Needed differential voting right shares

Needed differential voting right shares

For startups to raise funds, retain control.

The government is reportedly exploring ways to permit Indian entrepreneurs to raise funds without losing control. This is most welcome. What Indian companies, especially startups, need are shares with differential voting rights. A startup should be able to issue shares with zero or diluted voting rights to financial investors who want the kind of upside that equity and not debt offers, even as the founders retain control by holding on to voting shares or a majority of voting rights. It would also be desirable to end differential voting rights after a finite period, rather than extend them in perpetuity.

Google founders Sergey Brin and Larry Page have retained control over the company they founded, Google, after it was listed and further restructured, creating three classes of shares. Class A shares carry one voting right, Class B shares carry 10 votes each, while Class C shares carry no voting rights at all. Sure, they had to settle a class-action suit and dilute the extent to which they can exercise control, but the existence of different classes of shares with differential voting rights has allowed them to retain control, even as they have tapped the capital market to take on board large quantities of the investing public’s savings. Facebook stays under Mark Zuckerberg’s control by virtue of shares with differential voting rights. Indian startup founders should have the capacity to tap global pools of capital without surrendering their functional autonomy to those who control those pools of capital. Shares with differential voting rights is the way out.

Why not allow any company to have stock with differential voting rights? The reason is that a market for corporate control is good for optimal allocation and utilisation of resources. Differential voting rights distort the market for corporate control. That is why such instruments should be restricted to startups. After, say, 15 years of a company’s founding, all shares should automatically carry the same voting rights. The terms of such conversion should be clear from word go, when investors put their first rupee into the company.