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Snapchat Founders’ Grip Tightened After a Spat with an Early Investor
- perfmode 10y agoHow much has Spiegel's father earned for footing the initial bills?
- jzl 10y agoThis incident fails to explain why common stockholders should have zero voting power. That decision doesn't fall naturally from "an early VC had onerous terms that we didn't vet".
- sjtgraham 10y agoSerious question. Why should common stock holders have voting rights? If you're going to buy stock in any company the number one reason has to be that you believe in its leadership. The ultimate vote of a shareholder is to sell the stock. Mom & pop don't get to exercise any meaningful control over a company with voting rights, leaving folks like Icahn to exert undue influence, whose incentives are possibly not aligned with anyone else's.
- idiot_stick 10y ago>If you're going to buy stock in any company the number one reason has to be that you believe in its leadership. Why should this necessarily be the case? There are many reasons to buy a stock. Sometimes leadership is an issue, and getting rid of it is an opportunity.
- brightball 10y agoThe main reason is to protect their interests in the case of visibly poor leadership. There's almost no reason outside of that that I can see. FWIW, there are a lot of people who's goal isn't to sell but to collect dividends due to the long term success of a company.
- mholmes680 10y agoI'd rather you looked at it this way: If Icahn has an incentive, then the company has a management problem. You might not like the outcomes of his investments, but hes top-notch at recognizing shortcomings in existing management and their own businesses. For me, despite ever maybe owning 0.0000000000001% of a company, the power of mutual ownership means all perspectives are taken into account. And that generally means more accurate valuations, and therefore safer investments.
- marvin 10y agoSerious follow-up question regarding US securities laws: If stock class A has zero voting rights, can the stockholders of class B with voting rights unilaterally decide that class A will get no dividends while class B will get the entire company's profits paid out as dividends?
- bedhead 10y agoYes though it will depend on the bylaws of the company and the state they're in. There are some dual share classes in the US that do have materially different dividend policies in addition to voting rights.
- filleokus 10y agoI had the same question and it seems like that could be the case. I don't really have any reputable source but many sites write about it, like http://www.investorguide.com/article/11166/stock-classes-the-difference-between-common-stock-and-preferred-stock-igu/ http://www.investorguide.com/article/11166/stock-classes-the... Normally Class A has the voting right and Class B has not. But I would also like a clarification on this from somebody that actually knows. The S1 filing for Snap Inc. states: "We have paid a stock dividend of our Class A common stock on our capital stock in the past and from time to time in the future may pay special or regular stock dividends in the form of Class A common stock, which per the terms of our amended and restated certificate of incorporation must be paid equally to all stockholders." "Equally to all stockholders", does that mean all Class A holders or both A and B holders?
- marvin 10y agoOkay, thanks for the info. I was asking more due to the general case; if a stock class has no voting rights and never will receive dividends, it is effectively worthless unless holders of other stock classes voluntarily give away their money (they won't). I am a little puzzled at some of the latest innovations in the US stock markets. I can understand investing in a company that a small group of insiders will always have majority control in, as long as all owners are treated equally wrt. all forms of payouts. I really don't understand why the market would assign value to a stock class with no voting rights and no plausible scenario for returning capital to stockholders.
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- kgwgk 10y agoWhy should the owners of a business have any control? Just let the employees manage it!
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- wch 10y agoAnother serious question: if a stock has no voting rights and no dividends, why would it be worth anything at all? That is, what makes it different from a piece of paper with the company's name on it? If there are voting rights, then there's value because someone potentially could buy enough shares to meaningfully exert those rights, but if not, then what value do the shares have to anyone?
- amorphid 10y agoThat's an interesting question. To oversimplify it, the value of a stock of essentially a wild-ass guess about how much cash one might be able to pull out of a company eventually per share times the number of shares. If I a company isn't paying dividends or buying back stock, and we (the shareholders) can't coerce said company into doing so at some point, it's essentially an indestructible piggy bank in which money evaporates while you helplessly watch.
- tyre 10y agoIt's value is that you can sell it to someone else. One of the big risks that Snap is taking in this IPO is that their common stock has no practical value. As you said, stock generally has two ways of being worth something: partial control and/or profit sharing. Snap common stock has neither. It's only value is its ability to be sold to someone else. It's basically a currency? Is $Snap the new BTC? I have no idea.
- shalmanese 10y agoBut that just pushes the question one layer of abstraction deeper. Why would that person be willing to buy Snap shares from you at any price? On a long enough timeline, you have to believe that Snap will either disburse dividends, be acquired by another company or find some other way to convert ownership into actual cash.
