Harvard researchers say that Lyft investors will likely come to regret giving the cofounders so much control with so little stock

REUTERS/Mike Blake

Lyft President John Zimmer and CEO Logan Green could own less than 5% of Lyft's equity and still have nearly 50% of its voting power.

• Lyft's power structure, which gives founders Logan Green and Josh Zimmer a concentration of voting power, "can be expected" to decrease Lyft's share value in the future, according researchers at Harvard Law.
• The dual-class structure means that Green and Zimmer have near-total control over Lyft while collectively owning less than 5% of the company.
• They could also retain significant control while owning as little as 2.65% of the company's equity, the researchers found.
• This could hurt Lyft's shareholders in the long-term, the researchers found, especially since Green and Zimmer won't necessarily be motivated by the same incentives as other shareholders.
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Lyft shareholders could come to regret giving up substantial power to CEO Logan Green and President Josh Zimmer, the company's cofounders.

Lyft shares closed at $74.55 on Friday, nearly $4 below its first trade when the company went public on March 29. While the stock has seen a slight recovery from its all-time-low of $66 in its first week of trading, Wall Street isn't quite certain on how to treat the stock in the long-term.

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In a post published Wednesday, Harvard Law School's Lucian Bebchuk and Kobi Kastiel argue that Lyft's corporate governance structure "can be expected" to decrease Lyft's per-share value in the future, and increase the discount at which Lyft's low-voting shares trade.

"Each of these effects would operate over time to reduce the market price at which the low-voting shares of public investors would trade," wrote Bebchuk and Kastiel. "These effects should thus be taken into account by any public investors that consider holding Lyft shares."

At the heart of their argument is Lyft's dual-class share structure. Shareholders that buy Lyft's stock on the public markets buy Class A shares, which come with one vote each. This is compared to the Class B shares that make up the majority of Green and Zimmer's respective holdings. Lyft's Class B shares each grant 20 votes on the holder.

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Following the IPO, Logan and Zimmer had an "absolute lock" on power while owning just 4.96% of Lyft's equity. This collective stake nets them 48.6% of the voting power at Lyft.

Bebchuk and Kastiel found when taken to an extreme, Green and Zimmer could still retain "effective control" of the company with 2.65% of equity in the company, which would still give them 35% of the voting rights, the researchers found.

This is significant, they argue, because "tiny-minority controllers" can distort corporate decision making and ultimately harm other shareholders. Even with less than half of total voting power, their combined block could still swing any vote one way or the other.

In one scenario, Bebchuk and Kastiel found that Lyft's founders would be incentivized to reject a wide range of strategic acquisition offers due to "private incentives," even if all of the other shareholders would benefit from such a transaction. In other words, even if Lyft shareholders wanted to sell, Green and Zimmer could unilaterally turn down the offer.

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