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The market has changed, but super-voting shares are here to stay, says Mr. IPO

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2 months ago

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Yesterday, the ride-sharing company Lyft said its two co-founders, John Zimmer and Logan Green, are stepping down from managing the company’s day-to-day operations, though they are retaining their board seats. According to a related regulatory filing, they actually need to hang around as “service providers” to receive their original equity award agreements. (If Lyft is sold or they’re fired from the board, they’ll see “100% acceleration” of these “time-based” vesting conditions.)

As with so many founders who’ve used multi-class voting structures in recent years to cement their control, their original awards were fairly generous. When Lyft went public in 2019, its dual-class share structure provided Green and Zimmer with super-voting shares that entitled them to 20 votes per share in perpetuity, meaning not just for life but also for a period of nine to 18 months after the passing of the last living co-founder, during which time a trustee would retain control.

It all seemed a little extreme, even as such arrangements became more common in tech. Now, Jay Ritter, the University of Florida professor whose work tracking and analyzing IPOs has earned him the moniker Mr. IPO, suggests that if anything, Lyft’s trajectory might make shareholders even less nervous about dual-stock structures.

For one thing, with the possible exception of Google’s founders — who came up with an entirely new share class in 2012 to preserve their power — founders lose their stranglehold on power as they sell their shares, which then convert to a one-vote-per-one-share structure. Green, for example, still controls 20% of the shareholder voting rights at Lyft, while Zimmer now controls 12% of the company’s voting rights, he told the WSJ yesterday.

Further, says Ritter, even tech companies with dual-class shares are policed by shareholders who make it clear what they will or will not tolerate. Again, just look at Lyft, whose shares were trading at 86% below their offering price earlier today in a clear sign that investors have — at least for now — lost confidence in the outfit.

We talked with Ritter last night about why stakeholders aren’t likely to push too hard against super-voting shares, despite that now would seem the time to do it. Excerpts from that conversation, below, have been lightly edited for length and clarity.

TC: Majority voting power for founders became widespread over the last dozen years or so, as VCs and even exchanges did what they could to appear founder-friendly. According to your own research, between 2012 and last year, the percentage of tech companies going public with dual-class shares shot from 15% to 46%. Should we expect this to reverse course now that the market has tightened and money isn’t flowing so freely to founders?

JR: The bargaining power of founders versus VCs has changed in the last year, that’s true, and public market investors have never been enthusiastic about founders having super voting stock. But as long as things go well, there isn’t pressure on managers to give up super voting stock. One reason U.S. investors haven’t been overly concerned about dual-class structures is that, on average, companies with dual-class structures have delivered for shareholders. It’s only when stock prices decline that people start questioning: Should we have this?

Isn’t that what we are seeing currently?

With a general downturn, even if a company is executing according to plan, shares have fallen in many cases.

So you expect that investors and public shareholders will remain complacent about this issue despite the market.

In recent years, there haven’t been a lot of examples where entrenched management is doing things wrong. There have been cases where an activist hedge fund is saying, “We don’t think you’re pursuing the right strategy.” But one of the reasons for complacency is that there are checks and balances. It’s not the case where, as in Russia, a manager can loot the company and public shareholders can’t do anything about it. They can vote with their feet. There are also shareholder lawsuits. These can be abused, but the threat of them [keeps companies in check]. What’s also true, especially of tech companies where employees have so much equity-based compensation, is that CEOs are going to be happier when their stock goes up in price but they also know their employees will be happier when the stock is doing well.

Before WeWork’s original IPO plans famously imploded in the fall of 2019, Adam Neumann expected to have so much voting control over the company that he could pass it along to future generations of Neumanns.

But when the attempt to go public backfired — [with the market saying] just because SoftBank thinks it’s worth $47 billion doesn’t mean we think it’s worth that much —  he faced a trade-off. It was, “I can keep control or take a bunch of money and walk away” and “Would I rather be poorer and in control or richer and move on?” and he decided, “I’ll take the money.”

I think Lyft’s founders have the same trade-off.

Meta is perhaps a better example of a company whose CEO’s super-voting power has worried many, most recently as the company leaned into the metaverse.

A number of years ago, when Facebook was still Facebook, Mark Zuckerberg proposed doing what Larry Page and Sergey Brin had done at Google but he got a lot of pushback and backed down instead of pushing it through. Now if he wants to sell off stock to diversify his portfolio, he gives up some votes. The way most of these companies with super voting stock are structured is that if they sell it, it automatically converts into one-share-one-stock sales, so someone who buys it doesn’t get extra votes.

