Tech Founders Embraced Control Over Companies. This One Is Giving It Up.

For more than a decade, some of the best known technology companies, including Google, Facebook and Snap, have sold shares to the public while maintaining a corporate structure that allowed their founders to keep tight control over their companies.

For Silicon Valley entrepreneurs, it was a way to protect themselves from pesky investors interested in short-term gains, even as shareholder advocates blasted the arrangements for creating unaccountable leaders.

Now Zynga, a once high-flying maker of popular internet games such as FarmVille and Words with Friends, has taken the unusual step of scrapping its founder-friendly structure — a change that could make it easier for the company to sell itself down the line.

The founder-empowered structure at the heart of many tech companies is known as a multiclass stock structure, under which those who started the company own a certain class of stock that gives them outsized voting power even after it goes public.

At Zynga, Mark Pincus, the company’s founder, has now converted some of his shares that carry more voting clout — known as Class B and C shares — into common Class A shares. The conversion reduces his overall voting power at Zynga to about 10 percent from about 70 percent. Mr. Pincus will not see any change in his economic interest in the company from the conversion.

The changes comes as Mr. Pincus and his wife, Alison Gelb Pincus, are going through a divorce. Last year, publications in San Francisco, where Zynga is based, speculated that the divorce could jeopardize his control over Zynga. Ms. Pincus is challenging a prenuptial agreement with her husband, according to a document filed in California Superior Court.

In a phone interview, Mr. Pincus said his divorce, which he described as amicable, is “not part of or relevant to the announcement” of his conversion of his stock.

Rather, Mr. Pincus said he made the decision in consultation with Zynga’s board, partly because of growing criticism of dual- and multiclass share structures. As part of the change, Mr. Pincus said he would leave Zynga as an employee — he was executive chairman — and become nonexecutive chairman of the company’s board of directors.

“We think the company doesn’t benefit anymore from a multiclass structure,” Mr. Pincus said.

Dual-class voting structures have been around for decades and have been especially popular at media companies, such as News Corporation and The New York Times Company.

Many prominent tech companies have turned to them as well, starting with the initial public offering of Google, which is now owned by a holding company called Alphabet, in 2004. Since then, Facebook, Zynga, Snap and a variety of others have followed suit with similar structures.

The vast majority of companies that go public have a single class of stock, where one share equals one vote. About 81 percent of companies that went public last year had single-class arrangements, according to the Council of Institutional Investors, a nonprofit association of pension funds and other large investors.

In response to criticism of dual-class structures, more companies are going public with provisions that automatically convert their shares to a single class after a period of time, anywhere from 5 to 20 years. Fitbit, the maker of fitness trackers, went public in 2015 with a 12-year provision that sunsets its dual-class stock, while the cloud software company Okta went public last year with a similar 10-year provision.

Mr. Pincus said Zynga’s multiclass share structure provided his company with “air cover” during several difficult years after it went public at the end of 2011. The company originally made games that people played on Facebook through desktop web browsers, but its business was upended by the surge of mobile gaming on smartphones.

Zynga gradually focused on mobile games, but its stock has languished even as it has mounted a turnaround under a new chief executive, Frank Gibeau. The company’s shares trade at less than $4, far below its $10 a share public offering price. On Wednesday, it announced it had swung to a profit of $5.6 million in the first quarter from a loss of $9.5 million a year ago.

Mr. Pincus said his voting control at Zynga had not given him veto power over outside offers to acquire the company, though it did give him the ability to replace board members. He said he had never exercised that right.

When asked if Zynga could consider acquisition offers more easily now that Mr. Pincus had relinquished most of his voting power, Mr. Gibeau said, “That’s not our mission — our focus is to grow the company.”

Mr. Pincus said he intended to devote more time to investing in start-ups. He said he was particularly interested in companies focused on the blockchain, the technology that’s behind electronic currencies like Bitcoin, but could also have broader applications.

Giving up his control of Zynga, Mr. Pincus said, will ”create more space between me and the company whenever I go launch new products.”

Content originally published on https://www.nytimes.com/2018/05/02/technology/zynga-shares.html by NICK WINGFIELD