THE NON-FOUNDER'S DILEMMA

It’s finally here – one of the most talked about and anticipated IPO, that of Snap’s. Liquidity for the VC industry has been abysmal thus far, thanks to the plethora of investors over-capitalizing businesses with poor fundamentals, or if they are good still not helping manage crazy burn to spiral out of the non-sensibility. One might consider putting Snap in that bucket, having raised $2.4B at $17.8B valuation (the IPO at its current suggested share price will be more or less a flat round, and potentially a down-round if not fully subscribed) and currently losing $515M per year.

While there are merits and risks to investing in Snap, similar to all investments, I thought I would spend some time talking about an aspect of the IPO that has yet to be highlighted profusely. For those unwilling to read the 244 page S1, Goodwater has a good summary here. What has been glossed over in that report though, other than a one-liner, is that all that Snap is offering up are non-voting stock, and to date and to widespread knowledge, NO OTHER company has completed an initial public offering of non-voting stock on a U.S. stock exchange. As comps, both FB and TWTR issued Class A common stock with one vote per share for their public offerings.

What that means (and I am quoting some lines verbatim from the filing):

  • Spiegel (CEO) and Murphy (CTO) will represent 88.5% of the voting power holding Class C common shares, and potentially either one of them alone will have the ability to control the outcome of matters submitted to Snap’s stockholders for approval, including the election, removal, and replacement of directors, any merger, consolidation, or sale of all or substantially all of their assets and any other material business decision such as executive compensation.
     
  • Even if they are terminated, they will continue to have the ability to exercise the same significant voting power and potentially control the outcome of all matters submitted to their stockholders for approval. This will be true until they die, literally, or until they are diluted to owning 30% of the Class C shares each.  Should one be diluted first over the other, the remaining co-founder will be able to exercise voting control over the outstanding capital stock.
     
  • There will be no requirement for Snap to provide proxy statements or information statements for the Class A common stock they are offering in the IPO
     
  • If they do provide such statements, they may not include all information that a public company with voting securities registered under 5 Section 12 of the Exchange Act would be required to provide to its stockholders.
     
  • As an emerging growth company, Snap will not be subject to the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments because they would not be subject to provisions of the Dodd-Frank Act.

o    They may also take advantage of reduced disclosure obligations regarding executive compensation in their periodic reports and proxy statements

o    They may take advantage of these exemptions for up to five years or until they are no longer an “emerging growth company,” whichever is earlier.

While reading the prospectus, I got reminded of Noam Wasserman’s (currently at USC, and previously at HBS) book called The Founder’s Dilemma (cliff notes version here on HBR). Basic premise is the dilemma a founder faces between maintaining control of the business they founded, versus losing control by giving up equity in their business as they look to raise capital to keep growing the business. He found by the time a company even reached the IPO stage, fewer than 25% of those would be led by their founders, let alone still be asking for majority control. And now that Snap is looking to accomplish an unprecedented task of being the first company to go public with all non-voting stock, it is not so hard to envision a world where the dilemma is actually consigned to non-founders in the future.