25 March 2018

US Corporate Law News: Multi-class equity structures at technology companies (including Dropbox) engaged in IPOS spark corporate governance concerns

Flora Tsui
Associate | US

Dropbox, Inc., a cloud storage provider whose IPO priced on March 22, 2018 at a market valuation over $8 billion and whose shares were expected to start trading on Nasdaq in late March 2018, is one of the biggest technology companies to complete an IPO in recent years. Similar to many of its technology peers, Dropbox's capital structure consists of three classes of authorized common stock, with stockholders' voting rights differing among classes. Post-IPO, the co-founders and lead venture capital investors will continue to hold a majority of combined voting power, enabling them to control matters submitted to public stockholders for approval. Founders and investors of technology companies reaping benefits from such equity arrangements have defended the multi-class structure as a way to help them focus on long-term growth rather than short-term stock market swings. While experts have argued that potential advantages of dual-class structures tend to recede as time passes after an IPO, advocating sunset provisions for finite term dual-class structures to protect regular shareholders, investors have not thus far been deterred by such equity structures due to their willingness to accept reduced voting rights in exchange for getting in on a new technology IPO. For more information on the Dropbox equity structure, see the “Description of Capital Stock” section of the Dropbox registration statement at https://www.sec.gov/Archives/edgar/data/1467623/000119312518055809/d451946ds1.htm.

Flora Tsui Associate | New York