 "CEO Mark Zuckerberg gestures while delivering the keynote address at the Facebook F8 Developer Conference in San Francisco")
Mark Zuckerberg nurtured Facebook from a dorm room idea into the world's biggest social network. Now the company is taking steps to ensure its founder remains in charge.
Facebook on Wednesday proposed a new class of stock, known as C shares, in a move meant to allow Zuckerberg to maintain control of the Silicon Valley company. The creation of the new class of shares allows the chief executive to preserve his voting power at Facebook, even as he begins an effort to give away the majority of his stock for charitable purposes.
Facebook said the move was "not a traditional governance model," but it added that "Facebook was not built to be a traditional company."
The proposal speaks to a very Silicon Valley ethos where company founders often reign supreme - and where corporate structures have shifted to accommodate that philosophy. Over the past decade, more tech companies have adopted two classes of stock so that their founders can cement their voting power at the firms. In 2012, Google announced that it was creating a third class of shares to prevent its founders' voting power from diminishing.
Zuckerberg on Wednesday cited the Silicon Valley mantra of founders in explaining the new class of stock, calling Facebook a "founder-led company." In a conference call, he added, "Facebook has been built on a series of bold moves. When I look out on the future, I see more bold moves ahead of us, not behind us."
The social network on Wednesday also reported robust first-quarter earnings that show the results of Zuckerberg's leadership. Facebook said sales rose 52 per cent to $5.3 billion from a year ago, while profit increased to $1.5 billion, tripling from $512 million a year earlier.
Excluding certain items, profit was 77 cents a share, far surpassing Wall Street expectations of 62 cents a share. Facebook's shares, which are up more than 33 per cent over the past year, soared 9 per cent in after-hours trading. Facebook said it began considering a third class of stock last August when a committee of three directors - Erskine Bowles, Susan Desmond-Hellmann and Marc Andreessen - started evaluating the company's capital structure. In December, Zuckerberg and his wife, Priscilla Chan, announced the creation of a limited liability corporation to which they would give 99 per cent of their Facebook shares during their lifetimes for charitable purposes.
Zuckerberg's philanthropic plan posed an issue for his long-term control of Facebook. Zuckerberg, who is chief executive, owns almost 4 million Facebook class A shares and 468 million, or 85 per cent, of its class B shares, giving him overall voting power of 60 per cent. But if he were to give away 99 per cent of his Facebook stock over time, his voting power at the company would decline to less than 50 per cent. The new C shares effectively allow Zuckerberg to maintain 60 percent of voting power while still giving away large amounts of stock. Under the proposal, all holders of Facebook stock will get two C shares for each A or B share that they own. Importantly, the C shares come with no voting power. Holders of A shares are entitled to one vote per share, while holder of B shares have 10 votes a share. That means Zuckerberg, as the majority owner of Facebook shares, will obtain a large amount C shares that he can then donate without diluting his voting power in the company.
"It is a rational, if somewhat eyebrow-raising way, for founders to distribute wealth without giving up operating control of the company," said Lise Buyer, founder of the Class V Group, which advises start-ups on initial public offerings. "This structure will continue to allow Facebook to make decisions that may not always look great in the short term, but may pay off for investors over time."
Facebook's C shares may trade at a slight discount to A shares, which would still have one vote. Most investors currently hold A shares, which only have about a quarter of the overall shareholders' voting power, so they may not be forgoing much if they choose to sell their A shares versus their C shares.
"It's almost like voting Republican in Massachusetts - you can do it, but it won't affect the outcome," said Rick Kline, a partner in the technology and capital markets practice of law firm Goodwin Procter.
Investors getting new C shares will not gain economically because the same proportion of new stock will be given to all holders.
Zuckerberg might have a more difficult time convincing shareholders to accept the new class of shares were his company not doing so well. Facebook's financial results on Wednesday were a far cry from the disappointing numbers posted in the past 10 days by peers like Twitter, whose advertising business showed signs of stumbling on Tuesday, or Alphabet, the parent company of Google, which missed analysts' estimates for revenue last week.
Facebook, in contrast, has figured out how to wring billions of dollars from its members on mobile devices and other platforms, making the company's revenue-generation machine unstoppable.
The company said 82 per cent of its advertising revenue came from mobile devices in the first quarter. In addition, Facebook is starting to spin up revenues in Instagram, the photo-sharing application, and is testing advertising on Facebook Messenger, the messaging service for which the company recently introduced automated customer service "bots."
And while growth in new users on Facebook has slowed in recent years, the total is still getting larger. Facebook said 1.65 billion people visited the site on a monthly basis in the first quarter, up from 1.44 billion a year earlier. More than 1.5 billion people are monthly mobile-only users, up from 1.25 billion a year ago.
Facebook's other big bets like WhatsApp, the messaging service, and Oculus, its virtual reality play, have yet to pay off with immense new revenue streams. But Facebook is comfortable gathering a critical mass of users - nearly a billion in WhatsApp's case - and then introducing advertising later on when it makes more sense.
"To me, this is like Google 10 years ago," said Mark Mahaney, an internet analyst at RBC Capital. "They really had such momentum, and they're proving how valuable they are to both advertisers and consumers."
©2016 The New York Times News Service
