Why companies issue multiple classes of common stock?
Question
Companies issue various classes of common shares such as Class A shares and class B shares. Why is that?
Answer:
First, note that different classes of shares does not mean common shares and preference shares. Within common shares, companies issue different classes of shares such as Class A and Class B shares. All these classes of shares are the same as far as the profits of the company are concerned, i.e., each one has equal right on the profit of the shares.
However, the main difference lies in the voting rights. A company will issue different classes of common shares so that it can provide different voting rights to different sets of investors. For example, it may want to provide higher voting rights to founders, management and other insiders. A super voting multiple could be 10 votes per shares of a higher class. This is done to give them more control over the company. The other class will have lower/standard voting rights.
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