[notyourday]

> Preferred shares existed before Facebook, and it may not the be norm, but there's a reason we no longer see the hostile takeovers from the 80's.

That has nothing to do with preferred shares. Most of public companies adopted poison pills aka shareholder right protection plans which work along the lines of this:

1. If someone acquires a certain percentage of company shares without board of directors agreeing to it, then the company automatically issues a very large number (2x to 3x) of shares and allows shareholders of record of a certain past date before the hostile party launched the acquisition to obtain newly issued shares at a discount.

2. Board members have staggered terms so the acquiring party cannot replace more than a small percentage of board members thereby preventing the one's ability to flood the board one's supporters

It used to be that preferred shares were a special class of equity that paid higher dividends. The funny part is that tech companies tend not to pay any dividends what so ever and now with the special classes of shares that have nearly no voting rights ( compared to the 'preferred shares' that are controlled by the insiders ) the same companies make a virtual mockery out of the concept of a "public company". Facebook is not a public company in any sense other than the name -- it is Mark's personal piggybank that he shares with a few insiders with the crums off the table being given to the people whom he used to call "stupid".

[BubRoss]

The shares with no voting power would still be converted in the case of a buyout of a company though, right?

[notyourday]

It is also a lot more complicated than that.

With a single class of shares every shareholder interest is aligned. It is not possible to create a subclass of shareholders among the existing shareholders without existing shareholders agreeing to it. So in a buyout all shares are equal and will receive and equal percentage of distribution of all assets regardless of how those assets are structured.

The moment there are different classes of shareholders, there's a jockeying for a position. It is no different from the plays that can be made by a private company when it is getting a new round of investment/gets bought out -- those with A class shares have certain rights, with B some other rights with C some other rights etc. There's nothing ( apart from a rather complicated regulations that govern a right of minority shareholders not to get totally screwed ) that prevents those that control the voting block via special preferred shares from virtually screwing other shareholders:

Board can just vote to split the company into "icky carcass" with nominal assets, most of the liabilities give most of it to non-voting shares. Give the non-voting shares some tiny percentage of the ownership in the "awesome sauce" part of the company. Voting shares (held by insiders) get the opposite percentage. As the part of this deal the "awesome sauce" company gets sold.

It just has not been tried yet -- in fact I'm very surprised it has not been tried yet. It of course would be challenged in courts but I'm pretty sure it will be found legal -- after all "you have no rights compared to the rights of holders of class SP" has been spelled out in the offering paperwork and investors/employees/shareholders still lapped it.

[semi-extrinsic]

Excellent comment. Nitpick: it's "jockeying for position", as in, what the jockeys do during a horse race to get in a better position so they can win.

[notyourday]

Thanks for the correction. I totally suck at noticing misspellings on a phone and beat myself up afterwards.

[bradleyjg]

Eh. I don’t think the Delaware courts would go for it. Ebay vs Newmark is on point.

[notyourday]

Does not have much in common - single class of stock with the same rights vs. different classes of stock with different rights.

[bradleyjg]

Still stands for the proposition that directors have a fiduciary duty to shareholders which is subject to judicial scrutiny in the face of self dealing.

[notyourday]

That's where I happen to be disagree -- it goes back to the blue sky laws. I think we are going to see it fairly soon - SNAP, in my view, is heading there and it has an insane corporate structure.

[rossdavidh]

While there are issues with Zuckerberg, I think it bears noting that the FB IPO wasn't done because he needed the money, but rather because they were forced too by law because too many people had ownership. So, he didn't give great terms in the IPO because he didn't really need any cash; FB was already cashflow-positive. This is a marked contrast to WeWork.

[mbell]

> While there are issues with Zuckerberg, I think it bears noting that the FB IPO wasn't done because he needed the money, but rather because they were forced too by law because too many people had ownership.

This isn't entirely true. Once a company passes the shareholder limit they are required to publish public financials similar to what a publicly traded company must provide. However they are not required to sell their stock on the open market, it's just that it's such a small step at this point that most if not all do.

Also - while this is often quoted as the reason for Facebook's IPO, it's worth noting that the investor limit was actually raised (from 500 to 2000) a couple months before Facebook's IPO. If it were really the main reason they could have easily held off on the IPO and carried on as a private company.

[bradleyjg]

A company with 2000 shareholders and $10MM in assets it is forced to become a reporting company but it doesn’t have to go public.

[CPLX]

That's not correct at all, there's no rule requiring companies to go public.

And even if he didn't need cash, an IPO creates an incredible opportunity to use shares as a currency to fund high-dollar acquisitions, which he has most certainly taken advantage of.

[notyourday]

It is a bit more complicated than that - FB investors used SPEs rather than held the shares directly. When the number of SPEs got too high those SPEs themselves reorganized moving the investors more levels down.

[philistine]

I think the Facebook IPO was done for one reason only; public relations.

As is the case with toxic discourse on his website, the nonchalant attitude with private information, Zuck loves to steer clear of taking responsibility for anything. The IPO allows the message to be: it's not my personal responsibility, I'm merely the CEO of the company.