Facebook is implementing a new stock structure to make sure the founders retain control, immediately causing rumors about an impending initial public offering. Why would Facebook need Class A and Class B shares otherwise? Under the new structure, which is similar to Google's (GOOG), Mark Zuckerberg and other early entrants wouldn't have to worry about yielding the floor to outsiders
when if the company goes public.
The stock structure was adopted to ensure that existing shareholders keep control on voting issues, according to Facebook statement. No details were given as to who the winners are in this arrangement, but a Wall Street Journal report says that, according to its sources, all current shareholders would be converted to Class B shares, which carry 10 times the voting rights of Class A shares.
This is where Facebook's execution differs from Google's. In the case of the latter, these "super-shares" were not distributed widely, with only top executives benefiting.
While these dual structures do have the upside of rewarding founders and early employees (which can be an effective recruiting tool), ensuring continuity of leadership and decision-making and ensuring that institutional knowledge continues to have a voice after a change of ownership, they can impede progress as well. Playboy (PLA) and the New York Times Company (NYT) have been criticized for their dual share class structures, which have kept the companies from responding to a drastically changing market. Prior to its acquisition by News Corp (NWS), Dow Jones had a similar arrangement, which kept control in the hands of the Bancroft family.
Over the long term, especially given a time horizon that the founders and executives at Facebook could only comprehend theoretically, the dual share approach becomes fragmented, as one generation passes on and splits its shares up among heirs (as we saw with the Bancrofts and Dow Jones). Gridlock dominates decisions, and it can become difficult to escape to a better future.
Then again, this problem is at least a century away.
For now, social media spectators are watching and wondering if Facebook will take that major step and enter the public capital markets. Having raised $600 million in capital from investors over the past five years, with the most recent coming from Russian investor Digital Sky Technologies for $200 million, there are plenty of stakeholders among the gawkers.
So, the latest move could be the groundwork for an imminent IPO, or it may just be a touch of forward thinking in case that sort of transaction arises someday. I'm wondering, though, why such a granular play would be made if not for a near-term reason.