CFA Level II ExamCorporate IssuersHard
An investment bank is advising a technology startup on its initial public offering (IPO). The startup's founders are concerned about maintaining control over the company after going public. Which of the following share structures would best allow the founders to retain significant voting power while raising capital from public investors?
- AIssuing non-voting preferred stock to public investors.
- BA dual-class share structure with superior voting rights for founders' shares.
- CIssuing convertible bonds that can be converted into common stock.
- DA single class of common stock with one vote per share.
Show answer & explanationAnswer & explanation
Correct answer: B. A dual-class share structure with superior voting rights for founders' shares.
A dual-class share structure is specifically designed to allow founders or a select group to retain disproportionate voting control. By issuing shares with superior voting rights (e.g., 10 votes per share) to founders and shares with lesser or no voting rights (e.g., 1 vote per share) to public investors, founders can raise capital without ceding control.
Why the other options are wrong
- A. Issuing non-voting preferred stock raises capital but doesn't address the voting power of common stock, which public investors would still acquire.
- C. Convertible bonds can eventually dilute voting power if converted, but they don't provide a mechanism for maintaining superior control in the initial public offering structure.
- D. A single class of common stock means voting power is proportional to ownership, diluting founder control significantly during an IPO.
Dual-Class Share Structure
A corporate share structure where different classes of common stock carry different voting rights, typically allowing founders or insiders to retain control despite owning a minority of the economic equity.
- Often used by technology companies and family-controlled businesses.
- Class A shares typically have fewer votes (or none) and are sold to the public.
- Class B (or other) shares have superior voting rights and are held by founders/insiders.
- Can lead to agency problems and lower governance ratings.
Memory trick: Two classes of stock, one for votes, one for wealth.