How to sell your company, and keep it

This is a longer-than-usual article, but stick with me … You are probably invested in one or more of these companies, so it is relevant for you and your savings.

Typically, an initial public offering (IPO) involves a company selling shares (either new ones to raise capital and/or existing ones as insiders sell) in order to list on a public stock market. When it is through dilution or (partial) exiting, insiders are effectively ‘selling’ at least part of their company to the public.

Read/listen:

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Buffett, and why you need to eat with management

But over the last two or three decades, and particularly since 2006, when US regulatory mandates required firms to reflect share-based compensation as an expense on the income statement instead of journals through equity, two increasingly trends have emerged:

Dual-class companies have come to the market selling ‘low- or no-voting’ shares to the public while founders/insiders retain key controlling votes in other share structures (for example, Google’s A and B shares, and Meta’s dual-class structure).
Companies, particularly those where minority shareholders votes offset by insider control, have increasingly been writing share-based compensation (SBC) schemes that issue shares in lieu of cash payments to employees (and often themselves).

In other words, insiders can ‘sell’ their companies in IPOs, realise wealth, but retain control and, perhaps, via SBC, even build up stakes they sold (assuming no dual-class structures). That is, sell their companies, but also keep them.

Dual-class structures are a governance risk that is (perhaps) mitigated by arguments that ‘aligned’ founders in fast-moving, IP-intensive industries need to make big decisions, manage the firms efficiently and focus on long-term value creation without the risk of being voted off the board following a poor quarter.

While SBC schemes are increasingly being argued for talent-attraction and talent-retention, with management often going to great lengths to pretend that these schemes are not ‘real’ costs (but if someone is earning it, then someone is paying for it) – this is perhaps aggravated because dual-class companies can issue plenty of low- or no-voting shares, dilute minorities, but founder’s votes (and, thus, ultimate value) are left untouched.

Numerous statistics show that founder-led firms in the S&P 500 have outperformed their peers by as much as 2.1 times in terms of total shareholder returns (TSR) between 2015 and 2024.

This outperformance persists even when the technology sector is excluded, with founder-led companies beating peers by 1.4 times.

Now – using public datasets and Google’s Gemini to crunch these epically large datasets – I have compiled the following tables:

Separating the S&P 500 and Nasdaq into quartiles based on SBC as a percentage of GAAP (generally accepted accounting principles) profits;
Looking at these quartiles and seeing how many of them are ‘founder-led’, as well as the prevalence of voting/governance structures;
Digging into shareholder votes for, against and, when founder’s votes are excluded, minorities against remuneration policies; and
A breakdown of the 10 largest companies here and what they look like.

SBC intensity

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Quartile
SBC intensity (% of GAAP profits)
Dominant sectors
Average annual return (S&P 500 segment)

First quartile (High)
>15.0%
Technology, communication services, biotechnology
20.75% (Tech)

Second quartile (Med-High)
7.5% – 15.0%
Healthcare, consumer discretionary
13.26% (Health)

Third quartile (Med-Low)
3.0% – 7.5%
Financials, industrials
12.26% (Fin)

Fourth quartile (Low)

Energy, utilities, real estate
5.45% (Energy)

Source: S&P 500/Nasdaq public market data, Gemini analysis

The table clearly shows a correlation between ‘intellectual property’-intensive industries like tech and biotech, and their SBC intensity.

Interestingly, the returns in these sectors over the last five years have been higher, perhaps lending weight to talent-acquisition/retention arguments.

