Quick facts
- What it does: separates voting power from economic ownership
- Statutory basis: 8 Del. C. § 151(a)
- Common ratio: ten votes per insider share against one for the public
- Also possible: shares with no vote at all
- Main cost: index exclusion and investor resistance
Dual-class stock means a company has more than one class of common stock with different voting rights. Founders and insiders hold the class with extra votes. Public investors hold the class with one vote, or sometimes none.
The result is that ownership and control stop being the same thing.
In plain English
Normally, buying half a company's shares buys half the votes. Dual-class breaks that link. A founder can sell most of the economics of the business to public investors while keeping the ability to decide everything.
If you have wondered how a founder holding a small minority of a public company still controls it outright, this is the answer.
What the law allows
Delaware's default is one vote per share: "each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder," unless the certificate of incorporation provides otherwise.2
The permission to provide otherwise is broad. A corporation may issue one or more classes or series, and those "may have such voting powers, full or limited, or no voting powers," as stated in the certificate of incorporation.1
"Or no voting powers" is doing a lot of work in that sentence. Delaware permits a class of common stock that carries no vote whatsoever, and companies use it.
What this looks like in practice
Snap Inc. is the clearest published example, and its own annual report describes the structure plainly: "Class A common stockholders have no voting rights, Class B common stockholders are entitled to one vote per share, and Class C common stockholders are entitled to ten votes per share."3
Class A is what the public bought. It carries nothing.
The filing states the consequence without softening it. The co-founders "control over 99% of the voting power of our outstanding capital stock, which means they control substantially all outcomes submitted to stockholders," and it goes on to warn that this "concentrated control may result in our co-founders voting their shares in their best interest, which might not always be in the interest of our stockholders generally."3
That is a company telling its own investors, in a required filing, that their votes do not exist.
What it costs
Control of this kind is not free.
Index exclusion. Snap discloses that exclusion from certain indexes "may limit the types of investors who invest in our Class A common stock and could make the trading price of our Class A common stock more volatile."3 Index funds that track an index which excludes non-voting shares simply cannot buy them, which removes a large and permanently patient class of buyer.
Reduced disclosure obligations, in a way that cuts against holders. Because the Class A stock is non-voting, the company notes that it and its stockholders are "exempt from certain provisions of U.S. securities laws," which "may limit the information available to holders."3 Rules built around soliciting votes do not apply when there are no votes to solicit.
Investor resistance. Some institutions decline these structures on principle, and others price them.
Sunset provisions
The common compromise is a sunset: the high-vote class converts to ordinary stock after a fixed period, or when the founder's holding falls below a threshold, or on death or departure. Transfer-based conversion is near universal, and it is why these structures rarely survive the founder selling out. Snap's own Class B shares "generally convert into shares of our Class A common stock upon transfer."3
A sunset makes the structure a bet on a specific person rather than a permanent feature of the company, which is a materially easier proposition for investors to accept.
Why it is the strongest takeover defence
A poison pill can be redeemed by a board the acquirer replaces. A staggered board delays that replacement but does not prevent it. Both are obstacles that a determined bidder can eventually clear by winning votes.
Dual-class removes the votes. There is no proxy fight to run when the shares that decide the outcome are not for sale, and buying every publicly traded share would still not deliver control.
It is the only structure on this site that makes a hostile takeover arithmetically impossible rather than merely expensive.
What this means for a founder
You do not need a public listing to use the idea. Multiple classes of stock with different voting rights are available to any Delaware corporation, and the same section of the statute governs both cases.
In practice, though, most private-company control is not achieved this way. It is achieved through board composition and protective provisions in the financing documents, which is where the real decisions sit. Introducing a high-vote founder class at a priced round is a hard negotiation, and investors will read it as a statement about how you intend to handle disagreement.
The honest way to think about it: dual-class is a commitment device that says disagreements will be resolved by you. That is genuinely valuable when your judgement is the asset, and it removes the mechanism that would correct you when it is not.
Related reading
- Poison Pill covers the defence dual-class makes unnecessary
- Proxy Fight covers the contest dual-class forecloses
- Staggered Board covers the slower alternative
- Cap Table covers where multiple share classes are tracked