Blog: VLP Speaks

The Benefits and Risks of Super Voting Common Stock: What You Need to Know – A Blog Post by David Goldenberg

Posted on Feb 6, 2025 in Venture Capital, New and Emerging Companies, Blog by David Goldenberg

When structuring a company, especially a startup or a firm gearing up for an IPO, one of the most powerful decisions founders and investors face is how to structure voting rights. One increasingly popular tool for founders looking to retain control over their company’s future is super voting common stock. While this stock class offers clear advantages, it also comes with significant risks, particularly when considering the timing of issuance, whether at formation or just before an IPO.

What is Super Voting Common Stock?

Super voting common stock refers to shares that provide holders with more voting power per share than common stock. In many cases, this can mean 10 to 100 votes per share compared to one vote per share for regular common stock. It’s a common strategy for founders and key executives to retain control over significant corporate decisions, such as mergers, acquisitions, or the appointment of board members, even if they own a relatively small percentage of the company’s equity.

The Benefits of Super Voting Common Stock

• Preserving Founder Control
  For many entrepreneurs, their company represents not just a financial investment but their vision and long-term goals. Issuing super voting shares allows founders to maintain control over key decisions as the company grows, even when they bring in additional investors. By maintaining more votes per share, founders can ensure they will be able to prevent unwanted interference from investors or hostile takeovers once the company is public.
• Attracting Investors Without Ceding Power
  Startups often need to raise significant amounts of capital, which typically means issuing new equity. Super voting common stock allows founders to bring in investors without losing control. Investors can gain equity and benefit from the financial growth of the company without acquiring the same voting power that could shift the company’s direction.
• Long-Term Strategic Vision
  Founders often have a long-term vision for their company that may not align with short-term investor goals. Super voting shares allow founders to focus on the company’s future without worrying about being overruled by investors who may prioritize quick returns or an exit strategy. This can be particularly valuable in industries where patience and long-term innovation are crucial, such as tech or biotech.

The Risks of Super Voting Common Stock

• Potential Investor Pushback
  While super voting stock can be advantageous for founders, it may deter some investors. Venture capitalists and institutional investors often want a say in how their investment is managed, and the imbalance of power created by super voting stock can be a turnoff. Before issuing such stock, founders must weigh the importance of control against the potential for attracting high-quality investors.
• Perceived Inequity in Corporate Governance
  Issuing super voting stock can raise concerns about fairness and governance. As the company grows and brings on more shareholders, questions may arise about whether it is equitable for founders or insiders to wield such outsized influence. Public companies, especially those preparing for an IPO, may face scrutiny from analysts, shareholders, and regulators if super voting stock is in play, especially if decisions appear to disproportionately benefit insiders.
• Potential for Abuse
  Concentrating voting power can lead to founders or key executives making decisions that may not be in the best interest of the company or its shareholders. Super voting stock can give a small group of individuals significant control over the company’s direction, increasing the risk of self-dealing, nepotism, or resistance to necessary change.  This can be particularly tricky if the founder retains those shares even after ceasing to be employed by the company.

Timing: Issuing Super Voting Stock at Formation or Before an IPO

Issuing super voting stock at the company’s formation is a common tactic. Doing so allows founders to maintain control from the start, ensuring that as the company scales and brings in outside investors, they do not lose influence over key decisions. This is often more palatable to investors early on, as they are joining the company with full knowledge of the voting structure.  In addition, issuance at formation can be done relatively easily and avoiding any potential tax issues.

However, if venture capitalists object to the structure, super voting shares can also be issued before an IPO.  If the board is supportive, this can be an effective strategy to preserve control after an IPO.  However, depending on the company’s structure at the time of the IPO, issuing super voting shares before an IPO can be a more delicate matter. Investors, especially institutional ones, may view this as a power grab or an attempt to lock in founder control before the company goes public. Public markets typically favor transparency and balanced governance, and potential IPO investors may hesitate to invest in a company where control is highly concentrated among a few insiders.

Conclusion

Super voting common stock can be a powerful tool for founders looking to maintain control over their companies. However, it is not without its risks. Whether issued at formation or before an IPO, companies must carefully weigh the benefits of control against potential investor pushback and governance concerns. When used wisely, super voting shares can help founders retain their strategic vision while still attracting the capital necessary for growth.