(Capital-intensive industries, like energy and real estate, have negligible SBC and low returns. Given the huge rise in data centre and AI spending by tech firms that are increasingly shifting them from a capital-light model into a capex-intensive structure, it does beg the question about whether their SBC will naturally come down, or their returns will too? Or both? AI wants to be a ‘global utility’, but be careful what you wish for …)

SBC intensity versus founder-led

SBC quartile
Estimated % of companies with founder control
Governance model tendency
Strategic priority

First (High)
35% – 40%
Dual-class, insider super-voting
Innovation, R&D, long-term bets

Second (Med-High)
15% – 20%
Large blockholdings, board presence
Strategic renewal, market expansion

Third (Med-Low)
8% – 12%
Standard proxy, passive majority
Operational scale, efficiency

Fourth (Low)

Widely dispersed, non-founder lead
Asset maintenance, yield

Source: S&P 500/Nasdaq public market data, Gemini analysis

Interestingly, this table indicates that companies with higher SBC have higher odds of being founder-led and to feature controlling and/or dual-class structures. Vice versa also hold true.

Minority votes for or against founder-led remuneration schemes

Company structure
Reported support (%)
Adjusted support (excluding insiders)
Opposition gap (pp)

Dual-class (Founder-led)
92.90%
85.60%
7.3x

Single-class (Professional)
89.30%
89.3% (approx.)
0

Source: S&P 500/Nasdaq public market data, Gemini analysis

Despite the correlation between higher SBC intensity, founder-led companies, and higher shareholder returns, this table shows that minority shareholders are increasingly voting against these schemes and, in general, remuneration proposals.

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To try to get around it, remuneration committees (RemCos) have been trying to push ‘evergreen’ SBC (it just renews each year as a percentage of outstanding shares without need for shareholder voting).

But incentives that are not earned are not incentives, they are just overheads.

Any evergreen SBC that wipes out annual profits implies that a company is not actually profitable (or, at worst, sterilises minority worth of a share).

Read: Navigating the RemCo annual cycle: Core steps for effective remuneration governance

In other words, the market and minority investors are starting to push back on these schemes.

If minorities have just as much risk as insiders (or, given their lack of control here, more risk), why aren’t they getting just as much returns?

Reflecting this, the ‘Big Three’ asset managers with material voting power across equity markets – BlackRock, Vanguard, and State Street – are becoming increasingly vocal about the principle of ‘One share, one vote’ and have begun to support shareholder proposals to collapse dual-class structures.

Unfortunately, as predominantly passive investors, they are forced to keep buying these companies …

Read: Fund giant BlackRock is out to unite public and private markets

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Finally, the following table shows what the 10 largest companies in these indices look like when viewed through this lens.

S&P 500 top 10 companies – SBC intensity, founder-led, and governance highlights

Ticker
Market cap share (%)
TTM net income share (%)
Founder involved?
SBC intensity profile

NVDA
7,00%
High
Yes (Jensen Huang)
Quartile 1

AAPL
6,30%
11,20%
Influenced
Quartile 2

MSFT
4,60%
10,10%
Post-founder
Quartile 2

AMZN
3,60%
7,70%
Post-founder CEO
Quartile 1

META
2,40%
6,00%
Yes (Zuckerberg)
Quartile 1

GOOGL
2,30%
13.2% (Combined)
Yes (Page/Brin)
Quartile 1

BRK.B
1,80%
6,60%
Yes (Warren Buffett)
Quartile 4

LLY
1,40%
Moderate
Professional
Quartile 2

JPM
1,30%
5,70%
Professional
Quartile 3

XOM
1,20%
2,80%
Professional
Quartile 4

Source: S&P 500/Nasdaq public market data, Gemini analysis

By categorising companies into quartiles based on SBC as a percentage of profits, our analysis illustrates how high-intensity SBC is intrinsically linked to founder-managed firms that prioritise long-term innovation and the retention of control.

While this model has successfully delivered superior total shareholder returns over the last five years (a good thing), it has also created a governance environment in which the economic cost of dilution is often obscured, and insider voting power is used to override the concerns of the broader investment community (a bad thing).

Any capitalistic system has healthy points of tension that drive efficient capital allocation, and the growing pressure from minority and professional investors against insider enrichment may be kept at bay if returns remain high.

But if history is anything to go by, returns cannot remain high indefinitely.

This growing pressure will eventually come to a head in some way or another. And in that sense, the age of being able to sell your company and keep it will eventually end.

* Keith McLachlan is CEO of Element Investment Managers. 

#sell #company