Peloton insiders will have 20 votes per share — twice as many as those at other startups — but CEO John Foley may not wield all the power after the IPO

John Foley attends the 2018 Best In The Business Awards at Trianon Ballroom at The New York Hilton Midtown on November 8, 2018 in New York City.

Like many startups that have gone public recently, Peloton will have a stock structure that gives extra votes to certain insiders.
Many companies with such arrangements give insiders 10 votes per share, but Peloton CEO John Foley and some early investors in the fitness firm will get 20 votes per share.
At least as things stand now, Foley wouldn't have majority control by himself, because he's not the biggest holder of super-voting shares.
Governance experts and institutional investors tend to frown on super-voting shares, because they shield corporate managers from accountability.
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As has the case at many startups that have gone public lately, insiders at Peloton will have shares that give them extra votes after its initial public offering.

But Peloton's insiders will get more votes than most — 20 for each of their shares. And, at least as things stand now, its CEO, John Foley, wouldn't be the number-one vote holder once Peloton is public.

Holders of the super-voting shares "will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval" after the IPO, Peloton advised potential shareholders in the offering paperwork it made public this week. It continued: "This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future."

A growing number of startups that have gone publicly lately or are about to have multi-class stock structures that provide disproportionate numbers of votes to certain insiders, typically founders, CEOs, and early investors. The structures help those insiders to retain control over the companies even after selling shares to public investors.

In general, though, the super-voting stock held by insiders usually comes with 10 votes per share. The stock held by Foley and other Peloton insiders will come with twice as many votes per share. That would allow the holders of those shares to continue to control the company with as little as a 5% combined economic stake in the company — half that needed to retain control at a firm that had shares with 10 votes per share.

Dual-class structures in general are bad for investors, because they insulate corporate managers from accountability to the people who actually own the company, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

"Whether it's 10 [votes] or 20, it's still a structure where your control is complete over the company without the same level of economic interest," Elson said. "Twenty is simply adding insult to injury."

'Twenty is the new 10'

Although Peloton's 20-vote-per-share arrangement for insiders is unusual, it's not unprecedented. WeWork also plans to assign insiders, particularly CEO Adam Neumann, stock with 20 votes per share. Lyft and Pinterest also give certain insiders 20 votes per share.

"Twenty is the new 10," said Glenn Davis, director of research at the Council of Institutional Investors. "We're very discouraged by that."

In the tech world, dual-class structures usually are designed to empower founders and CEOs. The companies and their early backers typically argue that they allow such leaders to focus on realizing their long-term visions for their companies rather than having to be distracted by the concerns of short-term investors.

But at least as things stand now, Foley, who cofounded Peloton in addition to serving as its head, wouldn't be the primary beneficiary of its dual-class stock structure. Foley owns 15 million shares of Peloton's Class B stock, which will come with 20 votes per share. That's about 6% of the outstanding Class B shares.

Peloton director Jon Callaghan controls a larger amount as the representative of True Ventures' stake in the company. Callaghan and True Ventures own 28 million Class B shares, or about 12% of the total. Meanwhile, Tiger Global Management, whose own representative on Peloton's board resigned earlier this month after he left Tiger, owns 47 million Class B shares, or about 20% of the outstanding number.

Peloton didn't disclose in its paperwork how many shares its insiders and early investors plan to sell in its IPO. Callaghan and True Ventures did not respond to a request for comment about the venture firm's stake in the company. Scott Shleifer, a partner at Tiger Global Management, did not respond to an emailed interview request.

However, it's possible — maybe even likely — that Foley will emerge from the offering as Peloton's largest Class B shareholder and its dominant stakeholder overall. Venture capital firms frequently sell a sizeable portion of their stakes in startups in public offerings, and often continue to sell after.

"That's their mantra, they won't stay," Elson said. "And when they exit, management takes control."

Peloton's structure has a sunset provision

Peloton did throw one bone to potential investors, with regards to its dual-class structure — a sunset provision. The arrangement will go away in 10 years, when two-thirds of Class B shareholders vote to get rid of it, or when Class B shares only account for 1% of the total outstanding shares of company stock, whichever comes first.

In contrast, most of the companies that have gone public in recent years with multi-class stock structures do not have any kind of time-based sunset provision, according to data from the CII. Companies such as WeWork don't have a such a path to getting to one vote per share for all stockholders, noted CII's Davis.

"Peloton has a path," he said. "It's not as aggressive as we'd like to see, but at least it's a path."

But Peloton could renege on that sunset provision, Elson said. And even if it doesn't, things could happen at the company well before then that would make investors want to wrest control from Foley and other insiders.

"What happens if in five years you have a managerial disaster?" Elson said. "Ten years is a long time. It's very investor unfriendly no matter how you look at it."

Indeed, even before going public, Peloton acknowledged in its filing that it has flaws in its internal controls, processes companies put in place to ensure the accuracy of their financial reports and prevent fraud. There's no suggestion than anything nefarious has happened at the company, but the shortcomings raise the risk that something could have or might in the future, accounting experts have said.

Read this: In its IPO documents, Peloton warned it's got some particular shortcomings as a business that could lead to fraud or financial restatement

While many public investors frown on multi-class structures, they've become more common. According to recent data from CII, at the end of June, there were 255 US public companies with a market capitalization of at least $200 million that had dual- or multi-class stock structures that gave certain shares disproportionate voting rights. Of those, more than a third went public after 2013, and more than half went public after 2005.

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