Money Buzz 11/04
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Let's Make a Dual
If fear of losing control of your company is the only thing stopping you from an IPO, then dual-class ownership probably sounds like a great deal. In this public company ownership structure-which has gained exposure since Google announced plans to use it in its public offering-founders receive "supershare" stocks that carry multiple votes, while the shares sold to the public carry one vote each. Typically, a dual-share system is structured so the founders retain a majority voting power, thereby retaining operational control and insulating the firm from takeover attempts.
But control bears a hefty price tag. "The market places a real discount on firms like this," says Andrew Metrick, associate professor of finance at the University of Pennsylvania's Wharton School. "To retain control, you could be looking at a 20 to 30 percent lower valuation."
Is it worth the sacrifice? "You have to ask yourself what control is worth to you in dollar terms," advises Metrick. He notes that investment bankers invariably discourage the structure unless, as in Google's case, company founders rate near-celebrity status. "It brings the value down, and it's one more thing for them to have to explain to the [investing public]."
Venture-backed small businesses shunned by the SBA's Small Business Innovation Research Program (SBIR) in recent years may soon benefit from new legislation. Enacted in 1982 as part of the Small Business Innovation Development Act, the SBIR has helped thousands of small businesses compete for federal R&D awards. But in recent years, the program began to eschew startups with VC backing and revoke awards already bestowed on such companies, citing an eligibility requirement that mandates "51 percent ownership by one or more individuals who are citizens of or permanent resident aliens in the U.S."
"The genesis of the program was to spur innovation and create economic development," says Mark Heesen, president of the National Venture Capital Association (NVCA). "Artificially restricting that class of companies to only those that don't get venture financing cuts off many very sound companies."
Help is on the way in the form of two stand-alone bills in Congress (H.R. 4149.IH and S.2384.IS) as well as an SBA reauthorization bill bearing corrective language. All three state that companies owned in part by a VC operating company cannot be exempted from SBIR participation, says Nancy Saucier, director of the Medical Industry Group at the NVCA.
"The SBA is putting high-tech growth companies in a hard position of choosing either venture backing or SBIR grants, when what they really need are both," says Saucier. "That's why we're fighting the hard fight."
To learn how to get an SBIR grant, check out the "Raising Money" column in our upcoming January 2005 issue.
is a freelance writer in New York City specializing in business and finance.