While I was away in China, Google filed the first amendment to its registration statement. Most of the stories about the amendment focus on the naming of additional underwriters, but I was more interested in another addition to the registration statement.

The first amendment to the registration statement usually contains the most substantial changes that the document will see before the SEC declares the document effective. In this amendment, the company has an opportunity to respond to the SEC's initial comments. Also, if the underwriters have uncovered new information as a result of their due diligence examination, that information will be reflected in an amended filing.

In that light, Google's first amendment is remarkable for the limited number of changes. The Letter from Sergey and Larry is unchanged; the financial numbers have been tweaked only slightly; and the company provided new disclosure about taxes that only an accountant could love. The most substantial change -- other than the addition of underwriters -- was the disclosure of the voting power of principal and selling shareholders. From a purely personal standpoint, I wish this information had appeared in the first installment of the registration statement (I had to calculate this myself for a presentation in China), but the results are interesting:

Name (Pre-IPO Voting Power)
Eric Schmidt (6.3)
Sergey Brin (16.4)
Larry Page (16.4)
L. John Doerr and Kleiner Perkins (10.2)
Michael Moritz and Sequoia (10.2)

Why is this interesting? Well, for one thing, it shows that none of the major players has outright voting control. Taking an insiders v. outsiders perspective, the advantage goes to the insiders. But in the event of conflict, alliances are brittle, and Google's pre-IPO capital structure would allow for substantial gamesmanship.

Despite having four series of preferred stock, Google has had only one round of venture investment, with Kleiner Perkins and Sequoia taking almost all of the shares in that round. Although the venture capitalists obtained only 20% of Google's shares, they also obtained significant control rights. For example, this is the board composition provision from Google's charter:

The holders of the Preferred Stock, voting as a single class, shall be entitled to elect two (2) directors (the ‘Preferred Directors’), and the holders of the Class A Senior Common Stock and the holders of the Common Stock, voting as a single class, shall be entitled to elect three directors (the ‘Common Directors’). The remaining director shall be elected mutually by holders of the Preferred Stock, the holders of the Class A Senior Common Stock and the holders of the Common Stock voting together as a single class and on an as-converted basis (the ‘Joint Director’).

This is a fascinating example of control allocation. The venture capitalists were entitled to elected two of six directors, and the common stockholders (the insiders) were entitled to elect three of six. The remaining director was called a "Joint Director," but assuming that common stockholders and preferred stockholders comprise two potentially conflicting groups -- an assumption not wholly merited here, but close enough to make the point -- this Joint Director would be elected by the group with the most shares. In this instance, that would be Google's founders and other insiders, who own the common stock.

Google's current Joint Director is Eric Schmidt, undoubtedly a consensus choice among all of the relevant parties. The structure of the board composition provision, however, would allow for a shift in board control away from the insiders and toward the venture capitalists. If the venture capitalists, through additional rounds of investment, were to acquire a majority of the voting power of the corporation, they would be entitled under the foregoing provision to elect the Joint Director. (Of course, this board composition provision could be changed with an additional round of investment.) That would earn the venture capitalists only the power to deadlock the board of directors, assuming the two sides remained fixed in their loyalties. What is the purpose of having an even number of directors? Did the parties intend to lay the foundation for deadlock? Or were they assuming that the board would continue to act by consensus?

Normally, the venture capital contracts tell an interesting story, but in Google's case, the story is opaque. The board composition provision just discussed suggests that Google's founders would not relinquish control easily. Then there is the fact that Google's venture capitalists did not obtain a right of first refusal for subsequent rounds of investment. Such a right is routine in venture capital investments, and it allows the venture capitalists to maintain their ownership interest in the portfolio company. Why didn't Google's venture capitalists obtain this right? Perhaps Google's founders denied them the right for the purpose of maintaining maximum flexibility in future financings? Would there be some advantage to Google's founders if the current venture capitalists could have their ownership interests diminished by future investments (from other venture capitalists or strategic partners)? I can't discern the answer just by looking at the documents.

Then there are the strange voting rights for the pre-IPO shares. The Common Stock (held only by Sergey and Larry) has one vote per share, but the Class A Senior Common Stock (owned by Sergey, Larry, Eric, and other employees) has ten votes per share, as does each series of Preferred Stock. Given the small number of shares of Common Stock outstanding, the effect is simply to multiple the number of votes by ten with no discernable effect on control. Presumably, Google had some other plan in mind when it created the unusual class of common stock (complexity for its own sake is unappealing in creating a capital structure), but what was the plan?

By the way, Google's current board of directors numbers nine, with three directors being appointed to fill vacancies created by the increase in the size of the board. This change does not fit comfortably with the aforementioned charter provision (who would elect the new directors at the next shareholder meeting?), but it doesn't need to as Google's charter will be amended upon IPO (i.e., before it would make a difference).

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