Lyft's IPO Filing Shows How Tech CEOs Create Their Own Reality

Control is not just in the eye of the beholder. JL

Theodore Schleifer and Rani Molla report in Re/code:

Lyft’s two co-founders, Logan Green and John Zimmer, own 7% of the company’s stock, a meager amount that speaks to just how much money they raised from outside investors during the company’s decade-long cash burn. But they maintain close to majority control of the company thanks to a dual-class stock structure that awards them 20 votes for every one vote held by other investors. “It’s pretty egregious from a public shareholder perspective." Just like Evan Spiegel at Snap or Larry Page at Alphabet can’t be booted when things go wrong, good luck trying to change Lyft without the co-founders’ say.

You wouldn’t know that there is a growing public backlash to the power of Silicon Valley founders at companies like Facebook if you looked at the newest to-be-public company: Lyft.

Lyft’s 250-page IPO filing with the SEC on Friday, March 1, revealed a company going to extreme lengths to empower its founders and insulate them from any outside investor control, setting up a stock structure that will ensure they — like Mark Zuckerberg — will have near-total control of the company’s future.

Lyft’s two co-founders, Logan Green and John Zimmer, own about 7 percent of the company’s stock, a meager amount that speaks to just how much money they raised from outside investors during the company’s decade-long cash burn. But they maintain close to majority control of the company thanks to a dual-class stock structure that awards them 20 votes for every one vote held by other investors. Typically, dual-class voting structures have a 10-1 ratio, according to Amy Borrus, deputy director of the Council of Institutional Investors. “It’s pretty egregious from a public shareholder perspective,” Borrus told Recode.

So just like Evan Spiegel at Snap or Larry Page at Alphabet can’t be booted when things go wrong, good luck trying to change Lyft without the co-founders’ say.

That’s normal in the world of startups — after all, the founders built the damn thing — but some corporate governance critics look askance at a public company that acts like a private company. Yet this has become the new normal in Silicon Valley.

Lyft is only the latest in a string of tech companies opting for dual-class voting structures. Nearly 50 percent of recent tech listings have dual-class status, according to a December report in the Harvard Business Review.

The reasons for the rise in multiple-class stock listings is clear for the companies.

“Our nickel summary is that their growing popularity is due to the increasing importance of intangible investments, the rise of activist investors, and the decline of other protection mechanisms available to existing management such as staggered boards and poison pills,” the HBR authors wrote. “A dual-class structure, offering immunity against proxy contests initiated by short-term investors, could be optimal if it enables founder-managers to ignore pressures from the capital markets and avoid myopic actions such as cutting research and development and delaying corporate restructuring.”

The company itself determines the share structure, so there’s nothing preventing Lyft from having majority voting share. The choice might be more difficult for public market investors to stomach. Those evaluating whether to buy Lyft shares might be dissuaded by their inability to influence the company’s direction.

Lyft acknowledges as much.

“The dual class structure of our common stock has the effect of concentrating voting power with our Co-Founders, which will limit your ability to influence the outcome of important transactions, including a change in control,” Lyft’s filing told prospective investors. “Our Co-Founders, individually or together, may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests.”

That’s a long way of saying: Either you’re with Logan Green and John Zimmer, or deal with it.

Now, there are a lot of good arguments for founder-led companies, even when they hit public markets. As erratic as Elon Musk is, perhaps only he — as the person with the germinating idea — could shift the public discourse on how to power our cars. Amazon might be the most ruthless competitor in the business world today, but would the company be as driven if it were not molded every day by the values of Jeff Bezos? Bezos doesn’t have super-majority stock but does have outsized influence on the company.

Founders understand the company they built, proponents say, and can think for the long term, unlike give-me-growth-right-now investors. It’s unclear how dual-class structures affect a company’s performance: Studies have shown both positive and negative results.

Either way, Lyft has a difficult journey ahead — one that will take more than just the verve of its founders.

Lyft’s revenue grew more than 100 percent in 2018, compared to a year earlier. That’s growing faster than its losses, which grew 32 percent in that time. Still, nearly a billion dollars in net loss is a massive sum, and the journey to profit is unclear. In its initial public offering filings, the company warned, “We have a history of losses and we expect significant increases in our costs and expenses to result in continuing losses for at least the foreseeable future.”

It also has to worry about the elephant in the room: Uber.

Lyft is the first ride-hailing company to go public in the US. The company raced to go public before its chief competitor, Uber, and unveiled its IPO filing just weeks before Uber’s is expected to land.

But while the two companies have been in a public relations and price war for the better part of a decade, Lyft’s appeal to investors is that it is seen as a pure bet on the US ride-hailing industry. Uber, valued at about five times as high a price in the private markets, is a much more diverse, global business — with meaningful stakes in ride-hailing rivals in Asia and Europe, along with a blossoming food-delivery business in Uber Eats that Lyft lacks.

And Uber, which was once led by a mercurial founder, also offers something else in the post-Travis Kalanick era: no more dual-class shares.