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In Snap IPO, New Investors to Get Zero Votes While Founders Keep Control

81 points by flinner 10y ago

kevinpet 10y ago
Relevant information: Alphabet: GOOG (non-voting class C) closed Friday at a 2.8% discount from GOOGL (1x voting class A) Zillow: Z (non-voting class C) closed Friday at 1.1% discount from ZG (voting class A).
- nradov 10y ago
  Voting rights are nearly worthless in practical terms until you own enough shares to demand a board seat, at which point voting rights become worth a lot. It's almost a step function.
- tuna-piano 10y ago
  This is very interesting for me to think about. Perhaps someone smarter can explain what this means and answer some questions. A. On Google finance [1,2], it shows that both GOOG and GOOGL have a market cap of $565B. There is a difference in share price, but also a difference in the number of shares outstanding. Is this correct or a google finance mistake / confusing point? B. Assuming the discount for the non-voting shares is as you mentioned it, does this mean that shareholders value their vote for google at ~2.5x their vote for Zillow? C. At 2.8% of Google's market cap, that would mean Google's shareholders value voting rights for google at $15B - a huge amount. What votes does the market see that's worth $15B? D. It's an often stated point that the stock market and Wall Street focus on short term earnings, at the expense of long term results - and that the management would be more successful in the long term if they didn't have pressure from Wall Street. Does the discount for non-voting shares help determine if this point is true or not? 1. https://www.google.com/finance?q=googl&ei=_qd9WJG8BoKdugSE4onYBA https://www.google.com/finance?q=googl&ei=_qd9WJG8BoKdugSE4o... 2. https://www.google.com/finance?q=goog&ei=Wad9WIn8N4KdugSE4onYBA https://www.google.com/finance?q=goog&ei=Wad9WIn8N4KdugSE4on...
  - GeneralMayhem 10y ago
    I'm no expert, just a man with a calculator, but I'll take a stab. A. Do the multiplication - each share class only accounts for about half the market cap, so presumably Google Finance (or its source) knows that GOOG and GOOGL are the same company and sums them. I don't know why Z/ZG don't have the same property, though. B. I don't think the per-share spread is particularly illuminating here, because the distribution of outstanding shares between voting and nonvoting is different for each company (if there are relatively few voting shares, then I would expect the per-share spread to be higher proportionally, since each vote is more valuable). I'd be more interested in the total price of all votes - calculated as: (((price per voting share) - (price per non-voting share)) * (# of voting shares)) as a percentage of overall market cap: Google: $6.8B / $565.7B = 1.2% Zillow: $23.3M / $6.59B = 0.35% so I'd say investors actually value voting in Google at about 3.5x their vote in Zillow, proportional to overall company value. I'd be somewhat interested to see if this metric correlates with things like P/E ratio (e.g., are investors more or less interested in voting rights in fast-growing companies?), founder share status (e.g., does a high Google vote price mean that investors think the founders are more likely to cede their majority stake?), etc., or if it's just a case-by-case thing (e.g., due to liquidity issues like the other response talked about with CMG). C. That number should be "only" about 6.8B (per-share premium * number of shares of GOOGL); parent's calculation roughly double-counts the value of the vote (not exactly double since there are more shares of GOOG than GOOGL). Total control over Google would be immensely valuable - worth much, much more than $7B - so presumably the difference that large investors are willing to pay is based on a probability distribution of how many shares one would expect to need to control to have any influence on the board, weighted by what that influence would actually be worth (presumably fairly little, since Page/Brin/Schmidt hold a controlling majority of votes). The marginal value per vote is also different depending on how many you have - for an average investor, it's probably zero; for the institution trying to muscle its way onto the board, it's probably much more than $26/vote. D. This reads like a college essay question, and I feel like you have an answer in mind, but it's not immediately obvious to me what the two have to do with each other.
  - patio11 10y ago
