January 27, 2023

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The tech ‘nepo babies’ are coming

Netizens have spent the past year obsessively documenting which Hollywood actors and social media stars were born to rich and famous parents. Spotting nepotism babies or nepo babies is all the rage on TikTok. This month, the Fashionista website published a list of “upcoming Nepo babies to watch.” Eve Jobs, model and daughter of Steve, and Phoebe, daughter of Bill Gates, influencer, activist and Stanford student both made it.

Tech’s contribution to the Nepo baby trend isn’t limited to influencers with well-known last names, however. Instead of giving kids a leg up, some founders have the option to give them complete control for life.

The most interesting, high-profile workspaces have always been stuffed with Nepo babies. Prime Minister of Canada Justin Trudeau is one. Such was former US President George Bush. Family businesses, including media corporations, rely on them. Connections, wealth, and familiarity with a field of work confer tremendous benefits.

Tech goes one step further. WeWork founder Adam Neumann was clearer than most when he told employees he wanted his children to be the co-working space company’s moral compass. The subsequent collapse of WeWork put an end to that. Given that Neumann’s children were all under ten at the time, it probably didn’t bother them. But if WeWork had listed when he wanted, he would have had the means to give it to his kids one day.

This works via so-called dual-class shares. Tech founders who are taking their companies public love dual-class stocks. The structure means that even with a relatively small number of shares, they can retain the majority of voting rights. This enables them to continue to run the company as they see fit, regardless of shareholder feelings.

Two-tier stocks are why no one can oust Mark Zuckerberg from his role as Meta’s CEO, no matter how clunky the Metaverse looks or how far the stock price falls. His shares have more voting rights than everyone else’s. From time to time, other shareholders vote to abolish the Super Voting Shares. Since the only vote that counts is Zuckerberg’s, the vote is never taken.

Venture capitalist Bill Gurley has called these stocks a red flag, giving entrepreneurs the power to ignore investors. Still, investors were so desperate to buy into fast-growing tech stocks that they accepted the discrepancy. When social media company Snap went public, founder Evan Spiegel persuaded the public to buy non-voting shares. Together with his co-founder, he retains control of 99 percent of the voting rights of the outstanding shares. What they say counts.

Unless dual-tier stocks have an expiry clause that converts them back to regular stocks one day, the power is perpetual. As former Securities and Exchange Commissioner Robert Jackson wrote, “it is contrary to our values ​​as Americans to ask investors to place eternal trust in corporate royalty.” Or as the New York Times put it, “You can’t fire Mark Zuckerberg’s kids.”

SEC research found that companies with two-tier perpetual stock underperformed seven or more years after their listing. Still, the founders keep pushing them. Jack Dorsey blames them for not being able to run Twitter the way he wanted. In the first half of 2022, 17 percent of companies participating in US markets had unequal voting rights, according to the Council of Institutional Investors, which represents large pension funds. Half had no sunset clause. When Elon Musk takes SpaceX public, you can bet he’ll be arguing for perpetual super voting rights. Perhaps one of his 10 children will succeed him.

Transforming the technology sector into a series of family businesses does not correspond to its self-image as a meritocracy. The continuity of long-term ownership can increase resilience. But in public companies, the selection of family members to run things is viewed with suspicion.

The assumption is that connections trump skills and the wrong people end up in important jobs. Consider former Korean Air CEO Heather Cho, daughter of the company’s chairman. Her 2014 attack on flight attendants who served her nuts in a bag instead of a bowl sparked debate about the power of “owning” families in Korea.

Tech is still a fairly young industry. The children of successful founders may not want to start a new dynasty. If so, they should take notes on the lessons Hollywood’s Nepo babies learned. Talent and humility help avoid accusations of undeserved privilege. Nobody criticizes actress Billie Lourd, daughter of Carrie Fisher and granddaughter of Debbie Reynolds. Complaints make you the villain. Johnny Depp’s model daughter, Lily-Rose, has tried to defend herself against the idea that her family plays a big part in her success. The result: a viral article titled “What’s a Nepo Baby — and Why Are They So Rejectable?”.