Dual-Class IPOs: A Solution to Unicorn Governance Failure

The conventional view of dual-class structures assumes that the alternative to a dual-class IPO is a single-class IPO, where shareholders' voting power aligns with their economic interests. However, more often than not, the alternative to a dual-class IPO is for firms to remain private or, at the very least, postpone their IPOs. Dual-class IPOs have become prevalent among startup unicorns in the technology sector, with many of these unicorns being controlled by founders who highly value maintaining control. With the expansion of private markets, these unicorns may opt to stay private if their founders would otherwise have to relinquish control upon going public.



From a governance standpoint, the private option may be particularly worrisome. While founder-controlled firms, whether private or public, may grapple with agency problems, governance failures in private unicorns with dominant founders, such as Theranos, WeWork and FTX, have led to a complete collapse of the business model. In comparison, founder-controlled startups that went public with a dual-class structure have arguably performed reasonably well.



The explanation I offer in this article is that dual-class structures facilitate the IPO decision by enabling startup founders to take their company public without losing control. The IPO process, with its requirements for detailed disclosures about the firm’s business model and financial accounts followed by market scrutiny, effectively screens entrepreneurial startups with a viable business model from those that do not. Thus, the availability of dual-class structures effectively mitigates the tail risk of the agency problem in founder-controlled firms that could result in dramatic losses for investors.