A time-honored strategy for entrepreneurial individuals or families to maintain control over their enterprises is to issue two classes of stock.  One will be held by the entrepreneurs, the other by the investing public.  Shares of the former type will typically have a high multiple, say 10x, the voting power of the latter.  If the number is 10x, the entrepreneurs will still control a majority of the votes even if they hold only 10% of the outstanding shares.

Hershey shares are like this.  So, too, the New York Times, News Corp, Facebook and Google.

A variant on this idea, often used outside the US, is to list and issue to the public only preferred stock, not common.  Preferreds vary.  They derive their name from the fact they have some “preference” or other over common (which are also sometimes called ordinary). It may be a higher dividend.  Most usually in the US, preferreds simply have a place in line in the case of bankruptcy in back of all creditors but just ahead of common stockholders–which, to my mind, is as small a preference as you can get.

Snap (ticker: SNAP), the parent of Snapchat, is taking this idea one step farther.  It currently has two classes of stock:  Class C which has 10 votes per share and which the company’s founders hold; and Class B that has one vote per share and which is held by key employees and venture capital investors.  Snap intends to go public by issuing Class A shares that have no voting power at all.  Third party investors will have to accept the fact from Day 1 that they will never be able to wrest control of Snap from its insiders.

Questions:

–Will investors stand for this?

–Are the A shares really stock?   …or are they a funny kind of option?

–What does this say about value investing in the 21st century?

The answer to the first question is apparently “Yes!!!”

More tomorrow.