    A: Market capitalization is of an enterprise, not of a share class. B: I think you're overthinking this a little bit. C: GOOG and GOOGL have subtle differences between them beyond just the voting rights. For example, GOOG != GOOGL. If you have a contract which obligates you to give someone a share of GOOG, a share of GOOGL does not settle that contract. There are some liquidity-related problems, as there is substantial retail interest in Google and retail traders generally disproportionately have access only to one share class. One of my favorite examples for this: back in the day, there were two classes of Chipotle, CMG and CMG.B. They were identical in every way except CMG.B had 5x the voting rights. Which traded at a discount to which? Answer: CMG.B routinely traded at a 10% discount. That's either enough to shake one's faith in the efficient markets hypothesis or it's a powerful illustration that in the short run market microstructure matters A LOT. (I had originally become a shareholder in the A class and started buying B after I was aware of the mispricing. That worked out pretty well. I was far from the only person who realized this, but it was impossible to arbitrage away the difference profitably due to overwhelming short interest in CMG, which meant the cost of borrowing CMG to buy CMG.B and holding them to convergence was untenable. Eventually, some larger institutional buyers just crowded into CMG.B and voted to convert the B shares on a 1:1 basis to the A shares, immediately cutting off their voting power and realizing massive gains.)
PhilWright 10y ago
I have to say it feels like the founders want to have their cake and eat it. They want the money that comes from an IPO but they don't want to give up any control. Facebook is the same, Zuckerberg has the majority of the voting shares but a lot less than 50% of actual shareholding. This seems to be becoming increasing common with tech start ups. If you want others to invest and take on a financial risk then they should get an equal and fair voting share. If I was the stock exchange I would ban this kind of crap.
- exolymph 10y ago
  People are free to not buy the stocks. Clearly the tradeoff hasn't dissuaded Facebook shareholders.
  - kin 10y ago
    Yeah, personally I would be really upset if my fellow shareholders voted for a poor direction for the company. So, if the vision and direction of a company's leaders continue to do well for the company, I'd totally be on board investing. I wouldn't have to worry about the public eye being reactionary to any speed bumps.
- eberkund 10y ago
  Realistically what are most shareholders going to with a voting share? Unless you are big fund manager with a significant voting block, what are a few votes going to do for you? I think most people are content to put their trust in the people who got the company this far, for the most part their interests should be aligned anyways.
  - bravura 10y ago
    Realistically what are most shareholders going to with a voting share? Vote your shares, or be an activist shareholder, if the business goes south.
    - twblalock 10y ago
karpodiem 10y ago
Snapchat is the next Twitter (wrt financial performance)
- jayjay71 10y ago
  What makes you say that?
  - edblarney 10y ago
    It's not an unreasonable comment. Snapchat is mostly a texting app. Yes - their value prop is around 'sharing moments' and they do it well. Also - they have other ancilliary offers. And yes - they are the kings of college aged-students, and the 'cool thing' for now. But - texting is to some extent a commodity, and 'cool brands' fade. Facebook used to be cool - then they turned into a utility. Twitter was cool, and now it's at utility stage as well. And - do they really have the capacity to grow to 1.5 billion people? Facebook eventually had 'your parents'. Snapchat will not. Twitter has tons of regular folk. Snapchat probably will not. So there's a limit to their growth. The question is - can Snapchat exist as a utility when the buzz dies down? Will they anchor themselves as 'the' texting platform, do they have that kind of incumbency? Snapchat is going nowhere anytime soon, and it's entirely feasible they stay relevant for a long time. But - the valuation is pretty dam high. In order to justify a 17B valuation it means you have to produce 17B in profits at todays dollar value. That's a lot of money. It means 1 B in profits in the bank or back to shareholders for 17 years :). So it's a pretty big valuation to live up to, even if they are fairly successful. But they are definitely cashing in at exactly the right moment. They hype is at a nadir. They can't get any cooler, though they could break through to other demographics/countries/markets etc which would keep investors happy.
    - bookmarkacc 10y ago
      I don't think nadir is the right word here. Perhaps zenith
  - praneshp 10y ago
    He hates Snap, and would love for it to go the Twitter way
xwowsersx 10y ago
I was just thinking about Snap the other day. Social media platforms seem to be pretty fickle. Of course there are a couple of behemoths such as FB who don't seem to be going anywhere anytime soon, but how does a company like Snap create a moat around their business or keep it defensible long-term? Please don't take my question to mean that I don't see the product/company as compelling. I don't personally use Snap (when I did a little bit, I enjoyed it), but I guess I just don't understand how to valuate a company like this. Is it mostly branding wherein, somehow someway, they've managed to completely own a certain demographic (here it seems 25 year-olds and under) and they are, therefore, seen as a new medium/platform where brands will be putting a lot of their ad spend? Forgive the rant, just wondering how people think about this.
