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By Maureen Farrell 

Like many technology entrepreneurs, the founders of Snap Inc. want to retain management control of the messaging-app company, even as they sell shares to the public.

In one respect, the men are going further than tech firms typically do: Investors won't get any voting power with shares purchased in Snap's initial public offering, according to people familiar with the matter.

That leaves key decisions, such as the makeup of the board, primarily to Evan Spiegel and Bobby Murphy, co-founders of Snap, the owner of the disappearing-message app Snapchat. The two are expected to hold more than 70% of the voting power despite owning roughly 45% of the stock, the people said.

Companies with multiple classes of stock typically give IPO investors fewer votes per share than they give to founders, executives and early private investors.

The power of the "supervoting" shares is typically diluted over time as new shares are issued. But Snap's decision to sell nonvoting shares is extreme. Messrs. Spiegel and Murphy's proportional voting control wouldn't materially change when new shares are sold because the common stock doesn't have voting rights.

The setup evolved from a similar arrangement Snap had with its private investors, who received nonvoting shares in Snap's recent private funding rounds, according to the people familiar with the matter. The pre-IPO investors will receive voting shares with less power than those held by the two founders, the people said.

Mr. Spiegel has considerable leverage as Snap plots its IPO, which could come as soon as March and value the business at between $20 billion and $25 billion, people familiar with the matter have said.

The company's bankers and executives see the 26-year-old as a selling point to investors and plan to portray him as a visionary who knows how to create products for his coveted millennial peer group, The Wall Street Journal has reported.

The recent scarcity of tech IPOs could work in Mr. Spiegel's favor. In 2016, 26 technology companies went public on U.S. exchanges, raising $4.3 billion, the lowest number and dollar volume since 2009, according to Dealogic.

"If you're the only supply in the market, you're well positioned to dictate the terms," said Triton Research LLC Chief Executive Rett Wallace, whose firm collects and analyzes data on private companies.

Family-run companies in media and other industries have long used different classes of stock to keep control. At News Corp, which owns Dow Jones & Co., publisher of The Wall Street Journal, Rupert Murdoch and his family maintain greater influence through a dual-class setup. Class A shares that make up about two-thirds of the equity base have no voting power, while Mr. Murdoch and his family trust hold about 39% of the Class B voting shares.

Many tech companies prefer the setup because it allows them to innovate without risking a shareholder revolt. And such structures can thwart activist investors, who sometimes try to rally other investors to vote out a company's board.

Between 2012 and 2016, roughly 19% of U.S. tech firms that went public did so with dual-class structures -- more than double the share over the prior five-year period, according to data assembled by University of Florida Professor Jay Ritter. In 2016, 21% of tech firms went public with dual-class structures, down from 37% in 2015. Around 11% of all non-tech U.S.-listed IPOs used dual-class structures in 2015 and 2016.

Some big investors contend that dual-class structures unfairly remove public shareholders from the decision-making process. The California Public Employees' Retirement System, the largest U.S. public pension fund by assets, recommends companies adopt a "one share, one vote" structure. Last month, Calpers sued to block Barry Diller's IAC/InterActiveCorp from issuing nonvoting stock . Gregg Winiarski, IAC's general counsel and executive vice president, said in a statement the lawsuit is without merit.

Snap decided to create this nonvoting share class at the outset to be transparent with investors that the founders wanted to stay in control for the long term, rather than seek to make such a change later, according to people familiar with the process.

The setup includes some features meant to protect public investors. If the founders' ownership of the outstanding stock falls below around 30%, all shares automatically convert into common stock, according to people familiar with the deal. If either founder dies, his shares cannot be transferred, the people said.

The use of multiple voting classes doesn't seem to have damped interest in tech offerings. The difference in post-IPO performance between dual-class companies and non-dual-class companies isn't statistically significant, both among tech companies and all U.S. listings, according to Prof. Ritter.

The 2004 Google Inc. IPO has served as a model for other tech companies. Ahead of the offering, founders Larry Page and Sergey Brin said the structure would protect the company's "ability to innovate and retain its most distinctive characteristics." Messrs. Page and Brin, along with the company's executive management team and directors, controlled more than 60% of the voting power after the IPO.

In 2014, Google, now known as Alphabet Inc., changed its structure and added a new class of nonvoting shares that would keep control of Google with Messrs. Page, Brin and Executive Chairman Eric Schmidt after the company issues more stock. As of April, the three men had 59.6% of the voting power of the company's outstanding stock, according to a regulatory filing.

Facebook Inc. has moved in a similar direction. The company, which went public with a dual-class structure in 2012, last year said it would create a new class of nonvoting stock to allow Chief Executive Mark Zuckerberg to maintain control.

The move came several months after Mr. Zuckerberg informed the company's board that he planned to donate 99% of his wealth to the Chan Zuckerberg Initiative LLC, an entity he created with his wife to donate to nonprofits and make private investments toward causes such as curing disease and education. Absent this change, Mr. Zuckerberg would have been likely to lose control over time as he donated his Facebook shares.

Investors have sued Facebook over the change. "Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders," a spokeswoman said.

Write to Maureen Farrell at maureen.farrell@wsj.com

(END) Dow Jones Newswires

January 17, 2017 02:48 ET (07:48 GMT)

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