Dual-class share structures used to be an edge case. Now they’re mainstream—particularly among tech IPOs and private equity (PE)-backed exits. These structures upend the “one share, one vote” principle, concentrating voting power in the hands of insiders while distributing economic ownership more broadly.
That dynamic has profound implications: for founders seeking control, PE firms planning longer-term exits, and institutional investors weighing governance risk against growth potential. This post unpacks what finance professionals should know.
At its core, a dual-class structure means there are at least two types of shares with unequal voting rights. Most commonly:
Source: FourWeekMBA
But the variations are wide. Some companies add loyalty shares. Others use pyramidal or cross-ownership control. All share one feature: they weaken the direct link between ownership and control.
In the past, such structures were rare. But U.S. IPOs with dual-class shares have grown from 1% in 2005 to over 30% by 2022.
Dual-class shares aren’t just for founder-led startups. Private equity firms are increasingly adopting them too — not to disrupt norms, but to hold onto influence longer post-IPO.
An IPO used to mean a clean break for sponsors. Now, some PE investors opt to keep a seat at the table. By holding super-voting shares, they can:
That flips the traditional PE script. In some cases, the IPO is less an exit than a liquidity event paired with ongoing oversight.
Sponsors may argue that retaining voting control ensures long-term alignment with business objectives. But it also risks raising governance red flags — especially if insider decisions can’t be overruled by the majority economic owners.
“In dual-class firms, the CEO can effectively fire the board. We no longer have rule of law; we have rule of man.” —National Conference on Public Employee Retirement Systems
Founders often fear that public market investors won’t “get” their long-term vision. Dual-class shares give them the runway to prioritize R&D, acquisitions, or market expansion without quarterly distractions.
This is particularly common in software, biotech, and high-growth tech. If a founder can raise capital while keeping directional control, it’s hard to say no.
Dual-class popularity tends to rise with abundant private capital. When founders don’t need to go public, they can negotiate more favorable terms. The IPO becomes optionality, not necessity.
In 2021, 31% of U.S. IPOs featured dual-class structures, with tech firms leading the charge.
Dual-class shares shift power. That shift comes with serious governance implications for minority investors.
Investors in Class A shares often find themselves with minimal influence on board composition or strategic direction. Even with large holdings, their voting power is nominal.
| Structure | Votes per Share | Control Stake |
|---|---|---|
| Class A | 1 | Public float |
| Class B | 10 (or more) | Founders/PE |
This wedge between economic ownership and voting power invites classic agency risks: value extraction, related-party deals, poor capital allocation.
Without checks and balances, entrenched insiders can push through self-serving decisions. Minority shareholders lose levers to intervene.
That’s especially risky when the board lacks true independence. Even nominally independent directors may serve at the pleasure of a controlling shareholder.
Dual-class firms make activism hard to execute. Proposals backed by a majority of economic owners often never pass. Proxy fights become performative.
The result? Activists either avoid these stocks or rely on public campaigns and reputational pressure — tools with limited teeth.
Dual-class structures affect how a company is priced and traded over time. The effects are subtle at IPO but sharper later.
Research suggests that dual-class splits reduce liquidity:
That translates to higher cost of capital and makes the stock less appealing to a broader investor base.
Some dual-class IPOs debut at a premium, driven by excitement around founder-led growth. But over time:
A 2023 study found that mature dual-class firms often trade at a 12% discount to comparable single-class peers.
If you’re excluded from major indices, you miss out on passive flows. Here’s how the big three approach dual-class shares:
| Index Provider | Stance | Notes |
|---|---|---|
| S&P Dow Jones | Reinstated inclusion in 2023 | Reversed 2017 exclusion policy |
| FTSE Russell | Excludes if <5% free-float voting rights | Strictest policy |
| MSCI | Ignores voting rights | Prioritized market cap over governance |
The most aggressive governance advocates, like CII, argue that index inclusion should require sunset clauses or minimum public voting thresholds.
One increasingly common compromise is the sunset clause: dual-class rights expire after a set period (5–10 years) or upon a trigger event (founder departure).
According to Lazard, firms with sunset clauses often trade at higher multiples.
In private equity, control is everything — but in public markets, trust matters more. Dual-class structures walk a tightrope between the two. Get it right, and you extend your strategic runway. Get it wrong, and you’re left with illiquid stock, valuation drag, and investor pushback.
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