- rhodysurf 10y ago
  Snapchat is HUGE with college aged and under, they check it nonstop and it has become the go to social platform. It also has pretty good ideas for revenue between custom filters that anyone can pay for (different tiers) and placing ads in between stories when watching them. They can be skipped and are pretty non intrusive. I really like snapchat because it is super casual and there is no inherent risk in throwing something goofy together, and no pressure of getting likes or upvotes or anything.
  - econnors 10y ago
    I'm recently removed from that demo, and anecdotally can confirm this. Facebook is where your relatives are, and Instagram is where your entire peer group is. Snapchat is where you can share with who you want (send private snaps to groups, and post stories to the public) while still seeing everyone's content. All while being reasonably confident that your photos/videos aren't being saved (or at least notified when they are, assuming somebody doesnt have an external camera ready). All of that, plus the ads just feel fair. They exist, appear at the "right" times, and can easily be skipped if content isn't interesting. I used to think snapchat was a fad. But as its evolved, I've become increasingly confident in their ability to stay relevant. Edit: I didn't awknowledge your "no like count" point - also spot on. Only visible metric is views to your story, and that isn't public. Pressure to post something "amazing" just doesn't exist like other social networks.
siavosh 10y ago
Curious if this is part of a larger trend in IPOs across industries? And if something is driving it other than unique founder celebrity status'. And if I were to make a bit of a leap, if this is an anti-democratic trend we're witnessing.
- lisper 10y ago
  Nope, it's part of a trend that began with the Google IPO. Larry and Sergey kept control, but investors made money so they didn't care. Then Zuck tried the same thing, and it was a bit of rocky start, but investors still made money eventually. It will keep going until there is a disastrous IPO where founders keep control and investors lose their shirts and realize they have no recourse. Then it will stop.
  - Animats 10y ago
    A few publicly held companies with multiple classes of stock have tanked. Zynga (remember Farmville?) is one. Their shareholders are suing the directors for insider trading; the insiders sold around $12 and the stock then crashed to around $3. Groupon is another. Their stock dropped over 75%. Management lost a shareholder lawsuit and paid out $45 million to shareholders. If a company goes into any form of bankruptcy, the insider control goes away. That's why Ford Motor Company didn't go bankrupt like GM and Chrysler - the Ford family would lose control. So their financial management is more conservative than the other auto companies.
pfarnsworth 10y ago
A stock with no voting power and no dividends is entirely worthless. You're basically just giving your money away to the company. It's akin to buying shares in The Green Bay Packers, where fans can buy ceremonial shares of the Packers, with absolutely no value. I don't understand why you would buy a share like this, besides relying on the Greater Fool theory to make money. It's essentially like buying a collectible like a baseball card and hoping that you can sell it to some other fool at a later time.
- irq11 10y ago
  I don't know why people are voting your comment down. You're exactly right, in terms of any conventional stock analysis: if there's no dividend and no control, you're not getting a share of the business in any real sense. Shares like this have value only in the bitcoin sense: they're valuable solely because people think they're valuable.
  - eberkund 10y ago
    >Shares like this have value only in the bitcoin sense: they're valuable solely because people think they're valuable. That's not true, you have ownership in the company proportional to the amount of stock you own. Just like any other stock. If the company is bought out or decides to give out dividends in the future you stand to make money. That is why the stock value tends to track the company's ups and downs. Comparing a stock to bitcoin is ludicrous.
    - irq11 10y ago
      Yes, if the company someday decides to issue dividends, you may then someday collect. That's true. But until then, you're gambling.
    - lhopki01 10y ago
      And if the buy out is just of the voting rights stocks? There's no need to buy out non voting rights stocks if you want control. Give out dividends out of the goodness of their hearts?
maverick_iceman 10y ago
Non-paywalled version: http://www.theaustralian.com.au/business/wall-street-journal/in-snap-ipo-new-investors-to-get-zero-votes-while-founders-keep-control/news-story/75ee361a68f45369ce3f8644a39ac35c http://www.theaustralian.com.au/business/wall-street-journal...

