Zynga Inc. is revamping its stock structure to grant the shares owned by Chief Executive Officer Mark Pincus 70 times more voting power than shares sold in its planned initial public offering.
The board approved three tiers of stock, giving each one of Pincus’s shares 70 votes, up from 10, according to a document obtained by Bloomberg. Pre-IPO investors and other current holders will get seven votes a share, up from one. Public investors will get one vote for each share.
Pincus would get more power than counterparts at other public technology companies. The structure confers more voting ability on the CEO than LinkedIn Corp. and Zillow Inc., which offered certain shareholders 10 times more votes than public investors in IPOs this year. Public holders of Google Inc. (GOOG), which sold shares in 2004, got one-tenth the voting heft of stock held by co-founders Larry Page and Sergey Brin.
“Zynga has invented something new,” said Lise Buyer, a principal at IPO advisory firm Class V Group in Portola Valley, California, who was an adviser for Google’s public offering. Having three tiers of stock is “unprecedented” for technology companies, she said.
The move may be aimed at keeping too much voting power from a large number of shareholding staffers, she said.
“Maybe there are so many early employees that even 10-to-1 would put the ultimate decision power in the hands of too large a group of employees or investors,” she said.
Shareholder Influence Dilution
Multiple stock classes can dilute the influence of public investors, said Greg Taxin, the former CEO of proxy advisory service Glass Lewis.
“In other industries, we see the collapse of these structures,” said Taxin, now a principal at Spotlight Capital Management in New York. “It’s only because the founders of these new Internet companies believe they can do no wrong and everybody else is desperate to invest alongside them that they can get away with this.”
Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to comment.
Zynga asked current shareholders to agree to the new stock structure by Sept. 2, according to a legal contract distributed by Deputy General Counsel Karyn Smith last week. If approved, the new structure would take effect “in connection with the proposed IPO,” Smith said in documents obtained by Bloomberg.
Pincus, who founded Zynga in 2007 and has navigated the startup’s growth into the biggest maker of games played on social-networking websites, is the largest shareholder. He has a 16 percent stake after selling stock valued at $109.5 million, according to U.S. regulatory filings.
Before this month, 2011 was on course to be the biggest year for IPOs since 2007. Then Standard & Poor’s cut the U.S. credit rating on Aug. 5, leading to a surge in market volatility. The Nasdaq Composite Index moved more than 4 percent on four consecutive days, and companies such as WageWorks Inc. and InvenSense Inc. postponed their IPOs.
Zynga said in July it would seek to raise $1 billion in an IPO. The company reported net income of $90.6 million last year, its first profit. Even in the current market, the company can still have an IPO with a tiered stock plan, said Nitsan Hargil, research director at GreenCrest Capital Management LLC in New York.
“Zynga is holding the trump card here in that they do not need the IPO,” Hargil said. “This is the kind of company that the market needs more than it needs the market.”
Other companies with tiered stock have encountered resistance from investors. Last year, shareholders of Magna International Inc. voted to eliminate the dual class structure at the Canadian auto-parts maker and the power it bestowed founder Frank Stronach.
Berkshire Hathaway Inc., the New York Times Co. and Hyatt Hotels Corp. are among the businesses outside the technology industry with dual-class stock.
Social network Facebook Inc. implemented a two-tiered stock structure in 2009 to protect the voting rights of early stakeholders including founder and CEO Mark Zuckerberg. The company expects to be required by U.S. regulators to disclose financial results by April 30 if it doesn’t go public by then.
Daily-deal website Groupon Inc., which in June filed to raise $750 million in an IPO, has bi-level shares giving greater voting power to co-founders Andrew Mason, Eric Lefkofsky, and Bradley Keywell.
High demand for technology offerings such as Zynga may provide more leeway than in other industries to create tiered stock structures, said Ted Hollifield, a partner at law firm Dorsey & Whitney LLP in Palo Alto, California.
“A very special company is able to ask for special terms,” Hollifeld said.