With Snap’s IPO, Los Angeles Prepares to Embrace New Tech Millionaires | Hacker News Reader

With Snap’s IPO, Los Angeles Prepares to Embrace New Tech Millionaires

nytimes.com

40 pointslnrdgmz74 comments

Realistically, with all the various ratchet terms in Snap's financing, how many of the 2k employees will see very significant income from the IPO? By very significant, I mean >$150-300k per year in wealth creation adjusted for # of years it took to vest.

I honestly suspect not too many. A majority of the money that people will earn will just offset the difference in salary between Snap and larger more established companies that give out liquid RSUs - like Google. Plus Snap significantly backweights their equity. So the people who can cash out on all of their equity are a small percentage of the 2k employees (since it's still such a young company) and most employees probably haven't vested the full 4 years.

Still, the IPO will have an impact on the local economy - but probably not as much as is being purported.

Maybe someone with more experience in large financial liquidity events like this can chime in?

Zach Holman recently blogged about this:

I saw GitHub’s valuation move from sub-$10M to more than $2B; beyond that, GitHub is turning a decade old this year. Traditionally, this would be a great point where lots of little companies get spun off from this created wealth, and employees and former employees would be able to help with that.

In reality, I can probably count on one hand the number of people from GitHub who are in a financial position to become true angels. This is far from a problem unique to GitHub; the entire industry is concentrating its cash in a select few.

https://zachholman.com/posts/slow-exits

HN discussion: https://news.ycombinator.com/item?id=13655855

I thought his point was just that GitHub is still private. Snap going public is a different situation.

Holman was writing about slow exits, and how they keep employees illiquid and even claw back equity from those that leave.

Snap is not a slow exit. It may or may not produce a bunch of millionaires but it's definitely not what Holman was complaining about. In fact he would probably praise them for going public ASAP, like the old days.

Mmh. Yes, but I think the two are two sides of the same coin. Not only are exits rarer, but the companies who do exit produce fewer people who are then in a position to keep the innovation cycle going. Holman touches on a few reasons why in his post: "...concentration of wealth, and legal stipulations like gnarly 90 day exercise windows".

The exercise window is a non-issue after a company goes public. That's his main complaint about what's keeping wealth tied up.

Can you elaborate here on what you mean? I didn't follow this sentence:

>"A majority of the money that people will earn will just offset the difference in salary between Snap and larger more established companies that give out liquid RSUs - like Google."

I agree with you though, its not even just the full 4 year vesting schedule either because there's usually a 1 year cliff before the 1st year of vesting begins. And then of course for worker bees there's a 6 month lockup period where they can't sell while the fat cats are getting rich by selling on the day it opens.

The idea is that employees accepted a lower salary in exchange for the chance to earn more through stock from an eventual liquidity event. They're arguing that the gain from the liquidity event is just enough to make up the difference in salary.

Sure, that makes sense. I guess I didn't understand was comparison to Google and RSUs. Is it that Googles RSU are more like incentive bonuses?

They are so liquid and predictable they are essentially just more salary. So a startup needs to not just have good equity, but great equity.

I'm basically saying that for the majority of employees at Snap who accepted a far more risky (illiquid) compensation compared to Google/FB's entirely liquid compensation - this IPO for Snap will simply make up that difference more or less.

If someone is good enough to get a $1mm stock option package at Snap, then if you divide that by the 4 years that it takes to vest, the difference between taking a job at Snap and pulling in a big Google compensation package isn't too far off.

$1mm/4 = $250k per year - $Tax = something that RSUs at Google could have accomplished with far less risk.

The real life changing amounts of money are going to very few people in the org.

Thanks, that makes sense. And 4 years is a long time.

With a $20B valuation, With straight up ownerships having a couple of bps would do it.

How many people out of the 2000 have 0.02% of the company after its dilution? Maybe 150--200?

My understanding is that Snap's financing terms have actually been very good. The 2 co-founders each still own over 20% of the company each which is pretty exceptional. I'm fairly certain that some of their financing even involved selling common (not preferred) stock.

