Preliminary Abstract: 

Since Google’s IPO in 2004, an increasing percentage of tech companies have gone public with a dual class structure where the founders and other insiders hold high vote stock. Commentators debate whether this is a form of entrenchment that disenfranchises shareholders or a desirable practice that shields the founder’s vision from short term market pressures. Both sides to the debate assume, without further inquiry, that founders protected by dual-class stock in fact hold onto power and remain CEO long after the IPO. Existing research on dual class has largely overlooked the durability of founder control after the IPO.

To address this gap, we compile a dataset of US VC-backed firms that completed an IPO from 2002 to 2020, a period following the dotcom crash and during which dual class structures became more common. For a random subsample of the firms in our dataset we collect additional data about the CEO at the time of IPO, the CEO’s voting power (including high-vote stock), any dual-class sunset clauses, and for the period after the IPO we track all CEO replacements and, in each case, we code the reason for replacement.

Using time-to-event analysis (survival analysis), we find that the median time to CEO turnover from IPO was longer in the subset of IPO firms that use dual-class structure (6.6 years) as compared to single-class firms (5.4 years). This difference, however, is not statistically significant (p-value = 0.14). All but one instance of dual-class turnover in our sample occurred several years before the sunset date, emphasizing that the dual class CEO turnovers were not driven by the triggering of a sunset. Instead, CEO turnover in dual class firms (similar to single-class) is often preceded by poor shareholder returns and an increase in short-term liabilities.

On the one hand, our results partially support the conventional view that founders protected by dual class stock survive in the CEO position longer. Yet, they also challenge the conventional view. Specifically, despite concern that dual-class stock structures will allow the founder-CEO of VC-backed companies to stay at the helm indefinitely, our findings indicate that these structures do not necessarily impede the replacement of underperforming founder-CEOs, even before sunset provisions are reached. This suggests that dual-class stocks may not be as robust a barrier against CEO turnover as often perceived.