- tyre 10y agoThey would buy because they believe they can sell it later at a higher price, based on the belief that other people want to buy $SNAP and will drive the price up. I'm not avoiding your question—I agree that it should be based on underlying value—but that seems to be the only reason to buy $SNAP
- pjc50 10y agoPublic traded companies: you can sell the stock. The voting rights are rarely used, but they allow majority shareholders to properly control the company. No distinction is made by size of shareholder, just shares = votes. Private held companies: not necessarily traded. Your investment is illiquid. Nobody outside is really watching. The managers can fly the company into the ground before you can find a buyer, and voting is your only shield against this.
- bedhead 10y agoInterest misalignment leads to all sorts of problems. Think of it as part of a system with checks and balances.
- libertymcateer 10y ago> This incident fails to explain why common stockholders should have zero voting power. They don't have zero voting power. They have greatly reduced voting power. Huge difference. Snap Inc. is a delaware corporation. The shareholders (DE = shareholder; NY = stockholder) have certain non-waivable rights as a matter of delaware law. To put it another way: The founders create the company, including designing the ownership structure. The fact of the matter is, common shareholders are willing to buy into this structure, even without very strong voting rights, at a huge valuation. The proof is in the pudding - why should the founders have done otherwise? No one is forcing the common shareholders to buy into the Company - they are doing so knowing full well that they have very low voting rights. So, why should management give up control to common stockholders? What benefit is there? The only answer, in my role as a corporate lawyer, is when the company cannot raise money on terms more favorable to the founders and management. That was not the case with Snap. And it worked out brilliantly.
- argigg 10y agoIt's a little early to declare mission accomplished. The IPO hasn't actually happened yet. It will be hard to know if limited shareholder supervision reduces the value of the company. But if the IPO is a bust, a lot of people will wonder.
- libertymcateer 10y agoFair enough - but the S1 is filed. The IPO is set for Wednesday. As soon as the shares are sold Wednesday morning, it's champagne time. Granted there is a lockup period for company insiders, but unless they sink the ship in 6 months, they are going to be racing their new yachts by thanksgiving.
- jzl 10y ago> They don't have zero voting power. They have greatly reduced voting power. Huge difference. I have yet to see a news outlet describe the SNAP common stock as you have. Do you have any references? A few of many example articles describing how their common stock will have 0 voting rights: https://www.fool.com/investing/2017/02/08/your-snap-shares-wont-get-you-any-votes.aspx https://www.fool.com/investing/2017/02/08/your-snap-shares-w... http://fortune.com/2017/02/07/snapchat-ipo-snap-stock-buy/ http://fortune.com/2017/02/07/snapchat-ipo-snap-stock-buy/ "Snap acknowledged in its IPO filing that it would likely be the first company to sell non-voting stock in an IPO on a U.S. stock exchange." If all you mean is that Delaware law allows certain kinds of lawsuits by stockholders, then no, IMO, that is not the same as having voting rights. And yes I understand that it not unusual for common stock in public companies to have greatly reduced voting rights. There is still a difference between that and none.
- EGreg 10y agoWhat is the best way for a founder to secure the kind of control that Mark Zuckerberg has in Facebook to this day? And still raise VC?
- rdl 10y agoInsane growth before raising = maximum leverage, and the corresponding competitive pressure on the deal, plus asking for it. (and being in the right place/time)
- EGreg 10y agoOk but lets say they let you do anything, what terms and structure?
- rdl 10y agoRead https://www.amazon.com/dp/B01M3UIVW3/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1 https://www.amazon.com/dp/B01M3UIVW3/ref=dp-kindle-redirect?... and ask for/demand the suggested "clean" terms. That gets you pretty far -- going beyond that, you can probably either optimize for valuation or optimize for control, but probably not both, even in a very hot deal.
- e1g 10y ago+1 for "Venture Deals". It's a fantastic resource for founders raising money on every level - from "I know nothing about finance" seed to "how long till IPO" D-round. There are countless blog posts and articles on this, but none of them provide the same guided walkthrough for all important considerations along real-life examples.
- VuWall-Matt 10y agoAnything similar to this for Canadians?
- dagw 10y agoBeing seen as competent, leading your company from success to success, and giving great returns on people's investments is probably a very good start.
- sulam 10y agoMan, it's true those terms were standard -- in the 90's. Seriously founder-unfriendly.
- abalone 10y agoWhat exactly would constitute founder-friendly seed / series A terms in the area of future investor participation rights? Are we literally saying any right of first refusal is onerous, or is it just the multiple that gave Lightspeed up to 50% of the next round (which sounds like a 2-2.5X multiple)? Sam Altman has a right of first refusal provision in his "founder-friendly term sheet". At least I think he does.. he doesn't call it a ROFR, preferring the plainer language of "investor participation rights". But it's there and even the multiple is left as an open variable.[1] So are @sama's terms actually spat-worthy? [1] http://blog.samaltman.com/a-founder-friendly-term-sheet http://blog.samaltman.com/a-founder-friendly-term-sheet
- nikcub 10y agoThat's just a prorata right so that investors can maintain their holding in future rounds
- abalone 10y agoIsn't that a ROFR? Please explain the difference.