81 points by flinner 10y ago

Relevant information: Alphabet: GOOG (non-voting class C) closed Friday at a 2.8% discount from GOOGL (1x voting class A) Zillow: Z (non-voting class C) closed Friday at 1.1% discount from ZG (voting class A).

nradov 10y ago
Voting rights are nearly worthless in practical terms until you own enough shares to demand a board seat, at which point voting rights become worth a lot. It's almost a step function.
tuna-piano 10y ago
This is very interesting for me to think about. Perhaps someone smarter can explain what this means and answer some questions. A. On Google finance [1,2], it shows that both GOOG and GOOGL have a market cap of $565B. There is a difference in share price, but also a difference in the number of shares outstanding. Is this correct or a google finance mistake / confusing point? B. Assuming the discount for the non-voting shares is as you mentioned it, does this mean that shareholders value their vote for google at ~2.5x their vote for Zillow? C. At 2.8% of Google's market cap, that would mean Google's shareholders value voting rights for google at $15B - a huge amount. What votes does the market see that's worth $15B? D. It's an often stated point that the stock market and Wall Street focus on short term earnings, at the expense of long term results - and that the management would be more successful in the long term if they didn't have pressure from Wall Street. Does the discount for non-voting shares help determine if this point is true or not? 1. https://www.google.com/finance?q=googl&ei=_qd9WJG8BoKdugSE4onYBA https://www.google.com/finance?q=googl&ei=_qd9WJG8BoKdugSE4o... 2. https://www.google.com/finance?q=goog&ei=Wad9WIn8N4KdugSE4onYBA https://www.google.com/finance?q=goog&ei=Wad9WIn8N4KdugSE4on...
- GeneralMayhem 10y ago
  I'm no expert, just a man with a calculator, but I'll take a stab. A. Do the multiplication - each share class only accounts for about half the market cap, so presumably Google Finance (or its source) knows that GOOG and GOOGL are the same company and sums them. I don't know why Z/ZG don't have the same property, though. B. I don't think the per-share spread is particularly illuminating here, because the distribution of outstanding shares between voting and nonvoting is different for each company (if there are relatively few voting shares, then I would expect the per-share spread to be higher proportionally, since each vote is more valuable). I'd be more interested in the total price of all votes - calculated as: (((price per voting share) - (price per non-voting share)) * (# of voting shares)) as a percentage of overall market cap: Google: $6.8B / $565.7B = 1.2% Zillow: $23.3M / $6.59B = 0.35% so I'd say investors actually value voting in Google at about 3.5x their vote in Zillow, proportional to overall company value. I'd be somewhat interested to see if this metric correlates with things like P/E ratio (e.g., are investors more or less interested in voting rights in fast-growing companies?), founder share status (e.g., does a high Google vote price mean that investors think the founders are more likely to cede their majority stake?), etc., or if it's just a case-by-case thing (e.g., due to liquidity issues like the other response talked about with CMG). C. That number should be "only" about 6.8B (per-share premium * number of shares of GOOGL); parent's calculation roughly double-counts the value of the vote (not exactly double since there are more shares of GOOG than GOOGL). Total control over Google would be immensely valuable - worth much, much more than $7B - so presumably the difference that large investors are willing to pay is based on a probability distribution of how many shares one would expect to need to control to have any influence on the board, weighted by what that influence would actually be worth (presumably fairly little, since Page/Brin/Schmidt hold a controlling majority of votes). The marginal value per vote is also different depending on how many you have - for an average investor, it's probably zero; for the institution trying to muscle its way onto the board, it's probably much more than $26/vote. D. This reads like a college essay question, and I feel like you have an answer in mind, but it's not immediately obvious to me what the two have to do with each other.
- patio11 10y ago
  A: Market capitalization is of an enterprise, not of a share class. B: I think you're overthinking this a little bit. C: GOOG and GOOGL have subtle differences between them beyond just the voting rights. For example, GOOG != GOOGL. If you have a contract which obligates you to give someone a share of GOOG, a share of GOOGL does not settle that contract. There are some liquidity-related problems, as there is substantial retail interest in Google and retail traders generally disproportionately have access only to one share class. One of my favorite examples for this: back in the day, there were two classes of Chipotle, CMG and CMG.B. They were identical in every way except CMG.B had 5x the voting rights. Which traded at a discount to which? Answer: CMG.B routinely traded at a 10% discount. That's either enough to shake one's faith in the efficient markets hypothesis or it's a powerful illustration that in the short run market microstructure matters A LOT. (I had originally become a shareholder in the A class and started buying B after I was aware of the mispricing. That worked out pretty well. I was far from the only person who realized this, but it was impossible to arbitrage away the difference profitably due to overwhelming short interest in CMG, which meant the cost of borrowing CMG to buy CMG.B and holding them to convergence was untenable. Eventually, some larger institutional buyers just crowded into CMG.B and voted to convert the B shares on a 1:1 basis to the A shares, immediately cutting off their voting power and realizing massive gains.)

