Give Us Your Money And Go Away!

Today we’re going to talk about classes of stock. Boring right? (Okay, there really isn’t anything clever I can say here that will instill you with a burning passion to learn about classes of stock, but I’ll try to keep it simple, brief and pithy – and maybe you’ll take something useful away with you.)

Yesterday, I received an email from Square, Inc. You know them. They make those little things that plug into your mobile devices so buyers and sellers can transact credit card purchases at conventions, pop-up clubs and the renaissance festival. The email offered me a chance to “own part of Square” through purchasing some Class A common stock in their upcoming initial public offering (IPO), since I’m a current user of their product. (My wife and I use Square all the time in our indie film production company, Cavegirl Productions.)

Being the kind of guy that I am, I clicked on the link to their draft prospectus. Here’s what I focused on, and what this post is about:

We have two classes of authorized common stock: the Class A common stock offered hereby and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. After the completion of this offering, our existing stockholders will continue to hold all of our issued and outstanding Class B common stock and will hold approximately 99.1% of the combined voting power of our common stock. As a result of their ownership, they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of certain amendments to our certificate of incorporation and bylaws, the approval of any merger or sale of substantially all of our assets, and certain provisions that impact their rights and privileges as Class B common stockholders.” (emphasis added)

Interesting no? The Class B, which is not offered, gets all the power and control, and the Class A gets to “own a piece of Square” – for what that might be worth.

The bottom line here is that most of the people who are going to “bite” at this offering probably haven’t read the prospectus – and may not understand that they don’t have any real way to participate in the company’s governance. What’s actually happening here is that the company’s Board, controlled by the venture capital firms that invested in Square (Victory Park Capital) are maintaining control of the company and all decisions it makes.

Your takeaway? If you’re going to buy stock, make sure you read the d**m prospectus!