Sachin Bansal might’ve left Flipkart with Rs. 6,800 crore in the bank, but he’s hinted that his exit might not have been completely voluntary.
Bansal has spoken out about the lack of control that entrepreneurs are faced with when venture capitalists pump money into their startups. “Below 25% stake, entrepreneurs usually do not have much control on the main decisions, including mergers, unless separately agreed upon. Below 10%, which is a reality in many startups at late stage, founders can also be booted out,” he said in an interview with ET.
It’s unclear if Bansal was booted out of Flipkart when Walmart had acquired the company earlier this year in a record $21 billion deal, but Bansal’s own stake in Flipkart at that point had been in the single digits. Before Walmart acquired Flipkart, Bansal’s own stake was just 5.5%, while cofounder Binny Bansal controlled another 5.2%. With barely 10% of Flipkart being controlled by its original founders, decision making about an eventual sale would’ve ultimately rested with the coterie of Flipkart’s many investors.
Bansal has said that this isn’t ideal, and advocated dual-class voting shares through which founders can retain control of their companies even when their actual stockholding falls to low levels. “If you look at the great companies in India—whether it is Tata or Birla (groups) —they are highly empowered families and entrepreneurs who had control,” Bansal said. “Today, we need more capital than before and dilution happens. How to create a Tata or Ambani situation while being able to take a lot of capital? Dual-class shares should be good. I am in support.”
Dual-class shares are a corporate finance mechanism through which companies can issue shares which have different voting rights. Traditionally, one share means one vote at companies, and people with a majority of votes get to determine how a company is run. But increasingly, tech companies release two different kinds of shares — those with voting powers, and those without. Non voting class shares enable holders to enjoy the same economic benefits as those holding voting shares, but without a say in how the business is run.
Several global tech giants have already implemented such dual-class voting structures. Google issues two kinds of shares, which allow for greater control for the company’s founders. Facebook, too, has dual-class voting shares, and CEO Mark Zuckerberg controls 60% of the voting rights while owning only 1% of Facebook shares. Snapchat has taken this to its logical extreme — during its IPO, retail investors were allotted shares with no voting rights at all.
Such shares could come handy n India, where entrepreneurs are no strangers to VCs throwing their weights around. In 2015, Housing.com founder and CEO Rahul Yadav had been fired from his position after losing the support of his board. Last year, Snapdeal’s founders and its investors had engaged in a bitter public spat over whether their company was to merge with Flipakrt or not. Ola has already acted to empower its founders who were wary of a takeover by Softbank — a new article of association instituted by the company in 2017 says that SoftBank cannot buy more equity shares in Ola without approval from the company’s founders and board of directors.
Companies in India can currently have differential voting, but only after meeting a set of conditions, which includes that they be profitable. But going forward, it might be easier for Indian companies to implement dual-class shares. The Securities and Exchange Board of India (SEBI) is reportedly considering a proposal to allow a ‘Snapchat’ model for listing startups so companies can sell shares with differential voting rights. Bansal says it will be for the best. “If you look at China and the US, dual-class voting structure has helped create better companies,” he said. “Building a company is like a very long train journey. The entrepreneur is the driver, investors and employees are passengers. They get on and get off. If you take a 20-30-year view, no investor or employee will stay. Empowering the driver is good,” he added.