Startup Corp currently has 20 million Class A shares on issue of which 10 million shares are held by each of the two founders: Zuck and Berg. Each Class A share carries one vote and has an estimated current value of $1.00 per share.

The company needs $20 million in new equity to finance the future growth of the business and so decides to first issue 5 million Class B shares to Zuck and 5 million Class B shares to Berg for free and then issue 25 million new Class A shares at $0.80 each to a specialist hedge fund. Each Class B share carries ten votes and automatically converts to a Class A share if sold. This is the first time the company has issued Class B shares.

(a) Why did Startup Corp issue Class B shares to the founders ?

Assume one year after the Class B and Class A shares are issued, Berg sells her Class B shares to the hedge fund for $5.00 each.

(b) Why do Class B shares convert to Class A shares on sale ?