ET Decoder: What is dual-class share structure and why you should care

Lyft's initial public offering has revived the debate on dual-class share structures, with the company awarding its two co-founders 20 votes for every one vote held by other investors, thereby providing them nearly complete control of the company's future despite together owning roughly 7% stake in the company.

What is dual-class share structure?
Dual-class structure is one where a founder holds a significantly higher percentage of voting rights in comparison to share of equity capital of the company. This enables startup founders to make bold bets and focus on long term opportunities while insulating them from attacks from activist investors or those who are looking for short terms gains.


Key startup founders who are using this structure outside India
Dual-class share structures and dual voting rights (DVRs) are common in the US and China. Startup founders such as Facebook's Mark Zuckerberg and Alibaba Group's Jack Ma among others, have adopted this structure to maintain control over their companies despite their relatively small shareholdings.

Why is this important for the Indian startup ecosystem?
With more Indian startups crossing the $1-billion valuation mark at a rapid pace, the need for a framework that protects founders' rights has emerged as a hot-button issue.

Founders at several startup unicorns in the country have a shareholding in the single-digit to the low double-digit range while investors, including some of the biggest strategic and financial backers globally, own between 26% and 50% of the stock. This structure will enable the creation of India-owned startup unicorns.

While India's company law does allow, in its 2013 version, a company to issue shares with differential voting rights, it comes with several restrictions. For one, only companies who have a track record of making profits can issue such shares. Also, the total quantity of differential voting rights shares cannot be more than 26% of the total shares issued. Nor can shares of one type be converted to shares of the other type.

What are Indian startup founders doing?
India's top startup entrepreneurs Sachin Bansal and Bhavish Aggarwal have backed differential voting rights.

“If you look at China and the US, dual-class voting structure has helped create better companies,” Bansal had told ET on the sidelines of the ET Startup Awards jury meet in August last year “Building a company is like a very long train journey. The entrepreneur is the driver, investors and employees are passengers. They get on and get off. If you take a 20-30-year view, no investor or employee will stay. Empowering the driver is good.”

Indiatech, an industry grouping representing India's top internet entrepreneurs has also approached the government seeking a dual-class share structure along with differential voting rights for founder-promoters of startups, ET reported last month.

Indiatech, which counts the Bhavish Aggarwal-led Ola and Deep Kalra's MakeMyTrip as members, said the move will allow founders of India's largest startup ventures to list on national bourses instead of overseas exchanges, such as Nasdaq and the New York Stock Exchange.