Snapchat IPO | Why Investors Care About Non-Voting Shares.

As Snap Inc’s IPO date draws ever closer the buzz seems to get louder and louder with much of it focused around its unique position on offering only a voteless class of shares, but what does that really mean and why do we care?

Snap Inc. is set to be the biggest US tech IPO since Alibaba launched in 2014 and unsurprisingly there is a huge amount of talk and speculation. Some are optimistic, but the majority seem to be skeptical and others are downright scathing.

Normally I would roll my eyes and say we’ve all been here before. In fact we see this same scene play out nearly every time a high profile tech company goes public. We saw it with Google in 2004, we saw it with Facebook in 2012 and we saw it with Twitter in 2013… okay, the detractors got it right about Twitter.

But the Snapchat story actually is unique — Snap Inc are planning on being the first company to launch their IPO in the US with voteless shares. This means that anyone purchasing the A-level shares that Snap are offering will have absolutely no say over how the company is run and remaining founders Evan Spiegel and Bobby Murphy will retain their combined 88.5% control over the company. Investors naturally responded to this with the calm and rationality of of an Aussie with road rage. Infact over a dozen US pension firms have even sent in angry letters.

The question is why is this significant? Let’s look at why this might be troubling to potential investors.

Creating an App is not the same as running a public company.

Getting an app company to this stage is a huge achievement, but even with this milestone under their belts the co-founders of Snap Inc, Evan Spiegel and Bobby Murphy, are still lacking a substantial track record. The tech scene isn’t unfamiliar with millennial CEOs wielding huge amounts of power, but this point is valid as even Zuckerberg allowed voting rights with Facebook’s initial offering.

In particular investors are looking at Snap’s CEO Evan Spiegel. He is undoubtedly calling the shots and renown for his despotic management style. Spiegel cruises between Snap Inc’s California offices in his blacked-out land rover — with full security detail in tow — and occupies an imposing and remote office keeping him inaccessible to the general staff who have referred to him as “untouchable” and “looking down over everyone”.

Snap Inc is hugely secretive about… well… everything.

This leads to our next point. The company culture itself is awash with secret projects and forbidden topics which inevitably lead to communication failures and an alienated workforce, many of which don’t know about new features and products coming out until they see the headlines.

A security obsessed culture isn’t unusual in the business world, especially in environments where information and IP is the edge the company is built upon… just look at Apple. However, there does need to be a balance for the sake of both the employees and the investors.

Right now, investors are still kind of in the dark as Snap Inc lawyers and accountants have been divulging the bare minimum amount of info that they are legally required to. Given Snap’s short financial track record, and the haunting memories of Twitter, investors will be hugely skeptical about being forced to blindly trust Spiegel without any say whatsoever.

Snapchat still hasn’t proven itself as financially lucrative.

Despite fast revenue growth, Snapchat isn’t a profit-making machine. In fact it is still operating at a heavy loss. This isn’t a red flag in itself but investors do have to ask themselves how Snapchat is going to be monetising its platform.

Advertising is the obvious answer here and there are some ads on the app already. What is uncertain though is how users will respond once ads become more prominent on the site. The teen demographic is notoriously ad sensitive and once the user experience starts becoming interrupted it is very possible they will abandon the platform in favour of alternatives. This seems to be a point where investors are going to have to trust Spiegel’s instincts. Has been pretty spot on so far when it comes to user experience but investors don’t trust easily — especially without any definitive strategy or vision.

Snapchat’s user count seems to be dwindling already. After growing at a dramatic pace — increasing by 50 million daily users in 2016 — this growth has slowed considerably to just 5 million active daily users for Q4 compared to the 15 million plus they were drawing in during the previous three quarters.

Snap Inc spokespeople are putting this down to inactivity on their part — they haven’t come out with any new features in a while — but stiff competition also has a part to play. This comes in part from the hundreds of other messaging apps on the market and most notably from Facebook Inc’s Instagram, which has not only copied (literally just cloned) Snapchat’s “Stories” initiative but even made it more convenient and user friendly which has led to a sharp decline (30–40% in some cases) in the amount of stories viewed on Snapchat and user engagement on Snapchat as a whole. That said this seems to be affecting millennials more than teens, which are arguably Snap Inc’s target market.

With vote-less shares investors will be forced to blindly trust a company that still has a very uncertain future and there isn’t much of a track record for investors to look at in their search of clues relating to how well Snapchat can compete with this direct competitors.

No accountability to the shareholders.

When putting money into a company, investors are placing a huge amount of trust in the company’s executives. This can be offset by the collective power the investors can wield over the company’s top brass — sometime possibly removing offending execs. By issuing exclusively non-voting shares at their IPO, Snap Inc are keeping the power concentrated firmly in the hands of the founders.

This also raises issues when it comes to governance and compliance, particularly around gender equality and allegations of the ‘silicon valley boys’ club’. This is partially based upon Spiegel’s frat boy past, which may not be wholly fair to the Snap Inc CEO — plenty of public personalities behaved in appalling ways while in college and that doesn’t necessarily represent who they are now (who remembers Boris Johnson’s Bullingdon Club antics?). That said, given Spiegel is so young, those college days weren’t that long ago.

There’s A Bigger Picture

Investors are also expressing concerns over what this might mean for future IPOs. There is no shortage of arrogant companies aspiring to reach IPO some day soon and large groups like The Council of Institutional Investors and large investment firms are expressing concern over how this will encourage them to also offer shares with no voting rights. Many have actually written to Snap Inc to urge them to reconsider.

Issuing exclusively vote-less share at IPO seems to be violating one of the key checks and balances of the system to keep large corporations honest and if more companies adopt this then there will be less incentive for corporate and global responsibility, which are both becoming more and more valued in the investment community; especially with huge and influential firms like BlackRock putting more publicity into ethical investing.

Conclusion

Ultimately investors are right to be concerned about this brave new power play from Snap Inc. New IPOs are always risky and tech IPOs even more so. We all remember the spectacular flops like Groupon, GoPro and Twitter — all media darlings in their own way and all expensive lessons to investors.

Now Spiegel and company are playing a dangerous and arrogant game by hoarding power and keeping investors in the dark while offering a young and financially unproven company to the world. It will be interesting to see how this plays out on IPO day — will investors be clamoring to take the plunge or will caution and skepticism prevail? Media coverage tends to err on the side of a catastrophic fall for Snap Inc, but — as Brexit and Trump have shown us — that isn’t necessarily an indication of what will actually happen.

Despite it all I still can’t write the stock off as doomed. There is still a magnetism about the company with its’ rapid revenue growth, young user base and promising potential. If they can get the ad revenue right and keep their teen market engaged this could be a huge platform for publishers and marketers to reach a demographic that can be notoriously hard to engage through traditional means.

Beyond Snap’s IPO I’m also curious to see how this affects future IPOs. Will there be a new wave of omnipotent and unaccountable public companies or will others follow the example of Alphabet Inc and Facebook — issuing a voting class of shares first and then a non-voting class after to maintain control.

Curious as I am, though, I still won’t be adding Snap Inc to my portfolio in March.