ANGELES ó The founders of Snap Inc. want to take the
company public. But that doesnít mean they want to run
a public company.
companies, after all, have to deal with shareholders who
donít like the way the company is being run. They have
to ask shareholders whether they are paying executives
too much. They have to seriously consider takeover
offers. They have to, in other words, cede at least some
control and influence to investors.
the company behind messaging app Snapchat holds its
much-anticipated initial public stock offering in the
coming weeks, it will offer new shareholders exclusively
nonvoting shares, something no company has tried before
in a public debut.
novel move has an array of implications for the Los
Angeles company and would-be investors, affecting the
types of documents Snap will have to file with
regulators and limiting input from shareholders. But
most importantly, it will ensure founders Evan Spiegel
and Bobby Murphy can retain power in perpetuity.
all about control," said Kai Liekefett, a partner
at law firm Vinson & Elkins who works with companies
under pressure from investors. "Thereís no other
reason. Thereís no tax reason, no business
tight will be the pairís grip on the company that they
will be able to maintain control even if they no longer
work for Snap, and even if they own a tiny percentage of
the companyís total shares. Theyíll also be able to
decide who can acquire shares that have even token
the IPO, Murphy and Spiegel will each own about 18
percent of Snap shares, yet each will control 44 percent
of the companyís votes. And they could ultimately own
much smaller stakes ó perhaps less than 3 percent
apiece ó while still holding the vast majority of
in the tech realm, where company founders have grown
accustomed to outsized control, Snap is an outlier,
giving its founders the kind of permanent influence that
in other cases has been granted only to more proven
can create an impregnable fortress by doing an IPO where
the controlling stockholders keep absolute or
near-absolute voting control, which is what this kind of
share arrangement is," said Stuart Shapiro, a New
York attorney who specializes in corporate mergers and
acquisitions. "Itís a magic bullet."
Snap spokeswoman declined to comment, noting that the
firm is in a quiet period ahead of the IPO. In the
companyís public filings, it says it wants to keep
Spiegel and Murphy in control so that they can innovate,
take risks and prioritize "long-term goals rather
than short-term results."
essentially the same reasoning offered by other tech
companies that, over the last decade and a half, have
gone public with corporate structures that give founders
more control than other shareholders.
while the terms of Snapís IPO are groundbreaking, theyíre
also predictable ó a logical if brazen evolution in a
years-long trend. When Google went public in 2004, the
shares it offered to new investors came with a single
vote while the shares held by the companyís founders,
executives and early investors were worth 10 votes
Groupon, LinkedIn and Facebook all went public with two
classes of stock, allowing founders and early investors
to keep voting control.
difference between those offerings and Snapís, then,
is one of degree. Instead of giving ordinary
shareholders single-vote shares while keeping 10-vote
shares for themselves, as other companies did, Snap
plans to give new shareholders no votes at all.
and Facebook later issued nonvoting stock with the aim
of cementing their foundersí control, a controversial
step probably made easier by those companiesí
perennial success. Snap is doing the same, but without
the track record.
investors probably will have no problem with this
arrangement and will be eager to buy shares of a hot
company thatís going public amid an otherwise slow IPO
market. Others may refrain from investing at all,
believing that ownership should come with the right to
help decide how a company is run.
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California Public Employeesí Retirement System, the
nationís largest public pension fund, recommends
companies give equal voting rights to all shareholders.
So does the Investor Stewardship Group, a new coalition
that includes investment giants Vanguard, BlackRock and
the California State Teachersí Retirement System,
another huge pension fund.
Mastagni, a CalSTRS investment officer, said structures
that give founders extra power are especially concerning
when, as with Snap, those powers could continue for
decades. Spiegel, 26, and Murphy, 28, donít lose their
voting control unless they sell the vast majority of
their holdings or die.
to protect the foundersí vision is one thing,"
Mastagni said. "But if theyíre no longer even
working for the firm, itís just them wanting to
entrench themselves and maintain control in perpetuity.
Itís very alarming."
another consequence of nonvoting shares: They remove
some of the ways investors try to keep companies honest.
shareholders can withhold votes for board candidates or
vote against company proposals, a way of publicly
protesting a firmís actions or governance.
a little vote allows them to send the board a
message," said Sean Quinn, head of U.S. research
for Institutional Shareholder Services, which advises
institutional investors. "Itís at least an
opportunity to appeal to the companyís social
conscience or shame the company insiders, for all the
good that will do. It puts the company in the position
of having to defend its decisions."
shareholders can also submit proposals that are included
on a companyís annual ballot. Last year, for instance,
Boston firm Northstar Asset Management asked its fellow
Facebook shareholders to vote for a change that would
give all shareholders equal rights and dilute Zuckerbergís
Goodridge, Northstarís chief executive, knew the
proposal would not win a majority ó Zuckerberg, after
all, represents a majority by himself. But her aim wasnít
to win; it was to make a point and to publicly voice
displeasure with the companyís structure. With Snap,
she wouldnít be able to do even that much.
Snap plans to issue only nonvoting shares in its IPO,
investors wonít be able to submit those types of
shareholder proposals, according to the companyís
disgusting to me," Goodridge said of the Snapís
structure. "Itís a way of saying, ĎWe donít
care what anybody else thinks.í"
also a worry among investors that Snapís concentrated
voting power could prevent the company from accepting a
lucrative buyout offer.
Snapís public offering values the company at $25
billion. Now imagine Google immediately offers to buy
Snap for $50 billion. Investors might salivate at
doubling their money overnight, but the companyís
board ó members of which will be chosen and elected by
Spiegel and Murphy ó could reject the offer. Even if
the board considered such a deal, Spiegel and Murphy
could vote it down.
the company notes in its filings, Spiegel and Murphy are
"entitled to vote their shares Ö in their own
interests, which may not always be in the interests of
our stockholders generally."