Classes of Shares

Classes of shares (also known as 'share classes') refer to a company's practice of dividing its stock into different categories. While all shares represent ownership in a company, not all shares are created equal. Think of it like different types of tickets to a sports game: some get you a standard seat, while others give you access to a luxury box with special perks. Similarly, different classes of shares come with different rights and privileges attached. The most common distinctions lie in voting rights, which determine an investor's say in company decisions, and dividend entitlements, which dictate profit distributions. This structure allows a company to offer different packages of ownership to different types of investors, but it's most famously used by founders who want to sell equity to the public without giving up control of the company they built.

The number one reason for creating multiple share classes is control. Founders and their families often use a dual-class share structure to raise capital from the public markets while retaining a disproportionate amount of voting power. This allows them to steer the company according to their long-term vision, insulated from the short-term pressures of the market or the demands of activist shareholders. For example, a founder might hold 'Class B' shares that carry 10 votes each, while selling 'Class A' shares to the public that carry only one vote each. This way, even if the founder owns less than 50% of the total shares, they can still easily control more than 50% of the votes. Famous examples of companies with this structure include Meta Platforms (Facebook) and Alphabet Inc. (Google), where the founders maintain decisive control. While control is the main driver, other reasons include:

• Attracting different investors: A company might issue one class with a higher dividend for income-focused investors and another with more growth potential for those seeking capital gains.
• Employee incentives: Special classes of shares can be created for executive compensation plans.

Share classes can get complicated, but they generally fall into a few key categories. The names (e.g., Class A, Class B, Class C) are not standardized across the market; you must always read the company's charter to understand the specific rights of each class.

This is the vanilla ice cream of the stock world—the standard share most retail investors buy and sell. Typically, these shares (often designated as 'Class A') carry one vote per share and entitle the holder to a portion of the company's profits and assets. Their value rises and falls with the company's fortunes.

These are the shares that pack a punch. Often designated 'Class B', they carry multiple votes per share (e.g., 10, 20, or more). These are rarely traded on the open market and are almost exclusively held by founders, their families, and top executives to maintain voting control.

Preferred stock is another distinct class of share that acts like a hybrid between a stock and a bond. Its key features usually include:

• Fixed Dividends: They pay a fixed dividend, which must be paid out before any dividends are distributed to common shareholders. This makes them attractive to income investors.
• No Voting Rights: The trade-off for this preferential dividend treatment is typically the absence of voting rights.
• Priority in Liquidation: If the company goes bankrupt and is sold off (a liquidation event), preferred shareholders get paid back their investment before common shareholders see a penny.

For a value investor, the existence of multiple share classes, particularly a dual-class structure with unequal voting rights, is a flashing yellow light that demands caution. The core issue is a potential misalignment of interests. Warren Buffett, a vocal critic of the practice, argues that when management is entrenched with super-voting shares, they are less accountable to all shareholders. They can make decisions that benefit themselves at the expense of the minority owners (i.e., you). The fundamental principle of shareholder alignment—where management and owners share the same risks and rewards—is weakened. At his own company, Berkshire Hathaway, the Class B shares have 1/10,000th of the voting rights of Class A shares, a structure designed to broaden ownership, not to entrench management. This doesn't mean you should automatically reject any company with a dual-class structure. If a visionary founder with an impeccable track record of creating long-term value and treating all shareholders fairly is at the helm, it might be an acceptable risk. However, you must ask yourself a tough question: Am I confident this management team will act as true partners, or are they simply using the structure to protect their own power and perks? Ultimately, a dual-class structure adds another layer of risk. As a value investor, you should demand a higher margin of safety to compensate for the fact that your vote—and your ability to influence the company you partly own—has been diluted.