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Jack Dorsey’s 28.3% Square ownership gives him 75% control.
65 points by TravisDirks on June 20, 2012 | hide | past | favorite | 32 comments
Hi all, HN newbie here :). I was invited as a YC finalist back in April for our business which revolves around measuring shareholder control. Some of you told me you thought the community would find the link interesting, so I’m happy to oblige:


While the headline is Control at Square, I hope as fellow entrepreneur’s you’ll takeaway a few more broad points:

-Unless it is zero or greater than 50% , your percentage ownership reveals exactly nothing about your control.

-Sophisticated entrepreneurs and venture capitalists know this much, which is why they often advise letting control take care of itself. What they don't know is that the story doesn’t end there. (Almost no one knows this including activist’s investors I've worked with who take over companies for a living.)

-Control is not soft and fuzzy. It is definable, measurable, and manageable. Just like all the other metrics that drive your business, you can measure it, make decisions and move on.

Talk to me in the comments!

When I read this headline, I interpreted it to mean Jack owns 28.3% of the shares, but that his class of shares has greater voting rights, and so he has 75% of the votes (a majority - similar to Zuckerberg).

However, that's not what the author means by "control". He means the chance that a shareholder vote goes Jack's way, under the very large assumption that every other shareholder votes independently at random.

That doesn't seem a very meaningful statistic, especially if there are other groups of shareholders with shared interests (for example VCs may be more likely to have goals in common, and would be likely to vote their shares on a big issue together.)

75% is the number of possible situations in which Jack Dorsey could single-handedly control the outcome. That's not necessarily the number of plausible or actual situations that will arise.

Sorry for the confusion, terminology around this issue can be VERY confusing. The word control in particular is nearly always abused.

Control is itself an objective number without assumptions beyond a shareholder-list / Cap-table. Control is literally the percent of all possible outcomes in which the result of the vote/election is decided by the shareholder's vote.

In the link you will find a second graph, in which I give the chances of winning a shareholder vote. Here there is an assumption that each shareholder is as likely to vote one way as another. There is no doubt it is a softer number, but I report it because people can understand what it means much faster than control.

Now these issues of psychology and feelings about particular issues can be accounted for, as you can imagine its necessary when working on the activist situations we cut our teeth on, but there we generally have public statements about which way particular shareholders plan to vote, or how they feel. When looking at a founders long term control, its best to leave out these issue. Less good information is better than more so-so information.

If you want to know a about founders ability to do something specific that would polarize shareholders around common interests, such as sell the company at a price that is personally rewarding, but not great for the investors, that calculation can be done. I just think it should be thought of separately from a founders general control.

Sorry for the length and hope this helps!

terminology around this issue can be VERY confusing

You are not making it any simpler by redefining "control" in this theoretical way. You are making some very naive assumptions about independence: you'd be much better off treating the investors as a single voting bloc, which is what the usual sense of "control" assumes - and if there are multiple founders you should assume that serial investors are very sophisticated at splitting them.

A good followup would be to go out and actually measure the distribution of voting outcomes rather than making a strong claim based on the most tractable assumptions you can find.

To be literal, the only thing that a shareholder 'controls' are the votes that their own shares provide. They may be able to influence the votes of others, but that by definition is not control.

What you've defined in the second paragraph is 'the likelihood that the shareholder decides the outcome of a vote'. You can call it control if you like, but don't make the mistake of assuming it's a very intuitive description of what the metric describes.

This usage of the word 'control' in this article seems very different from how it is typically used in the tech industry, even misleading.

Normally when we're talking about a minority shareholder having control, it is as a result of multiple share types with different voting rights (as in Facebook, Google, News Corp, etc.).

The assumptions also should be really clearly labelled, to also avoid misleading people. "there is an assumption that each shareholder is as likely to vote one way as another" is a huge assumption that is essentially based on zero information, whereas information is typically available for a particular company. It's worse than the assumptions behind options pricing models using Gaussian (so-called 'normal') distributions, imho.

It would be great if there were a link to a primer on control and how it differs from ownership and how it is calculated.

Generally, it's simply a sliding scale of voting vs non voting stock. AKA each share of class A get's 10 votes, Class B get's 1 vote, and Class C get's 0 votes. Which is equivalent to A is 10 voting shares, B is 1 voting share 9 non voting share, and C is 10 non voting shares.

Note, none voting shares get the same percentage of the profits. And often there are conditions that transform A shares into B shares upon sale etc.

That doesn't appear to be the meaning of "control" that OP is using.

Thanks for the suggestion! I'll see what I can pull together quickly.

Briefly, control is the percent of all possible outcomes in which a shareholder's vote decides the result of the shareholder-vote/election. Control is directly related to the odds of winning the shareholder-vote.

This is something like the Banzhaf power index, I think: http://en.wikipedia.org/wiki/Banzhaf_power_index

I would need to see a more solid argument that control could come own to the odds of winning a vote. My hunch is that "the odds" would become mostly irrelevant when it came to a contentious topic.

I was CIO for PIRC.co.uk for some years and this is a fascinating topic, and I wish I had more time for this.

I assume you are using Banzhaf Indexes (If I spelt that right!) to determine the "swing vote" power.

I have long thought there is potential for individual investors in say pension funds to be allowed to vote their 'beneficial' (#) holding their way - so the controversial measures start to become more democratic. One day I will persuade a pension fund to try this, but that might just play havoc with your analysis :-)

Out of interest, how much of say the Dow have shareholders that hold 'disproportionate' power ? _ say 10% more influence than their vote count would suggest?

Good luck !

