Potential Perils of Zynga's Tiered Stock Strategy
Tiered stock is nothing new, giving some shareholders greater board control, first access to dividends or any other set of goodies. Hardly an equitable equity set up, yet seldom seen as uniquely onerous.
Zynga has managed to take this concept to a new level—literally. The board of directors approved a third tier of stock set aside specifically for CEO Mark Pincus that gets 70 times the voting clout of Joe Stockholder and 10 times the voting power of pre-IPO shareholders such as Zynga’s venture capitalists, according to reports.
The effect is clear enough, yet Zynga spells it out in its SEC filings:
“The three class structure of our common stock has the effect of concentrating voting control with those stockholders who held our stock prior to this offering, including our founder and Chief Executive Officer and our other executive officers, employees and directors and their affiliates; this will limit your ability to influence corporate matters.”
Image by Joi via Flickr
It is a message that must be considered in context, especially for those eyeing Zynga’s zaftig public offering.Those who have watched the company for several years will recall Pincus’ confession of doing “every horrible thing in the book to, just to get revenues right away.”
Pincus supporters and Zynga investors have claimed that these words were taken out of context or were misinterpreted by members of the media or didn’t accurately reflect what Pincus meant to say or should not be considered in a vacuum.
Yet Zynga’s actions seemed to bear out these words though, as it aggressively pushed its users—including children—into the hands of unscrupulous vendors who signed up unwitting users for expensive mobile messaging plans or other undesired products.
TechCrunch did a remarkable job of running the “Scamville” story to ground and holding Zynga’s feet to the fire. Pincus took action to curb these revenue grabs only after a public hue and cry of epic proportions.
To be sure, voting structure and corporate control is not an issue for many shareholders. If they don’t like what’s going on, they can always sell their stake. And academics are split on what the actual effects of activist shareholder proposals and their ability to mitigate principal-agent problems.
Yet investors looking to buy and hold must ask themselves if they’re ready to yield such unchecked power to Pincus.