A 20B+ exit (assuming that's where it ends up) is a pretty phenomenal success. That's 2 million bucks (well above your target) per basis point. A pretty huge chunk of the org in traditionally highly compensated roles (product, design engineering, and kind of management roll, etc) will do very well.

You are underestimating how big of a success this is (again assuming that the IPO goes well) for Snapchat stockholders.

These numbers make sense to me. What I wonder though is if Snap goes the way of Twitter and winds up halving in valuation by the lockup period expiration. Is it still $1 million per basis point? Or will ratchets kick in that further dilute employees and drive the value down?

Any unusual financing terms almost always get resolved at the time of exit/ipo.

Also, again, my understanding is that Snap had very clean financing rounds so this isn't a big concern here to begin with.

All the preferred shares convert to common at IPO so no.

VCs and directors (14 people) own 58% of Class A, 30% for Class B, and Evan and Rob have 100% of Class C stock. I'm not sure what was in the option pool for early employees.

Evan and Rob took some money off the table in earlier rounds I believe.

About 80% of Snapchat's employees were added in the past 18 months, so you're setting a pretty high bar by implying most need to see >$150K/year to be better off than joining Google. The earlier employees that took on significant risk are a lot more likely to see that kind of money, and thus become the next angels.

Not everyone is happy with the changes. Gentrification has pushed artists and working families out of Venice. Some restaurants have shut down because they can no longer pay soaring rents. In response, some politicians and residents in Venice have pushed for density restrictions, said Emil Schneeman, a real estate agent at Berkshire Hathaway Home Services.

Why has no community adequately planned for this sort of tech boom? Looks like the tragedy of the Bay Area housing crisis is going to replay itself, again and again. Seattle and Austin have already faced similar challenges.

Why would one?

What community would spend time preparing for someone, literally overnight, to have more wealth and leverage than your entire community as a whole?

If tech is truly eating the world, and tech companies have been setting up shop in your neighborhood for nearly fifteen years (MySpace was founded in 2003, and it's hardly the first major SoCal tech story), then you probably should pay attention to how tech industries have affected other cities.

I think its largely due to selfish residents in these cities. Other than a few property developers who would benefit from building lots of condos most of the residents benefit from keeping development at bay. They enjoy increased housing values, fewer new homes built keeps the "character" of the city the same and less new people who can afford to live in the area maybe results in less traffic (probably not as people just commute long distances and its worse but residents are often delusional).

Not all residents, but just home/land owners, I think.

I think current renters have reasons to want price pressure to stay down as much as new ones.

This is happening across the board in central LA, tech millionaires or no. The crazy thing is that you'll see a lot of turnover or a lot of empty storefronts in some of the hot areas, especially in some of the new, pricey mixed-use developments. I moved to LA in 2010, when things were starting to boom again but I don't think there was ever a rock-bottom hit in '08 (someone that was here then can speak better to that). I honestly can't see how any of this new wealth, or the other wealth, helps out the average person here other than giving us another burger-and-microbrew on the street corner.

Those who do not remember pets.com are doomed to repeat it.

This IPO is going to wipe out the unicorn bubble. The valuations for this company are utterly delusional.

It's being pumped on all the investment forums by people who seem to honestly believe that the embarrassingly dorky Spectacles are going to be the next iPhone, even though investors seem to be the only people who have even heard of the thing.

This IPO is going to tank.

People said that about FB in 2012. And I dislike FB as much as the next guy.

Why do you think it's overvalued? And pets.com was in a fundamentally different situation. So fundamentally different that you might as well compare it to Enron.

I think that you are overestimating the speed at which the stock market corrects itself esp when it comes to tech. Look at Twitter. It's technically dying but it wasn't a fast death.

Well Facebook built some actual technology. They aren't just making picture filters for genetalia.

> They aren't just making picture filters for genetalia.

And therein lies a wildly inept understanding of Snapchat that is so common among people outside of its main demographic.

Is it really wildly inept though? I truly cannot wrap my head around what value Snapchat brings the world, outside of maybe yet another way to ultimately advertise to young people. Just to be clear I'm not saying you're wrong, I just don't get it.

