By Maureen Farrell
Like many technology entrepreneurs, the founders of Snap Inc.
want to retain management control of the messaging-app company,
even as they sell shares to the public.
In one respect, the men are going further than tech firms
typically do: Investors won't get any voting power with shares
purchased in Snap's initial public offering, according to people
familiar with the matter.
That leaves key decisions, such as the makeup of the board,
primarily to Evan Spiegel and Bobby Murphy, co-founders of Snap,
the owner of the disappearing-message app Snapchat. The two are
expected to hold more than 70% of the voting power despite owning
roughly 45% of the stock, the people said.
Companies with multiple classes of stock typically give IPO
investors fewer votes per share than they give to founders,
executives and early private investors.
The power of the "supervoting" shares is typically diluted over
time as new shares are issued. But Snap's decision to sell
nonvoting shares is extreme. Messrs. Spiegel and Murphy's
proportional voting control wouldn't materially change when new
shares are sold because the common stock doesn't have voting
rights.
The setup evolved from a similar arrangement Snap had with its
private investors, who received nonvoting shares in Snap's recent
private funding rounds, according to the people familiar with the
matter. The pre-IPO investors will receive voting shares with less
power than those held by the two founders, the people said.
Mr. Spiegel has considerable leverage as Snap plots its IPO,
which could come as soon as March and value the business at between
$20 billion and $25 billion, people familiar with the matter have
said.
The company's bankers and executives see the 26-year-old as a
selling point to investors and plan to portray him as a visionary
who knows how to create products for his coveted millennial peer
group, The Wall Street Journal has reported.
The recent scarcity of tech IPOs could work in Mr. Spiegel's
favor. In 2016, 26 technology companies went public on U.S.
exchanges, raising $4.3 billion, the lowest number and dollar
volume since 2009, according to Dealogic.
"If you're the only supply in the market, you're well positioned
to dictate the terms," said Triton Research LLC Chief Executive
Rett Wallace, whose firm collects and analyzes data on private
companies.
Family-run companies in media and other industries have long
used different classes of stock to keep control. At News Corp,
which owns Dow Jones & Co., publisher of The Wall Street
Journal, Rupert Murdoch and his family maintain greater influence
through a dual-class setup. Class A shares that make up about
two-thirds of the equity base have no voting power, while Mr.
Murdoch and his family trust hold about 39% of the Class B voting
shares.
Many tech companies prefer the setup because it allows them to
innovate without risking a shareholder revolt. And such structures
can thwart activist investors, who sometimes try to rally other
investors to vote out a company's board.
Between 2012 and 2016, roughly 19% of U.S. tech firms that went
public did so with dual-class structures -- more than double the
share over the prior five-year period, according to data assembled
by University of Florida Professor Jay Ritter. In 2016, 21% of tech
firms went public with dual-class structures, down from 37% in
2015. Around 11% of all non-tech U.S.-listed IPOs used dual-class
structures in 2015 and 2016.
Some big investors contend that dual-class structures unfairly
remove public shareholders from the decision-making process. The
California Public Employees' Retirement System, the largest U.S.
public pension fund by assets, recommends companies adopt a "one
share, one vote" structure. Last month, Calpers sued to block Barry
Diller's IAC/InterActiveCorp from issuing nonvoting stock . Gregg
Winiarski, IAC's general counsel and executive vice president, said
in a statement the lawsuit is without merit.
Snap decided to create this nonvoting share class at the outset
to be transparent with investors that the founders wanted to stay
in control for the long term, rather than seek to make such a
change later, according to people familiar with the process.
The setup includes some features meant to protect public
investors. If the founders' ownership of the outstanding stock
falls below around 30%, all shares automatically convert into
common stock, according to people familiar with the deal. If either
founder dies, his shares cannot be transferred, the people
said.
The use of multiple voting classes doesn't seem to have damped
interest in tech offerings. The difference in post-IPO performance
between dual-class companies and non-dual-class companies isn't
statistically significant, both among tech companies and all U.S.
listings, according to Prof. Ritter.
The 2004 Google Inc. IPO has served as a model for other tech
companies. Ahead of the offering, founders Larry Page and Sergey
Brin said the structure would protect the company's "ability to
innovate and retain its most distinctive characteristics." Messrs.
Page and Brin, along with the company's executive management team
and directors, controlled more than 60% of the voting power after
the IPO.
In 2014, Google, now known as Alphabet Inc., changed its
structure and added a new class of nonvoting shares that would keep
control of Google with Messrs. Page, Brin and Executive Chairman
Eric Schmidt after the company issues more stock. As of April, the
three men had 59.6% of the voting power of the company's
outstanding stock, according to a regulatory filing.
Facebook Inc. has moved in a similar direction. The company,
which went public with a dual-class structure in 2012, last year
said it would create a new class of nonvoting stock to allow Chief
Executive Mark Zuckerberg to maintain control.
The move came several months after Mr. Zuckerberg informed the
company's board that he planned to donate 99% of his wealth to the
Chan Zuckerberg Initiative LLC, an entity he created with his wife
to donate to nonprofits and make private investments toward causes
such as curing disease and education. Absent this change, Mr.
Zuckerberg would have been likely to lose control over time as he
donated his Facebook shares.
Investors have sued Facebook over the change. "Facebook is
confident that the special committee engaged in a thorough and fair
process to negotiate a proposal in the best interests of Facebook
and its shareholders," a spokeswoman said.
Write to Maureen Farrell at maureen.farrell@wsj.com
(END) Dow Jones Newswires
January 17, 2017 02:48 ET (07:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Alphabet (NASDAQ:GOOGL)
Historical Stock Chart
From Apr 2024 to May 2024
Alphabet (NASDAQ:GOOGL)
Historical Stock Chart
From May 2023 to May 2024