PhilWright 10y ago

I have to say it feels like the founders want to have their cake and eat it. They want the money that comes from an IPO but they don't want to give up any control. Facebook is the same, Zuckerberg has the majority of the voting shares but a lot less than 50% of actual shareholding. This seems to be becoming increasing common with tech start ups. If you want others to invest and take on a financial risk then they should get an equal and fair voting share. If I was the stock exchange I would ban this kind of crap.

exolymph 10y ago
People are free to not buy the stocks. Clearly the tradeoff hasn't dissuaded Facebook shareholders.
- kin 10y ago
  Yeah, personally I would be really upset if my fellow shareholders voted for a poor direction for the company. So, if the vision and direction of a company's leaders continue to do well for the company, I'd totally be on board investing. I wouldn't have to worry about the public eye being reactionary to any speed bumps.
eberkund 10y ago
Realistically what are most shareholders going to with a voting share? Unless you are big fund manager with a significant voting block, what are a few votes going to do for you? I think most people are content to put their trust in the people who got the company this far, for the most part their interests should be aligned anyways.
- bravura 10y ago
  Realistically what are most shareholders going to with a voting share? Vote your shares, or be an activist shareholder, if the business goes south.
  - twblalock 10y ago

karpodiem 10y ago

Snapchat is the next Twitter (wrt financial performance)

jayjay71 10y ago
What makes you say that?
- edblarney 10y ago
  It's not an unreasonable comment. Snapchat is mostly a texting app. Yes - their value prop is around 'sharing moments' and they do it well. Also - they have other ancilliary offers. And yes - they are the kings of college aged-students, and the 'cool thing' for now. But - texting is to some extent a commodity, and 'cool brands' fade. Facebook used to be cool - then they turned into a utility. Twitter was cool, and now it's at utility stage as well. And - do they really have the capacity to grow to 1.5 billion people? Facebook eventually had 'your parents'. Snapchat will not. Twitter has tons of regular folk. Snapchat probably will not. So there's a limit to their growth. The question is - can Snapchat exist as a utility when the buzz dies down? Will they anchor themselves as 'the' texting platform, do they have that kind of incumbency? Snapchat is going nowhere anytime soon, and it's entirely feasible they stay relevant for a long time. But - the valuation is pretty dam high. In order to justify a 17B valuation it means you have to produce 17B in profits at todays dollar value. That's a lot of money. It means 1 B in profits in the bank or back to shareholders for 17 years :). So it's a pretty big valuation to live up to, even if they are fairly successful. But they are definitely cashing in at exactly the right moment. They hype is at a nadir. They can't get any cooler, though they could break through to other demographics/countries/markets etc which would keep investors happy.
  - bookmarkacc 10y ago
    I don't think nadir is the right word here. Perhaps zenith
- praneshp 10y ago
  He hates Snap, and would love for it to go the Twitter way

xwowsersx 10y ago

I was just thinking about Snap the other day. Social media platforms seem to be pretty fickle. Of course there are a couple of behemoths such as FB who don't seem to be going anywhere anytime soon, but how does a company like Snap create a moat around their business or keep it defensible long-term? Please don't take my question to mean that I don't see the product/company as compelling. I don't personally use Snap (when I did a little bit, I enjoyed it), but I guess I just don't understand how to valuate a company like this. Is it mostly branding wherein, somehow someway, they've managed to completely own a certain demographic (here it seems 25 year-olds and under) and they are, therefore, seen as a new medium/platform where brands will be putting a lot of their ad spend? Forgive the rant, just wondering how people think about this.

