Riding off into the Sunset: Dual-Class Structure in the Age of Unicorns Going Public

The increasing adoption of dual-class shares (DCS)—an ownership structure that gives corporate insiders greater voting power than other shareholders—among newly listed companies has raised significant governance concerns. We investigate the decision to adopt the DCS structure and its value implications in the recent U.S. IPOs. Using founder cultural traits and Silicon Valley law firms as instrumental variables, we find significant post-IPO outperformance by firms adopting DCS with a sunset clause, especially incapacity-based sunset which stipulates that the DCS will cease after founders’ death, incapacitation or departure, compared to non-DCS firms and DCS firms without sunsets. This outperformance is more pronounced for high-tech firms, after Google’s IPO, and for firms that rely more on R&D. DCS firms with sunset provisions have greater operating efficiency, marginal value of cash, and more innovation outputs but lower quality ones, which is in line with the incentive schemes provided to their executives.