What it means
Companies create multiple classes when one set of terms cannot satisfy everyone at the table. Founders often want to keep control while raising money, and investors often want priority on returns in exchange for taking risk, so the capital structure splits into classes that give each side what it values most.
The alternative, a single class for everyone, is simpler but far less flexible. Voting rights are the most visible difference.
Dual class structures typically give one class ten votes per share and another one vote per share, letting a founding group retain a majority of the votes while holding a minority of the economics. Investors accept this when they believe the concentration of control is what makes the strategy work, and they discount it when they do not.
Economic rights are usually the more consequential difference, particularly in private companies. Preference shares commonly carry a liquidation preference, meaning their holders are paid a set amount before ordinary shareholders receive anything from a sale.
In a modest exit that preference can absorb most of the proceeds, leaving ordinary shareholders with far less than a simple percentage calculation would suggest. Fund management uses the same language for a different purpose.
A fund's share classes generally hold identical underlying investments but differ in fee level, minimum investment, currency hedging or whether income is distributed or accumulated. Comparing performance across classes without adjusting for the fee difference is a common error in that context.
The practical rule for anyone reading a cap table is to check the rights, not the count. Ownership percentage answers one question, and the class terms answer the far more important ones about who controls decisions and who gets paid first when money is finally distributed.
In practice
Real-world examples
Example 1
A family owned drinks business creates a non-voting share class for the third generation while keeping voting shares with the two family members who run the company. Dividends flow to everyone, but strategic decisions stay with the operators.
Example 2
A venture backed software company issues Series B preference shares with a one times liquidation preference. When the company later sells for $60,000,000, the preference holders take their invested capital back first and the ordinary shareholders divide only what remains.
Example 3
An investment fund offers an institutional class with a 0.45% annual charge and a retail class with a 1.20% charge, both tracking the same portfolio. Over ten years the fee gap alone produces a visible difference in reported returns despite identical underlying holdings.
Think of it
Imagine a cinema screening the same movie. Standard ticket holders sit in regular seats, while VIP ticket holders get plush recliners and free snacks, but everyone watches the exact same film.
Formula
Calculation
Voting power of a class = (shares in class x votes per share) / total votes across all classes
A company has 8,000,000 Class A shares carrying one vote each, held by public investors, and 2,000,000 Class B shares carrying ten votes each, held by the founders.
Class A votes = 8,000,000 x 1 = 8,000,000
Class B votes = 2,000,000 x 10 = 20,000,000
Total votes = 8,000,000 + 20,000,000 = 28,000,000
Founders' voting power = 20,000,000 / 28,000,000 = 71.4%
Founders' economic ownership = 2,000,000 / 10,000,000 = 20%
The founders own a fifth of the economics but control just over seven tenths of the votes. An outside investor buying Class A shares is therefore buying a proportionate claim on profits with almost no ability to influence who sits on the board.Case study
Seen in the real world
Cadence Media is an illustrative and entirely fictional streaming business that listed on a public market using a dual class structure. It sold 30,000,000 Class A shares carrying one vote each to public investors and retained 6,000,000 Class B shares carrying ten votes each in the hands of the two founders.
The arithmetic gave the founders 6,000,000 x 10 = 60,000,000 votes against 30,000,000 Class A votes, a total of 90,000,000. That left them with 60,000,000 / 90,000,000, which is roughly 66.7% of the votes, while holding 6,000,000 / 36,000,000, which is roughly 16.7% of the economics. They could not be outvoted on any ordinary resolution.
Two years after listing, a large shareholder group pressed for a change of chief executive after a weak trading year. In this illustrative scenario the founders simply declined, and the episode fed into the discount at which Cadence's Class A shares traded relative to single class peers. The lesson for anyone buying into such a structure is that the voting arithmetic is knowable in advance and should be priced in at purchase, not discovered during a disagreement.
Watch out
Common mistakes
- Assuming all shares in a company are equal. Classes can differ on votes, dividends, exit proceeds and conversion rights, and the differences are often the whole point of the structure.
- Calculating exit proceeds from ownership percentage alone. Liquidation preferences are paid before ordinary shareholders see anything, so a 10% stake can be worth far less than a tenth of the sale price.
- Comparing fund share classes on headline performance. Classes tracking identical holdings will show different returns purely because of fee, currency or income treatment differences.
Questions
People also ask
What is a dual class share structure?
An arrangement where a company has two classes of ordinary shares with different voting power, typically used so founders can retain control after raising outside capital.
Why would an investor accept non-voting shares?
Usually because the economic terms compensate for the lack of control, or because they believe concentrated decision making will produce better long-term results.
Where do I find the rights attached to a class?
In the company's articles of association or equivalent constitutional documents, together with any shareholders' agreement, and for funds in the prospectus or key information document.