- argonaut 10y agoPro rata is just ROFR with a 1x multiple, yes, so it seems it was the particular multiple (anything greater than strictly proportional) that was onerous.
- libertymcateer 10y ago> Pro rata is just ROFR with a 1x multiple, This is incorrect. See my comment above.
- libertymcateer 10y agoA right of first refusal is the right to purchase the shares offered by a company to someone else. So if VentureBros wanted to invest $10M in TheGuild, and TheGuild's old VC, ImpossibleIndustries, had a ROFR, ImpossibleIndustries could block VentureBros and buy the same shares for $10M. Pro-rata participation rights means that if you sell shares to a third party, the rightsholder gets to purchase more stock from the company in order to maintain their percentage share so that they are not diluted. So if ImpossibleIndustries owned 10% of TheGuild, and VentureBros then invested $10M and got a certain percentage of TheGuild, ImpossibleIndustries would have the right to buy more stock of TheGuild in order to ensure that, after the transaction, ImpossibleIndustries still had 10% of the total shares of the TheGuild.
- drfuchs 10y agoOn the face of it, it seems that if existing investor VC1 has a ROFR, it only means that VC2 can't under-bid on the next round, and that minimizes dilution for founders on that round. That is, if VC2 says "We'll give you $2M at a $10M valuation" and VC1 says "We choose to exercise our ROFR at that price", clearly VC2 has set a valuation too low; if they want in, they'll have to make an offer that VC1 won't match. That all sounds good for the founders (and other early shareholders). What am I missing here?
- rdl 10y agoVc2 doesn't bother putting the effort in to negotiate the deal because he knows vc1 can steal the deal as soon as he has validated it.
- drfuchs 10y agoIf VC1 chooses to steal the deal, then VC2 underbid on the valuation, no? Plus, even without any ROFRs, there are bidding wars all the time (between VC2 and VC3, say, where neither has a chunk yet).
- abalone 10y agoFrom VC2's perspective they are probably overpaying due to the ROFR. In your example, $10M could just be what both VCs actually value company at, so VC1 exercising their right is not a bad sign. Therefore to win the deal (if it can't be shared) VC2 has to offer >$10M.. perhaps a lot more if they want to ensure they don't waste their time with the offer. So the concern is this may discourage other VCs from bidding on the deal, knowing the only way to win is to overpay. Or that startups need to sell a bigger stake to make room for both VCs. This is illustrated in detail here: http://venturehacks.com/articles/options-open http://venturehacks.com/articles/options-open
- drfuchs 10y agoBy that logic, even if VC1 is dead and buried, VC2 still will never make an offer, since VC3 might swoop in and steal the deal, so it's always a waste of time to make an offer. Additionally, it's implausible that two VCs will calculate the exact same "fair" valuation, since it's all so nebulous. From the point of view of the original angel investors and early employees, why shouldn't the founder push for the best, least dilutive, offer? Are you suggesting that if VC2 comes in with a low-ball offer, the founder should just say "gee, they made such an effort, I owe them the right to excessively dilute us all, even though VC1 is putting his money where his mouth is, and is willing to step up to avoid it." Let's say I helped you by putting up a down payment for you to buy your house, for which I get 10% ownership. Later, you want to sell the house (or a further interest in it). If you get an offer, and I think it's too low, is it unreasonable for me to want to "steal the deal" at that artificially low price? Otherwise, it's simply a transfer of wealth from me (and you) to the new buyer, which I'd certainly like to defend myself against. People buy houses all the time in competition with other buyers; no serious buyer says "I'm not going to make an offer on that house, because someone else might beat my offer, or maybe exactly match it and the seller could choose that other offer."
- vmarsy 10y agoThe 2015 interview at a start-up awards show linked [1] in the article is pretty interesting. Evan gives a few startup ideas who failed before he succeeded with Snapchat, how he initially marketed Snapchat with flyers in a local mall , and that the amount "his father was tired of paying" in Snapchat’s bills was around $5K a month. [1] https://www.youtube.com/watch?v=R-UAjGVPFIE https://www.youtube.com/watch?v=R-UAjGVPFIE
- molmalo 10y agoJust curious, Wouldn't that give his father the right to claim some kind of compensation as an early investor?
- lu5t 10y agoHow is one supposed to view the article? Even the web link doesn't work, as all results present a paywall.