(#) I don't think the term I mean exists.

edit: * -> # to avoid italics

Just went over to PIRC, very cool! I'd love to have a short chat some time. I'm interested in the UK market because a very high percentage of the ownership in public companies is known. Nothing like tiny error bars :P

That's an interesting idea with the pension funds. It might cause a hiccup in the analysis bybincreasing the percentage of unknown stockholders, Proxy Solicitor would love it since the retail campaigns are highly profitable.

I've been tossing around the idea of partnering with a website like moxyvote that has retail investors following these issues. I think it would be interesting to let them indicate their intended vote then calculate their collective power. I think it would be motivating and increase turnout.

In answer to you question about the Dow I have not run them as a set, but I've never worked on a company yet that didn't have at least one shareholder that met that criteria.

Email me at T@RotaryGallop.com if you'd like to chat.

Control is obviously closely linked to share ownership, in the sense that where ownership is over a certain threshold you will be able to exercise a much greater degree of control than below that threshold. For example, the 51/49% split, but also, in the UK, where you have power of veto over major decisions requiring a special resolution with 25% or more.

However, I would be interested here to understand how two people with different shareholdings are able to exercise equivalent levels of control (again on the assumption that each share attracts one vote).

This assumes that control is being assessed on a pure basis without taking into consideration the psychology at play between different shareholders.

Consider the case of a company with 3 shareholders.

  A has 49%
  B has 49%
  C has 2%
When an important vote comes up, C's vote is just as important as A or B.

Bingo! I call this the Crazy Uncle Charlie example:).

One tiny correction: when any vote, important or otherwise, comes up C's vote is just as important as A or B.

Let me know if the ABC example didn't get the job done. The core insight is to understand that it doesn't matter how high the result is. 51% wins just as well as 85%. So how much you win by is irrelevant.

No, that's fine. Actually I had initially read it as equivalent shareholding giving different control, which was what my query was based on. I then realised the opposite was relayed in the graph, so reversed the position, without realising that this nullified my query. Thanks for your response though.

Thank you everyone for the Up votes and the conversation! We reached six or seven on HN on the same say Seth Godin sent out a blog post mentioning how unlikely it is to reach the front page of HN. That was a treat!

I'd love to keep it going, but its late here (I'm traveling in Holland at the moment). So I think what I'll do is work on a post to try to address the most common questions and get back tomorrow.

As a HN newbie I would appreciate advice on whether it is better to post this in the comments, or start a new post.

So control is unrelated to ownership; does this change the mechanics of companies based on their type? (C or S corps, LLC... etc) For instance, I thought ownership in an LLC reflected control as well.

So if votes count with equal weight, then letting other people in to the "ownership" of a company could be disastrous to the founders. A third, less knowledgeable but opinionated, party in the voting could totally destabilize the company if it threw its weight around.

This seems counter-intuitive.

It is counter initiative! I done lots of these analyses and I've learned to just run the numbers, because intuition is often wrong ( though you can usually understand it in retrospect )

On control and ownership, if you tell me one shareholders percentage ownership, I still know nothing about thier control(unless they own more than 50%). So in this sense, a single shareholder's ownership is undelated to thier control. Now if you tell me all the shareholders ownership, then we know about control.

Your right control over an LLC works generally the same way as C Corp. This measure works regardless of corporate structure. We've even used it to measure control on a board of directors. The things that require accounting for are how the voting system works. For example is the criteria to win a vote 50% or 66%. Is it 50% of all shares, or of shares that bother to vote?

I almost understand what you mean, but my intuition keeps tripping me up.

Say there's an LLC with 3 owners: 70%, 20%, and 10%. All members get 1 vote (unless I'm missing something). So how does the ownership relate to their control? What's implied by basic math is that 3 votes equals roughly 33% control each, assuming all votes are in (and for/against). But what you showed in your article appears to disprove that.

You've gotten enough of my attention for me to subscribe to your blog, though.

Thank you! That is great to hear!

Ah the three person system! You can really understand a lot of this by digging into it, so you are thinking along the right track! If you like we can have a chat by phone. Otherwise I think I can answer a lot of your questions and others by writing a post on the three person example, so you could wait for that too.

But a brief answer: 1) Whether each gets one vote depends on the LLC. It should outlined in the operating agreement. (Our company is considering adopting a voting system that actually equalizes ownership and control, a surprisingly hard thing to engineer! but once you've decided on it you can just amend the operating agreement.) 2) Lets say that is true, each of the three people gets one vote. Then you are right that they each have equal power, but if memory serves it actually amounts to 50%, not 33%. (un-intuitive right!)Meaning each person has a deciding/swing vote in half of the 8 possible outcomes.

I think I'll wait on the article for now. But I may ask for a phone call later out of personal curiosity.

Sounds good. I was over optimistic promising today, though. Look for it next week. I'll post a comment hear when its up.

This article and discussion makes me think that you either have control or you don't?

Interesting. I'm meeting McKelvey tomorrow, so this whets my excitement.

Great! I'd love to hear what reaction you get!

I'm there to listen! One of the few times thus far in my life where I'll be in a room with a combined attendee net worth probably exceeding $ 1 Billion USD. And, to think that I'm decreasing that value when factoring in student loans. . .

This is flat-out wrong. You are not talking about "control", which has specific meanings in corporate and tax law. You are talking about "likelihood of control" or some other concept that is somewhat related to control but is not "control" in the meaning as it is used by everyone else.

I'm not a lawyer, but I have been consulted by law firms employed by major activist investors litigating fortune 500 companies.

The short of it is, if your worried about actually controlling a company this is the control you need and I would suggest talking to me. If you are going to court, I would suggest talking to a lawyer (who may well want to talk to me :P).

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