rhodysurf 10y ago
Snapchat is HUGE with college aged and under, they check it nonstop and it has become the go to social platform. It also has pretty good ideas for revenue between custom filters that anyone can pay for (different tiers) and placing ads in between stories when watching them. They can be skipped and are pretty non intrusive. I really like snapchat because it is super casual and there is no inherent risk in throwing something goofy together, and no pressure of getting likes or upvotes or anything.
- econnors 10y ago
  I'm recently removed from that demo, and anecdotally can confirm this. Facebook is where your relatives are, and Instagram is where your entire peer group is. Snapchat is where you can share with who you want (send private snaps to groups, and post stories to the public) while still seeing everyone's content. All while being reasonably confident that your photos/videos aren't being saved (or at least notified when they are, assuming somebody doesnt have an external camera ready). All of that, plus the ads just feel fair. They exist, appear at the "right" times, and can easily be skipped if content isn't interesting. I used to think snapchat was a fad. But as its evolved, I've become increasingly confident in their ability to stay relevant. Edit: I didn't awknowledge your "no like count" point - also spot on. Only visible metric is views to your story, and that isn't public. Pressure to post something "amazing" just doesn't exist like other social networks.

siavosh 10y ago

Curious if this is part of a larger trend in IPOs across industries? And if something is driving it other than unique founder celebrity status'. And if I were to make a bit of a leap, if this is an anti-democratic trend we're witnessing.

lisper 10y ago
Nope, it's part of a trend that began with the Google IPO. Larry and Sergey kept control, but investors made money so they didn't care. Then Zuck tried the same thing, and it was a bit of rocky start, but investors still made money eventually. It will keep going until there is a disastrous IPO where founders keep control and investors lose their shirts and realize they have no recourse. Then it will stop.
- Animats 10y ago
  A few publicly held companies with multiple classes of stock have tanked. Zynga (remember Farmville?) is one. Their shareholders are suing the directors for insider trading; the insiders sold around $12 and the stock then crashed to around $3. Groupon is another. Their stock dropped over 75%. Management lost a shareholder lawsuit and paid out $45 million to shareholders. If a company goes into any form of bankruptcy, the insider control goes away. That's why Ford Motor Company didn't go bankrupt like GM and Chrysler - the Ford family would lose control. So their financial management is more conservative than the other auto companies.

pfarnsworth 10y ago

A stock with no voting power and no dividends is entirely worthless. You're basically just giving your money away to the company. It's akin to buying shares in The Green Bay Packers, where fans can buy ceremonial shares of the Packers, with absolutely no value. I don't understand why you would buy a share like this, besides relying on the Greater Fool theory to make money. It's essentially like buying a collectible like a baseball card and hoping that you can sell it to some other fool at a later time.

irq11 10y ago
I don't know why people are voting your comment down. You're exactly right, in terms of any conventional stock analysis: if there's no dividend and no control, you're not getting a share of the business in any real sense. Shares like this have value only in the bitcoin sense: they're valuable solely because people think they're valuable.
- eberkund 10y ago
  >Shares like this have value only in the bitcoin sense: they're valuable solely because people think they're valuable. That's not true, you have ownership in the company proportional to the amount of stock you own. Just like any other stock. If the company is bought out or decides to give out dividends in the future you stand to make money. That is why the stock value tends to track the company's ups and downs. Comparing a stock to bitcoin is ludicrous.
  - irq11 10y ago
    Yes, if the company someday decides to issue dividends, you may then someday collect. That's true. But until then, you're gambling.
  - lhopki01 10y ago
    And if the buy out is just of the voting rights stocks? There's no need to buy out non voting rights stocks if you want control. Give out dividends out of the goodness of their hearts?

maverick_iceman 10y ago

Non-paywalled version: http://www.theaustralian.com.au/business/wall-street-journal/in-snap-ipo-new-investors-to-get-zero-votes-while-founders-keep-control/news-story/75ee361a68f45369ce3f8644a39ac35c http://www.theaustralian.com.au/business/wall-street-journal...