Analysis: Children of billionaires are all the rage on TikTok and in business

Netizens have spent the last year obsessively documenting which Hollywood actors and social media stars were born to rich and famous parents. Identifying nepotistic babies, or “nepo babies”, is all the rage on TikTok. This month, the Fashionista website published a list of “promising nepo babies to watch out for”. Model Eve Jobs, daughter of Steve, and influencer, activist and Stanford student Phoebe, daughter of Bill Gates, made the list.

But technology’s contribution to the nepo baby trend isn’t limited to influencers with familiar last names. Rather than giving their children a head start, some founders have the ability to give them full control for life.

The most interesting and high-level lines of work have always been filled with nepo babies. Canadian Prime Minister Justin Trudeau is one of them. Just like former US President George Bush. Family businesses, including media groups, depend on them. Connections, wealth, and familiarity with a line of work confer enormous advantages.

Technology takes this one step further. WeWork founder Adam Neumann was more explicit than most when he told the team that he wanted his kids to be the coworking company’s moral compass. The subsequent collapse of WeWork ended that. Since Neumann’s children were under 10 at the time, they probably didn’t mind. But if WeWork had gone public when he wanted it, he would have had the wherewithal to give it to his children one day.

The way this works is through something called dual class actions. Tech founders who take their companies public love dual-class stocks. The structure means that even if they have a reasonably small number of shares, they can retain majority voting rights. This allows them to continue running the company exactly as they wish, regardless of the shareholders’ opinion.

Dual-class stock is why no one can oust Mark Zuckerberg as Meta’s chief executive, no matter how clunky the metaverse may seem or how much the stock price plummets. His shares have more voting power than everyone else’s. From time to time, other shareholders vote in favor of eliminating supervoting shares. Since the only vote that counts is Zuckerberg’s, the vote never goes through.

Venture capitalist Bill Gurley called these actions the danger signals that give entrepreneurs the power to ignore investors. Still, investors are so desperate to buy fast-growing technology stocks that they accept the disparity. When social media company Snap went public, founder Evan Spiegel convinced the public to buy non-voting shares. Along with its co-founder, he controls 99% of the voting power of the outstanding shares. Everything they say goes.

Unless the dual-class shares have a sunset clause that turns them back into regular shares one day, the power is perpetual. As former Securities and Exchange Commission (SEC) Chairman Robert Jackson wrote, “Asking investors to place undying trust in corporate royalties is antithetical to our values ​​as Americans.” Or, as the New York Times put it, “You can’t fire Mark Zuckerberg’s children.”

SEC research found that seven years or more after listing companies with dual-class perpetual stock underperformed. Yet the founders continue to run them. Jack Dorsey blames not having them for not being able to run Twitter the way he wanted. In the first half of 2022, 17% of companies entering US markets had unequal voting rights, according to the Institutional Investors Council, which represents large pension funds. Half of them had no sunset clause. If Elon Musk takes SpaceX public, expect him to defend perpetual supervoting rights. Perhaps one of his ten children will be slated to succeed him.

Transforming the technology sector into a series of family businesses does not match his view of himself as meritocratic. Long-term continuity of ownership can increase resilience. In publicly traded companies, however, choosing family members to run things is viewed with suspicion.

The assumption is that connections trump skill, putting the wrong people in key jobs. Think of former Korean Air executive Heather Cho, the daughter of the company’s president. His 2014 attack on female flight attendants who served him nuts in a bag instead of a bowl sparked a debate about the power of “owning” families in corporate Korea.

The technology industry is still quite young. The children of successful founders may not want to create a new dynasty. If they do, they should take note of the lessons learned by Hollywood’s “nepo babies”. Talent and humility help avoid accusations of unearned privilege. No one criticizes actress Billie Lourd, daughter of Carrie Fisher and granddaughter of Debbie Reynolds. Complaints turn you into the villain. Johnny Depp’s model daughter Lily-Rose has tried to resist the idea that her family plays a big role in her success. The result: a viral article entitled “What is a nepo baby – and why is it so easy not to like them?”

Translated by Luiz Roberto M. Gonçalves