What are Class A Shares
Class A shares refer to a classification of common stock that is accompanied by more voting rights than Class B shares, usually given to a company's management team. For example, one Class A share may be accompanied by five voting rights, while one Class B share may be accompanied by only one right to vote. A detailed description of a company's different classes of stock is included in the company's bylaws and charter.
BREAKING DOWN Class A Shares
Class A shares are used to provide a company's management team with voting power in a volatile public market. Since these types of shares carry a higher amount of votes per share, it helps keep control of the company in the hands of senior management, C-level executives, and the board of directors. If class A shares didn't exist, for example, it would be easier for an outside investor to obtain enough shares of stock to take control of a company. The existence of these shares ensures a hostile situation like this cannot happen.
Additional Benefits of Class A Shares
Additionally, class A shares usually provide enhanced benefits to the holder of the shares. These benefits, in addition to increased voting rights, include dividend priority and liquidation preferences. This means that people who own class A shares of a company are paid first when dividends are distributed and are also paid first in the event of an exit.
If, for example, a public company has debt and is sold to a larger public entity, all debt holders are paid first, until the debt is paid in full. Then, holders of class A shares are paid. Sometimes, class A shares are convertible to more than one share of common stock, which further benefits these shareholders. If the company is sold for $5.00 a share, and the CEO of the company owns 100 class A shares that are convertible into 500 shares of common stock, he is set to earn $2,500. After all the class A shareholders are paid, common shareholders are paid the remaining amount.
Extra Information about Class A shares
Class A shares are not sold to the public and also can't be traded by the holders of the shares. This, in theory, allows a company's management team and other key executives to focus on the long-term goals of the company and not be bothered with agency problems that may arise if the class A shares were sellable or tradable. Agency problems, of course, occur when a person prioritizes personal goals over the initiatives of the company for which they work.