Not too long ago, one of the biggest fears for someone who founded a new company was the thought of eventually losing control of their business. Very few billion dollar ideas come around too often, and when they do, the vulture capitalists are sure to follow. In Silicon Valley, the revolutionary ideas usually come from young people who have very little money. So one of the trade-offs that they face is having to give up large portions of their company in exchange for the financing needed to get the idea rolling. This is the business model of venture funds, many of whom provide hundreds of millions of dollars to startup companies in order to take an ownership or controlling stake.
One of Silicon Valley’s newest and most influential venture funds, Andreessen Horowitz, works to enable founders to stay in control of their companies. This philosophy came about when Marc Andreessen founded a company named Loudcloud with Ben Horowitz many years earlier. The venture capitalist who funded Loudcloud tried to convince Ben Horowitz to remove Marc Andreessen from the business completely. This experience eventually led Andreessen Horowitz to adopt a pro-founder philosophy with their fund.
Zuckerberg Controls Facebook
Mark Zuckerberg’s Facebook idea is a once-in-a-decade event. That makes Facebook a tempting target for vultures to take off of Zuckerberg’s hands. Cognizant of this fact, Zuckerberg set up Facebook’s stock structure to ensure that he maintains control of the company, even while not owning a majority of the shares.
Prior to Facebook going public and being listed for trade on the stock exchange, the company was very clear about its stock structure. There would be two classes of shares, with Zuckerberg owning the majority of “Class B” shares, but less than one percent of “Class A” shares. Class B shares had ten times the voting power of Class A shares, which meant that even though Zuckerberg owned only 15 percent of Facebook, he controlled 60 percent of the voting power. Between the time Facebook was listed publicly on the stock exchange in 2012 and the summer of 2016, this two class share structure governed the company’s ownership structure.
Charity and Control
Since Mark Zuckerberg has made his billions, there is not much left for him to prove in the business world. Like Warren Buffett and Bill Gates, Mark Zuckerberg is working to donate his fortune to charitable causes. This entails Zuckerberg having to sell his shares in Facebook in order to raise the cash necessary to finance his charitable foundation. The problem, however, is that the sale of shares by Zuckerberg could eventually lead to him losing control of Facebook.
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In order to prevent Zuckerberg from losing control of his company, the Facebook Board of Directors, which includes Marc Andreessen, devised a strategy that created a new class of shares. These “Class C” shares would be issued to the owners of Class A and Class B shares. This would allow Zuckerberg to sell his new Class C shares in order to raise money for the charitable foundation and still retain his Class B voting shares (and allowing him to retain control of Facebook).
This Time Lawsuit
Unlike in 2012, when the Board of Directors announced this new stock plan, this time a lawsuit was filed. A lot changed between 2012 and 2016. Facebook became a publicly traded company, so it was no longer “Mark Zuckerberg’s company”. Importantly, owners of Class A shares were now owed certain duties by the executives and the Board of Directors. These duties included making decisions in the best interests of Facebook the company, even if those decisions might be detrimental to Mark Zuckerberg, the founder.
The main objections raised by the plaintiffs in the lawsuit were that the share split would enable Zuckerberg to retain full control of Facebook even though his ownership percentage could fall to five percent. Many investors believe that it is in the best interests of a company when the amount of control parallels the amount of ownership, which was certainly not the case with the new share plan. There was also a risk that Class A shareholders could lose value in their investment because of the new Class C shares. The plaintiffs could see no benefit to them or the company for losing all this value.
In September 2017, Facebook announced that it would abandon this new plan. As a result, the lawsuit was settled, and we will never know how the Court would have ruled on the many issues raised by the plaintiffs.