Zynga founder Mark Pincus got to portray himself as a shareholder friendly founder on Wednesday.
But it could well be that he’s simply setting himself up to do something that isn’t so friendly for investors — dump his shares in the company.
Since he founded the company, Pincus has exercised dictatorial control over it through his ownership of shares with special “super-voting” rights.
Zynga has three classes of stock. Regular Class A shares, which trade on the open market, get just one vote per share in shareholder elections. Class B shares get seven votes per share and Class C shares get a whopping 70 votes per share.
Pincus only owns about 10% of Zynga’s outstanding shares. But because he owns 100% of its Class C shares and 96% of its Class B shares, he controls 72% of all the votes at the company.
That control allowed him to oversee any and all decisions at the company and even to wrest back day-to-day oversight of it in 2015 after he stepped back from the company two years earlier.
Pincus is converting his preferred shares to common ones
On Wednesday, Pincus and the social-gaming company announced that he’s planning on giving up that control. He’s no longer going to be a company employee and will no longer be its executive chairman; instead, he’ll serve as its non-executive chairman.
Meanwhile, he’s planning on converting all of his Class B and Class C shares into Class A shares. He’ll still be Zynga’s largest shareholder after the move, but the stock conversion means that he’ll get the same amount of votes for each of his shares as any other investor in the company.
Zynga and Pincus painted the move as being an affirmation of the company’s health and stability. After years of struggling, the company’s sales grew last year and it posted its first full-year profit since it went public in 2011.
But even more so, the company and Pincus described the move as being done on behalf of common shareholders.
“Given our positive momentum, now is the right time to simplify our stock structure and transition to one share, one vote,” Pincus said in a statement. “I believe it’s in the best interests of our shareholders to establish voting rights parity for all.”
In an interview with Recode, Pincus played up that theme, even taking shots at other tech companies that have insulated their executives by giving them outsized voting control through multi-class stock structures and other means.
“Is the value we were worried about at founding served by multi-class structures?” Pincus told Recode. “It’s no longer obvious what benefit it has given.”
Pincus is relinquishing control — but gaining a new freedom to sell
But Pincus’ motivations for converting his shares may be a little less altruistic than he and the company are letting on.
The thing about Zynga’s Class B and Class C shares is that for all the voting power they gave Pincus, they had one big limitation — he couldn’t sell them, at least not directly. In order to sell the shares, he had to convert them into Class A shares first.
What often happens in companies that have multi-class stock structures is that the executives who hold preferred shares convert some of their stake to common shares from time to time — a little bit here, a little bit there. That allows founders to liquidate some of their holdings, while still reassuring everyday shareholders that the founders are still invested in the companies.
But that’s not what’s happening here. By converting all of his preferred shares to common stock, Pincus has given himself the freedom to sell his entire stake in Zynga — some 91 million shares, which are worth around $332 million — whenever he sees fit.
Zynga and Pincus are telegraphing his plans
Pincus may or may not have that in mind. Zynga did not immediately return a request for comment on Pincus’ plans for the stock.
But the company telegraphed that he may be planning to sell off a big chunk of his stake.
As part of Pincus’ agreement to step down as executive chairman, Zynga agreed to nominate him to its board in perpetuity — as long as he retains half of his current shares in the company. In other words, Pincus can now sell up to half of his stake in Zynga and still keep a hand in helping direct the company.
Pincus may have another reason to convert his stock. He’s reportedly in the middle of a divorce from his wife, Alison Gelb Pincus. His wife is reportedly contesting a prenuptial agreement they signed, a move that could have forced him to sell his stake in Zynga anyway.
However, Pincus told the New York Times the divorce was “not part of or relevant to the announcement” of his stock conversion
Now may be a good time for Pincus to sell. Zynga’s shares are off the peak they hit in December, but they’ve retained much of the rise they saw last year and are trading well above where they’ve been for much of the last four years.
In the statement, Pincus said he plans to “continue to play an active role” at Zynga. But he also told Recode that he’s got lots of other projects he wants to work on.
“It’s time to create more space between me and the company,” he said. He continued: “I have a lot of pent-up ideas and energy that for well over a year I have wanted to pursue.”
It wouldn’t be a surprise if he sold off some of his stake to fund those projects. And now he has plenty of freedom to do so.
That’s good for Pincus. Maybe not for investors.
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