Palantir Founders Can "Unilaterally Adjust" Their Control

Data mining and surveillance software specialist Palantir is preparing to go public, and the latest update to its prospectus includes some blunt language about the control that the company's founders will continue to wield once Palantir completes its IPO. Slowly but surely, tech companies have been steadily eroding corporate governance for years, with little to no backlash from investors, who have been largely placated by strong gains.

Poor voting rights have now become the rule as opposed to the exception.

Image source: Getty Images.

Founders can basically have as many votes as they want

Palantir will have three different share classes: Class A, Class B, and Class F. The voting structure for Class A and Class B are familiar for a modern tech company. Class A shares, which will be sold to public investors, will receive 1 vote per share, while supervoting Class B shares held by insiders will have 10 votes per share.

Class F, however, is a different beast altogether. Those shares will be entitled to a variable number of votes and only be held by Palantir founders Alex Karp, Stephen Cohen, and Peter Thiel. This was all already disclosed in the original S-1 Registration Statement that Palantir submitted to the SEC last month, but the amendment this week describes the stark reality of Palantir's governance in plain language (emphasis added):

In addition, it may be very difficult for our Class A common stockholders to determine from time to time, including in advance of a meeting of stockholders, their individual or aggregate voting power due to the unique features of our multi-class capital structure, such as the variable number of votes per share of our Class F common stock and the ability of our Founders who are then party to the Founder Voting Agreement to unilaterally adjust their total voting power, for example, by designating shares as Stockholder Party Excluded Shares, as described in more detail herein.

Not only is Palantir acknowledging that its founders can basically have as many votes as they want, but investors also won't even be able to reliably determine their voting power ahead of events like annual shareholder meetings.

The "Founder Voting Agreement" allows the founders to control up to 49.99% of voting power combined, while the part about "Stockholder Party Excluded Shares" refers to a provision that allows any founder to exclude shares from that agreement. In the aggregate, the founders will wield that 49.99% voting power plus the votes associated with any excluded shares.

The whole capital structure is extremely convoluted and arguably unnecessary. Tech investors are already accustomed to not having much voting power, and Snap set a new precedent in 2017 when it went public and gave investors precisely zero votes per share. Shareholders don't appear to be bothered by that laughable corporate governance practice, so why doesn't Palantir just do the same thing?

Part of the explanation is that the Founder Voting Agreement is set up in a way that will allow a founder to leave the company while preserving control among any remaining founder(s). Palantir lays out various scenarios where remaining founders will maintain majority voting power even when owning a tiny percentage of shares outstanding.

Data source: SEC filings.

As is often the case with tech stocks nowadays, public investors shouldn't expect to have any say in how Palantir is run.