A story in Bloomberg earlier today asked why there are so many family dynasties in media — the Murdochs, the Sulzbergers — but not in tech. What do you think?

The media industry is different from the tech industry. Forty years ago, there was analysis of dual-class companies and, at the time, a lot of the dual-class companies were media: the [Bancroft family, which previously owned the Wall Street Journal], the Sulzbergers with the New York Times. There were also a lot of dual-class structures associated with gambling and alcohol companies before tech firms began [taking companies public with this structure in place]. But family firms are nonexistent in tech because the motivations are different; dual-class structures are [solely] meant to keep founders in control. Also, tech companies come and go pretty rapidly. With tech, you can be successful for years and then a new competitor comes along and suddenly . . .

So the bottom line, in your view, is that dual-class shares aren’t going away, no matter that shareholders don’t like them. They don’t dislike them enough to do anything about them. Is that right?

If there was concern about entrenched management pursuing stupid policies for years, investors would be demanding bigger discounts. That might have been the case with Adam Neumann; his control wasn’t something that made investors enthusiastic about the company. But for most tech companies — of which I would not consider WeWork — because you have not only the founder but employees with equity-linked compensation, there is a lot of implicit, if not explicit, pressure on shareholder value maximization rather than kowtowing to the founder’s whims. I’d be surprised if they disappeared.

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Tesla more than tripled its Austin gigafactory workforce in 2022

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April 6, 2023

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Tesla’s 2,500-acre manufacturing hub in Austin, Texas tripled its workforce last year, according to the company’s annual compliance report filed with county officials. Bloomberg first reported on the news.

The report filed with Travis County’s Economic Development Program shows that Tesla increased its Austin workforce from just 3,523 contingent and permanent employees in 2021 to 12,277 by the end of 2022. Bloomberg reports that just over half of Tesla’s workers reside in the county, with the average full-time employee earning a salary of at least $47,147. Outside of Tesla’s factory, the average salary of an Austin worker is $68,060, according to data from ZipRecruiter.

TechCrunch was unable to acquire a copy of the report, so it’s not clear if those workers are all full-time. If they are, Tesla has hired a far cry more full-time employees than it is contracted to do. According to the agreement between Tesla and Travis County, the company is obligated to create 5,001 new full-time jobs over the next four years.

The contract also states that Tesla must invest about $1.1 billion in the county over the next five years. Tesla’s compliance report shows that the automaker last year invested $5.81 billion in Gigafactory Texas, which officially launched a year ago at a “Cyber Rodeo” event. In January, Tesla notified regulators that it plans to invest another $770 million into an expansion of the factory to include a battery cell testing site and cathode and drive unit manufacturing site. With that investment will come more jobs.

Tesla’s choice to move its headquarters to Texas and build a gigafactory there has helped the state lead the nation in job growth. The automaker builds its Model Y crossover there and plans to build its Cybertruck in Texas, as well. Giga Texas will also be a model for sustainable manufacturing, CEO Elon Musk has said. Last year, Tesla completed the first phase of what will become “the largest rooftop solar installation in the world,” according to the report, per Bloomberg. Tesla has begun on the second phase of installation, but already there are reports of being able to see the rooftop from space. The goal is to generate 27 megawatts of power.

Musk has also promised to turn the site into an “ecological paradise,” complete with a boardwalk and a hiking/biking trail that will open to the public. There haven’t been many updates on that front, and locals have been concerned that the site is actually more of an environmental nightmare that has led to noise and water pollution. The site, located at the intersection of State Highway 130 and Harold Green Road, east of Austin, is along the Colorado River and could create a climate catastrophe if the river overflows.

The site of Tesla’s gigafactory has also historically been the home of low-income households and has a large population of Spanish-speaking residents. It’s not clear if the jobs at the factory reflect the demographic population of the community in which it resides.

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Launch startup Stoke Space rolls out software tool for complex hardware development

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2 months ago

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April 5, 2023

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Stoke Space, a company that’s developing a fully reusable rocket, has unveiled a new tool to let hardware companies track the design, testing and integration of parts. The new tool, Fusion, is targeting an unsexy but essential aspect of the hardware workflow.

