly. Well, SNL is the same way, right? I mean, Saturday Night Live, it’s recorded live but it’s not live-live.
MATT: I think, on the east coast, it might be. Maybe a ten-second delay?
NASIR: Maybe. I thought it wasn’t anymore but we’ll have our research team go on.
MATT: Well, I know they record late at night so, like I said, on the east coast, it’s live, I believe.
NASIR: Okay, by the next episode, we’ll figure that out, okay? We’ll do a quick search.
MATT: All right, cliffhanger.
NASIR: All right, have a good one, everyone!
MATT: Keep it sound and keep it smart!