Supervoting shares and protective provisions

I was recently thinking about an investment we made where the founder has supervoting shares. In this case, each founder share carries 10 votes relative to a single vote for each investor share. Basically, such structures are designed to give the founder control over the company’s shareholder decisions even if they don’t have a majority of the shares.

Although this wasn’t the case here, a founder can apply a similar structure to gain control of the board even when they’re outnumbered at the board level.

On the other hand, investors almost always negotiate to establish protective provisions, share lockups, and vesting schedules which let them oversee the actions of founders and gain greater control over their investments.

On one hand, investors agree to give a founder almost total control. On the other hand, they act to limit that control as much as possible. How do you explain the existence of both types of investments?

There are two answers to this.

First, the terms of an investment are a reflection of supply and demand. If you have a lot more supply of capital than demand for that capital from the founder, the founder may be able to negotiate supervoting shares. If the reverse is true, they may need to accept many protective provisions that constrain their actions.

The second answer, which influences the first, is that the founder’s reputation and integrity matter. If a founder is ethical and has great judgment, giving them supervoting shares won’t hurt investors. In fact, it may even be to their advantage as the founder won’t have to deal with the potential misguidance of investors.

The corollary to this is that if a founder is unethical, no amount of protective provisions is enough to save investors.


Also published on Medium.