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Facebook to Remain 'Private' in a Key Way

A lot of attention has been paid, to say the least, to Facebook’s long-awaited public stock offering, which could put a valuation as high as $100 billion on the company. For the first time, the average investor will get a chance to own a piece of the massive social network and its multibillion dollar revenue stream. In an important way, though, Facebook will remain a private company. Why? Because it is controlled by Chief Executive Officer Mark Zuckerberg through a special class of stock that gives him super voting rights. He also controls the board. In other words, you may own stock in the company, but you will have virtually no say in what will happen to it.

As described in the Facebook prospectus, new shareholders in the company, once it is publicly traded, will get class A shares that each carry a single vote. Zuckerberg and early investors own class B shares that each hold 10 votes. The co-founder and CEO has about 28 percent of this class of stock but also has voting agreements with a number of other Facebook insiders and co-founders that give him control of about 57 percent of the votes in the company.

What happens when other holders of the class B super-voting stock decide to sell shares, as some early investors will no doubt do when the company starts trading publicly? Their holdings will automatically convert to class A shares, which means Zuckerberg’s control over the voting structure effectively remains. The Facebook founder even has the right to transfer control of the company to a handpicked successor after his death.

Popular Device in Tech IPOs

Facebook is far from the only tech superstar to choose this kind of tiered structure: Larry Page and Sergey Brin retained control of Google (GOOG) after it went public by wielding super-voting shares that gave them 10 votes per share, although the two have said they will sell large chunks of their stock over the next couple of years, reducing their control. Zynga (ZNGA) also has super-voting shares that give founder and CEO Mark Pincus 10 votes per share. The founders of LinkedIn (LNKD) and Groupon (GRPN) have votes that come with 150 votes apiece.

Are multiple-voting shares good or bad? That depends on whether you believe that giving a 27-year-old entrepreneur almost complete control over the fate of a $100 billion company is a good thing or not. In terms of what is called “corporate governance,” multiple-voting shares are seen as a large risk factor, in part because of what such corporate raiders as Conrad Black have done to their companies after controlling them so completely.

Particularly in Silicon Valley, whose entrepreneurs are seen as a special breed, retaining control over a company is viewed positively. Zuckerberg has been congratulated by many insiders for managing to keep an iron grip on the company through multiple rounds of financing. The entrepreneurs’ perspective is understandable; many fear their successful companies will be taken over by venture capitalists or others who won’t hold its interests at heart.

Should a CEO Wield Total Control?

Still, when you run a public company, retaining that much control can be dangerous. In addition to controlling votes, Zuckerberg has the right to nominate a majority of the board as a result of voting agreements with other shareholders and founders. Although Steve Jobs didn’t control his Apple (AAPL) board the way Zuckerberg does, Apple’s board of directors was criticized for keeping the details of Jobs’s illness hidden from investors and for approving the repricing of options in a way that arguably went against the interests of common shareholders.

Did the kind of control that Jobs held at Apple ultimately result in incredible, world-changing products? Sure, it did. Shareholders who have seen their investments multiply a hundredfold are likely unconcerned about any board or option irregularities. Does the end always justify the means?

Selling shares to the public is supposed to grant a certain amount of responsibility to shareholders, who should have the ability to hold a company’s CEO and board accountable if decisions are made against stockholders’ interests. Controlling almost 60 percent of the votes and a board majority will let Zuckerberg do whatever he wants with Facebook; public shareholders are just along for the ride. Investors should be aware of this before they buy tickets.

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