It’s a solution born out of “ubiquitous pain in the industry,” Stoke CEO Andy Lapsa said in a recent interview. The current parts tracking status quo is marked by cumbersome, balkanized solutions built on piles of paperwork and spreadsheets. Many of the existing tools are not optimized “for boots on the ground,” but for finance or procurement teams, or even the C-suite, Lapsa explained.

In contrast, Fusion is designed to optimize simple inventory transactions and parts organization, and it will continue to track parts through their lifespan: as they are built into larger assemblies and go through testing. In an extreme example, such as hardware failures, Fusion will help teams connect anomalous data to the exact serial numbers of the parts involved.

Image credit: Stoke Space

“If you think about aerospace in general, there’s a need and a desire to be able to understand the part pedigree of every single part number and serial number that’s in an assembly,” Lapsa said. “So not only do you understand the configuration, you understand the history of all of those parts dating back to forever.”

While Lapsa clarified that Fusion is the result of an organic in-house need for better parts management – designing a fully reusable rocket is complicated, after all – turning it into a sell-able product was a decision that the Stoke team made early on. It’s a notable example of a rocket startup generating pathways for revenue while their vehicle is still under development.

Fusion offers particular relevance to startups. Many existing tools are designed for production runs – not the fast-moving research and development environment that many hardware startups find themselves, Lapsa added. In these environments, speed and accuracy are paramount.

Brent Bradbury, Stoke’s head of software, echoed these comments.

“The parts are changing, the people are changing, the processes are changing,” he said. “This lets us capture all that as it happens without a whole lot of extra work.”

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Amid a boom in AI accelerators, a UC Berkeley-focused outfit, House Fund, swings open its doors

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April 4, 2023

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Companies at the forefront of AI would naturally like to stay at the forefront, so it’s no surprise they want to stay close to smaller startups that are putting some of their newest advancements to work.

Last month, for example, Neo, a startup accelerator founded by Silicon Valley investor Ali Partovi, announced that OpenAI and Microsoft have offered to provide free software and advice to companies in a new track focused on artificial intelligence.

Now, another Bay Area outfit — House Fund, which invests in startups with ties to UC Berkeley — says it is launching an AI accelerator and that, similarly, OpenAI, Microsoft, Databricks, and Google’s Gradient Ventures are offering participating startups free and early access to tech from their companies, along with mentorship from top AI founders and executives at these companies.

We talked with House Fund founder Jeremy Fiance over the weekend to get a bit more color about the program, which will replace a broader-based accelerator program House Fund has run and whose alums include an additive manufacturing software company, Dyndrite, and the managed app development platform Chowbotics, whose most recent round in January brought the company’s total funding to more than $60 million.

For founders interested in learning more, the new AI accelerator program runs for two months, kicking off in early July and ending in early September. Six or so companies will be accepted, with the early application deadline coming up next week on April 13th. (The final application deadline is on June 1.) As for the time commitment involved across those two months, every startup could have a different experience, says Fiance. “We’re there when you need us, and we’re good at staying out of the way.”

There will be the requisite kickoff retreat to spark the program and founders to get to know one another. Candidates who are accepted will also have access to some of UC Berkeley’s renowned AI professors, including Michael Jordan, Ion Stoica, and Trevor Darrell. And they can opt into dinners and events in collaboration with these various constituents.

As for some of the financial dynamics, every startup that goes through the program will receive a $1 million investment on a $10 million post-money SAFE note. Importantly, too, as with the House Fund’s venture dollars, its AI accelerator is seeking startups that have at least one Berkeley-affiliated founder on the co-founding team. That includes alumni, faculty, PhDs, postdocs, staff, students, dropouts, and other affiliates.

There is no demo day. Instead, says Fiance, founders will receive “directed, personal introductions” to the VCs who best fit with their startups.

Given the buzz over AI, the new program could supercharge House Fund, the venture organization, which is already growing fast. Fiance launched it in 2016 with just $6 million and it now manages $300 million in assets, including on behalf of Berkeley Endowment Management Company and the University of California.

At the same time, the competition out there is fierce and growing more so by the day.

Though OpenAI has offered to partner with House Fund, for example, the San Francisco-based company announced its own accelerator back in November. Called Converge, the cohort was to be made up of 10 or so founders who received $1 million each and admission to five weeks of office hours, workshops and other events that ended and that received their funding from the OpenAI Startup Fund.

Y Combinator, the biggest accelerator in the world, is also oozing with AI startups right now, all of them part of a winter class that will be talking directly with investors this week via demo days that are taking place tomorrow, April 5th, and on Thursday.

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