12.14.11 11:18 PM ET
Zynga's IPO Gives Founder Mark Pincus a Stock Class All His Own
Except that in his meritocracy, Pincus has created a class of stock just for himself. He’ll have 70 votes for every supershare of Zynga he owns. Other corporate insiders have been granted stock carrying seven votes per share.
And for anyone else choosing to buy a small piece of Zynga, which is slated to go public on Friday? Sorry, the roughly 100 million shares being offered to the masses don’t carry the same voting rights as Pincus’s supershares or those owned by other insiders. They’ll cost the same but provide a mere one vote per share.
In other words, Zynga, producer of such wildly popular online games as FarmVille and Words With Friends, is happy to take your money as it moves ahead with an IPO expected to raise about $1 billion from the public. It’s just not interested in giving you much of a say over how it runs what ostensibly will be a publicly owned company.
Zynga is hardly the first company to create multiple classes of stock before going public. Old-line media companies (The New York Times, The Washington Post) did it, ostensibly to insulate their editorial content from market pressures. The tech world picked up on the trend starting with Google, says Nell Minow, a shareholder activist who since the mid-1980s has been railing against companies issuing two or more classes of stock. When it went public in 2004, Google offered Class A common stock (one vote per share) to the public while reserving its Class B shares (10 votes per share) for its founders, early investors, and top management. LinkedIn, Groupon, and Facebook are among the tech companies that, prior to going public, have followed suit, creating a dual-class stock structure that gives insiders 10 votes per share.
Yet Zynga is that rare company creating an extra class of stock solely for its founder—and Pincus has gone well beyond his fellow tech moguls by saying his voice is worth 70 times that of the average shareholder and 10 times even that of other insiders. Following the IPO, Pincus will own 12 percent of the company yet control 37 percent of the vote. All told, insiders holding B and C class stock will control 62 percent of the vote.
“There’s only one reason why people go public with dual or triple classes of stock,” says Minow, who sits on the board of GovernanceMetrics International, a research firm specializing in corporate-governance issues. “They want the access to capital of a public company, but they want to maintain the control of a private company.”
Pincus, through a spokesman, declined to comment for this article, citing the SEC-mandated quiet period that precedes an IPO. But the arguments he would no doubt raise are those that Google’s founders floated back when. Creating a dual class of stock allows the company’s management to insulate itself from the short-term horizon of most investors, thereby allowing it to focus on the long term. Another factor: a company constantly answering to shareholders is one that is not as nimble as a small startup—deadly in the world of technology.
“That’s what they always say,” says corporate-governance expert Charles Elson, a law professor at the University of Delaware. “But I think this issue of long-term versus short-term success is a false one. It’s basically a way of deflecting talk of accountability. And it’s based on the assumption that you have all the answers. And nobody has all the answers.
“Maybe an entrepreneur knows best for a company initially, but not for the long term,” Elson says. “Ultimately, the accountability entailed in answering to your investors is invaluable.” A case in point, Elson says: the woes of Rupert Murdoch’s News Corp., another media company with a dual-class stock structure that is only now recognizing—after a series of self-inflicted wounds—the downside of a setup that insulates the company and its board from shareholder feedback.
A desire to have the power of a Rupert Murdoch, however, might be ultimately what is fueling Pincus’s grand power grab. After all, before he founded Zynga he blogged, “In my perfect world ... who am I kidding, in my perfect world I'm Richard Branson or Rupert Murdoch or better, [Google cofounders] Larry [Page] or Sergey [Brin], and I own a controlling share and don't waste any time buttering up board members!” That billion or so dollars Zynga is expected to raise when it starts selling shares as early as Friday offers a rich platform from which to build—and who needs pesky shareholders and others with a financial stake in Zynga to get in the way of his plans to become the tech world’s newest mogul?