May 01, 2004
The Real Terms of the Google Deal

Google's equity class structure (10 votes per share for "us", 1 vote per share for "you") is designed to keep insiders in control, pocketing investors' dollars while letting them sit in the back seat for the ride. In this, they're following the lead of media companies like the New York Times and the Washington Post which have long enjoyed structures that have kept control in the family, literally for generations.

This insulation from shareholder pressure has been criticized as arrogant and anti-democratic, but it is also prudent, I'm sad to say, since Google intends to run its business with an eye to risky, creative experiments that are poorly understood or tolerated by the public markets.

Even so, Google wants to have its cake and eat it too. While they may have been forced to pull the trigger on the IPO by SEC rules limiting the number of shareholders in a private company, there was no chance, given its venture capital investment, it would not go public sooner or later. It's just part of the deal. Moreover, Google needs to have liquidity and the prospect of a rising stock price as an incentive to motivate and attract the success-minded, high I.Q. workforce it requires. People want to work at a Google for many reasons; financial upside is near or at the top of the list for most.

But an even deeper problem is that the relationship between Google and its prospective shareholders is a form of mutual exploitation slightly worse than usual and much more evident because of the greed and envy factor.

Google says: Give us your money and we'll sell you a lottery ticket. We know what we're doing, so it would be counter-productive for you to have any control over what we do. Sit in the back seat and enjoy the ride and don't think too much about the odds.

The Public says: We're willing to go along for the ride if it means we get to benefit from your money-making magic. We're still in love with the fantasy of striking it rich; we miss the early days of the Dotcom boom. Can we get in? (Personally I think buying into the Google IPO is a sucker bet, but investing in public stocks isn't how I made my money).

In a better world, would all public corporations be more accountable to their shareholders? Hell, yes. But today's shareholders are, in the main, no better than the vast majority of companies they invest in. They only really care about their financial upside, not the means by which it is achieved. Exploitation of labor here and abroad a la Wal-mart, environmental degradation, and massive corporate welfare through government subsidies and sweetheart deals a la Halliburton are perfectly acceptable sources of profit and make for perfectly good investments most say.

At least the Google guys want to do the right thing in terms of responsible corporate citizenship and for this they should get a lot of credit. What needs to change are the basic terms of the deal between public companies and the public. Business success needs to be measured not just by profit, but by social impact as well. In a world where that was the norm, absolute returns on stocks might be slightly lower, but absolutely everyone, would be better off.

Posted by mitch@osafoundation.org at May 01, 2004 02:54 PM
Comments

"...there was no chance, given its venture capital investment, it would not go public sooner or later. It's just part of the deal."

Which only gives yet another reason why "venture capital" should be avoided by startups at all costs short of the survival of the company.

Then again, I think the same thing about IPOs.

But if I'm reading you correctly here, what you're saying is, because Google had a pre-existing debt in the form of venture capital, they had to sooner or later swap to the debt that is equity to pay it off.

Why not just pay it off in cash? Are they really that deeply in the hole? (I will confess to not having looked at their SEC filing.)

Posted by: Hal O'Brien at May 2, 2004 12:48 PM

I'm of the same mind on this post.

My understanding as well is there is no choice when you accept venture capital money -- it's IPO or M&A. This is not a big surprise. You are obligated to maximize investor return on investment. I wrote a post last week why I think many women entrepreneurs (speaking for myself) don't go down the VC route -- they are intentionally self-selecting themselves out of the "public company route".

"What needs to change are the basic terms of the deal between public companies and the public. Business success needs to be measured not just by profit, but by social impact as well." Amen, but this would be a radical departure from the legal requirements of a public corporation today, which requires operating for return on financial capital solely (not human, social, etc.). I'd love to see more variety of ROI 'contracts' with shareholders and investors that define public companies in a variety of ways in my lifetime. I hope the Google IPO spurs some innovation on this front.

My post: http://evelynrodriguez.typepad.com/crossroads_dispatches/2004/04/google_public_c.html

Posted by: Evelyn Rodriguez at May 3, 2004 04:02 PM

I think the best quote is from Michael Douglas' character in the Movie Wall Street, "If you're not on the inside, you're on the outside".

When the market collapsed and people lost billions, it was another glaring example how clueless the average person is. The money is made BEFORE the company actually goes IPO, the average person is given a bone with some meat scrapings on it like some proverbial dog to keep them happy.
People are greedy by nature and 95% aren't willing to put the time and effort into understanding the whole system of money and investing. they want someone to do it for them and that may be fine for most peope but not me.
You wanna make the real money? Get in on the ground floor, get on the inside and stop gambling with your futures

Posted by: Matt DeGeorge at May 4, 2004 07:57 AM

Mitch, how else could you measure business success if not by profit? To value a company that makes less than another company simply because it is more environmentally friendly or gives more money to the homeless shelter is ludicrous. Your argument basically implies that government regulations can't work, so we need to resort to changing the definition of business success. If that's the case then it's a very scary future indeed.

I believe that the only answer is for the government to set the standards for corporate citizenship, then let the market sort everyone out. Those that make the most profit while still following the rules win.

Posted by: Tim Harding at May 4, 2004 04:15 PM

(Hey Mitch)

A more immediate problem than profits not capturing net "value" in the broad sense Mitch describes is that profits don't even capture *financial* value. How many times have you used Google? How often have you paid it by following an ad? (For me the answers are 1000's of times and 0, respectively.) See

http://www.j-bradford-delong.net/movable_type/2004_archives/000713.html

for more

Posted by: Sam Penrose at May 6, 2004 10:40 AM

What does Howard Dean and Google have in common? They both will grab tens of millions of dollars from individuals through the Internet! And because of the prospect of a financial return, I can only imagine that Google will be even more successful.

But after reading the prospectus for Google, I have a deep concern about the process. They jump up and down about the "dutch auction," which engenders trust among the buyers to bid their true value. But the London gold market, a real dutch auction, has multiple buyers and sellers.

Google, as the sole seller, makes the concept of the "clearing price" totally bogus, especially because they reserve the right to change the number of shares they sell. Want to double the share price? Restrict the shares sold. And, by the way, the projected market value of the remaining shares is higher that way too. Interesting.

- Mike

Posted by: Michael Weiksner at May 10, 2004 01:15 PM

Well said Mitch. I love Google and am watching this with great interest. But I still remember the days that Yahoo seems like such a "good" company in every way. It was hard to imagine them becoming another soulless corp. I'm afraid the IPO will do the same to Google. And when their employees make a lot of money, their burning desire to be productive will totally change. Never feed an artist.

Posted by: MySQLwebmaster at June 29, 2004 06:44 PM

I'm of the same mind on this post.

My understanding as well is there is no choice when you accept venture capital money -- it's IPO or M&A. This is not a big surprise. You are obligated to maximize investor return on investment. I wrote a post last week why I think many women entrepreneurs (speaking for myself) don't go down the VC route -- they are intentionally self-selecting themselves out of the "public company route".

Posted by: MiC at July 9, 2004 05:29 AM