If a picture’s worth a thousand words, a disappearing one could be worth $22 billion.
Snap Inc. priced shares in its impending initial public offering at $14 to $16 last week, which could value the company at more than $22 billion and raise $2.3 billion in its IPO.
While the eye-popping valuation would make Snap’s public offering the largest ever for an L.A.-based firm, there’s some question about whether the unusual concentration of voting shares awarded to Snap co-founders Bobby Murphy, its chief technology officer, and Evan Spiegel, its chief executive, is dragging the share price down. While the market generally seems to love the pair, who are 28 and 26 years old, respectively, some institutional investors seem less than enthused about having no say in the ephemeral photo and video-sharing company’s corporate strategy.
“Not having any control is probably creating some issues for bigger institutional investors who have fiduciary duties,” said Muizz Kheraj, a managing partner at West L.A. investment bank FocalPoint Partners and head of the firm’s technology practice. “But the way the overall market is valuing Snap seems to show Spiegel and Murphy are getting a pass.”
The newly released numbers, which come from Snap’s updated S-1 prospectus filed with the Securities and Exchange Commission on Feb. 16, give more clarity for investors ahead of next month’s offering. The company is putting up 145 million newly issued shares and another 55 million existing shares from executives, employees, and early investors in the offering. Another 30 million shares will be made available if that initial batch sells out. None of the potential 230 million shares being offered as Class A stock will have voting power.
That power will remain overwhelmingly with Murphy and Spiegel, who together control 88.5 percent of all voting shares. That control comes through their approximately 216 million Class C shares, which hold 10-to-1 voting power over Class B shares, which are held by some Snap employees and early investors.
Coup for leadership
Jorge del Calvo, a corporate securities attorney at Palo Alto’s Pillsbury Winthrop Shaw Pittman who helps take companies public, said the structure is a coup for Spiegel and Murphy given they will enjoy nearly unfettered power over Snap’s direction.
“It more or less allows them to control the company for an indefinite period of time,” del Calvo said. “The structure gives them a lot of flexibility in the future. They can sell more stock without falling below the control threshold if they need to.”
Del Calvo said that while the voting structure seems extreme – no one in the industry seems to recall another company issuing zero voting shares in an IPO – the arrangement is basically a tweak on past offerings. Consider Facebook Inc.’s 2012 offering, he said, which offered massively diluted shares and entrenched founders in similarly insulated positions of power.
“Practically speaking, it makes limited difference for investors to invest in a company with this structure than a company that employed the dual-class structure that preceded it,” del Calvo said. “The change is only one of degree.”
While these stock structures might seem enticing to other founders eyeing an initial offering, del Calvo said that it was unlikely to be adopted broadly for several reasons.
“This type of structure tends to be available only to companies in spaces that are doing very, very well,” he said. “And the calculation isn’t just about how hot the company is, but about how hot the market is as well.”
While Instagram’s Stories feature has offered competition to Snapchat over the last several quarters, Snap’s sector has few major rivals. That’s why some industry watchers, including FocalPoint’s Kheraj, have wondered why Snap wasn’t valued higher given its nearly 160 million daily active users.
“The only concern – and this could be why we’re seeing a slightly lower valuation – is that user growth is slowing a bit,” Kheraj said. “These companies are priced almost exclusively on value per user and how much the market thinks they can make off each user.”
