- Palantir has an unusual voting structure that will give its three cofounders — CEO Alex Karp, President Stephen Cohen and board member Peter Thiel — effective control over the company for as far as the eye can see.
- The company will have a three-tiered stock structure: everyday shareholders will hold stock that gives them one vote per share; certain insiders, including the founders, will have a second class of stock that gives them 10 votes per share; and the three founders will have a third group of stock that ensures they have almost 50% of the voting power of the company.
- They'll be able to keep that control for as long as they live, continue to hold a certain number of shares, and remain a party to their joint voting agreement.
- Those founder shares will ensure that Karp, Cohen, and Thiel will retain control no matter how many new shares Palantir issues and even if they sell a substantial portion of their holdings.
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Similar to many other tech startups that have gone public recently, Palantir is going to have a corporate structure that ensures that insiders will retain control over it long after it goes its stock starts trading on New York Stock Exchange.
But the three cofounders of the secretive data analytics company — CEO Alex Karp, President Stephen Cohen, and board member Peter Thiel — have created an unusual system that will allow them to maintain the same amount of power over Palantir even if they sell off substantial numbers of shares in the company.
"As a result of the voting rights and related agreements contemplated herein, for the foreseeable future ... our Founders will be able to effectively control all matters submitted to the stockholders for approval, including the election and removal of directors and significant corporate transactions such as a merger or other sale of the Company," Palantir said in the public offering paperwork it filed publicly on Tuesday.
The filing of that paperwork represents the next big step for the company on its way to having a publicly traded stock. The Denver company plans to direct list its shares rather than holding an initial public offering. In a direct listing, early investors create a public market for their company's stock by selling shares directly to other investors via a stock exchange.
Palantir will have three classes of shares
Once its shares begin trading, Palantir will resemble a growing number of other tech startups in that it will have more than one class of stock. The shares that will be offered on the NYSE will be Class A. That will be the only class of Palantir stock that public investors will be able to buy and sell, and gives them one vote per share.
The company will have a second group of shares called Class B that will be held by certain insiders, including not just Palantir's founders, but also some of its directors, executives, and venture investors. Holders of that class of stock get 10 votes per share.
In most companies with more than one class of shares holders of Class B stock control the company. But that's not necessarily going to be the case at Palantir. That's because it will have a third group of shares — Class F — that effectively ensures the control of its three founders.
Karp, Cohen, and Thiel will be the only holders of Class F shares; at least at the onset, they will split those shares evenly, each holding 335,000.
The founders' Class F shares will give them control
Unlike most stock, those shares won't have pre-determined voting power. Instead, when combined with the votes the three founders get from their Class A and Class B shares, the Class F shares will ensure that they collectively will hold at least 49.999999% of the voting power of the company.
Assuming the Class A and Class B shares held by the cofounders gave them more than 50% of the vote, their Class F shares wouldn't give them any extra voting power. But if the votes they derive from those other classes dipped below 50%, their Class F shares would boost them up to the 49.999999% level.
That power is contingent on the Karp, Cohen, and Thiel collectively owning at least 100 million "corporation equity securities," a term Palantir's public offering documents left undefined. Should their holdings dip below 100 million, their Class F shares will have 10 votes a share.
But the structure ensures that they will maintain control over the company no matter how many new shares it issues, even if they sell off a substantial portion of their holdings.
The three founders have agreed that their shares will be held in a trust and voted as a single group. How they are voted will be determined by a majority of the three founders. If they can't reach a majority decision on a particular proposal, the shares will be voted against or withheld from that proposal.
The founders' control will last
Karp, Cohen, and Thiel will hold the Class F shares until they die, are permanently disabled, or they voluntarily withdraw from their voting agreement. If any of those three things happen, the Class F shares held by the departing founder will convert into Class B ones. But the voting agreement and the power of the Class F shares will stay in force until all the founders die or they decide collectively to cancel the deal.
That could be years into the future. Karp and Thiel are each 52 years old, and Cohen is 37.
Even then, their descendants could continue to exercise control over Palantir in perpetuity, because the company didn't set any kind of expiration on the extra votes accorded to Class B shares.
When it debuts on the public markets, Palantir will have 2.7 billion shares of Class B stock. Thiel alone will hold 329 million of those, giving him nearly 30% of the class. Karp will hold another 108 million, or 9%, and Cohen 35 million, or 3%.
"The multiple class structure of our common stock, together with the ... Founder Voting Agreement, have the effect of concentrating voting power with certain stockholders, in particular, our Founders and their affiliates, which will effectively eliminate your ability to influence the outcome of important transactions, including a change in control," Palantir warned prospective investors in its offering paperwork.
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