To be fair, selling crap to young people is a totally valid business model. I just don't see any evidence that snapchat can do it.

Can you ELI5 this for me? I've worked since I was 16, and sure it was pure profit, but I still feel like adults should have a bit more disposable income.

It's something I've always wondered about with the movie industry and it obviously seems to be the groupthink across the board about young kids.

There's a golden period between the time when your parents are making financial decisions for you and when you make your own financial decisions where your habits are in flux.

If an advertiser can reach you during that time and convince you to change behaviors, they've locked in a lifetime pattern. Pretty much everyone, for all but the few things they care about, once they form a habit, will continue on that habit until some event is big enough to jolt them out of it. Once you've decided what kind of cereal you eat and shoes you wear and car you buy, it's exceedingly hard for advertisers to reach you and change your mind.

That's why 18-35 is such an important demo for advertisers.

>outside of maybe yet another way to ultimately advertise to young people.

Yes, but this new way requires the target to physically engage with the ad. The sponsored filters allow quite a bit of personalization, which seems to be something young people want more of. Not really a heavy Snapchat user, but I think it's helpful to think of them as an advertising platform instead of a disappearing photo company.

I do, however, share your "who cares" gut reaction to all of this.

"auto-deleted pictures and videos so you can send them to your friends en masse and they don't need to be all that good" (and we show video ads every so often when you're watching loads of others' snaps)

I'm a fan.

But that's really worth $20 some billion dollars?

Most of the people I know inside its main demographic are just using Instagram now.

The medium itself facilitates entirely different user activity.

Instagram users sparsely update and check their feeds. Snapchat is much more rapid, and users tend to post much more content though out the day.

I mean specifically the Instagram 'stories' feature which is used precisely this way.

>"And therein lies a wildly inept understanding of Snapchat that is so common among people outside of its main demographic."

Well isn't that a problem if people outside of its main demographic with "wildly inept understanding" of the company might be the same people you hope to sell shares to? The kids aren't the ones that will be buying the stock.

I think most people who are going to be buying this will be looking at the financial trends. If it makes money....

Though I bet the fact that so many financial types love Twitter could be resulting in Twitter getting more love than it should on the markets (even now), I don't think the inverse happens.

But for the IPO nobody knows if it makes money so I think they might want to try understand their investment no?

How much disposable income does their main demographic have?

If they're using smartphones, enough to splurge out on $130 for a pair of specs as a Christmas or birthday present- or to beg the parents for one.

You are making the same mistake that a lot of programmers make. The value of a product to the user base is almost completely unrelated to the tech they use.

I'm somewhat reminded of when Drew Houston launched Dropbox and showed it to HN. https://news.ycombinator.com/item?id=8863 The comments are somewhat dismissive.

I know it's a fun thing for the media to grab onto, but I would bet that genitalia pics have never been more than 5-10% of all pics sent through Snapchat. Real number is probably <1%. Of course they could never release those stats except by user polls.

From a purely "back of the envelope" look at it:

If we compare Snap to Ford (bear with me), we're looking at 40% the market cap (20bil vs 50bil) and .3% the revenues (400mil vs. 150bil).

Snap is definitely a valuable company with a lot of future prospects, but is it worth 20bil? Tech companies are extremely young animals and their valuations have yet to reach the accuracy of more established industries. This looks like a classic case of FOMA from investors.

The correction, in theory, should be faster this time around as we've already gained insights from Twitter.

It's not easy to short an IPO.

What makes the comparison to Pets.com for you appropriate here?

Pets.com was insanity. It IPOed 15 months after it was founded and had no fundamentals of any kind. Snap is 6 years old and has hundreds of millions of retained users.

From the wikipedia page for Pets.com:

Despite its success in building brand recognition, it was uncertain whether a substantial market niche existed for Pets.com.[5] No independent market research preceded the launch of Pets.com.[5] During its first fiscal year (February to September 1999) Pets.com earned revenues of $619,000, yet spent $11.8 million on advertising.[5] Pets.com lacked a workable business plan and lost money on nearly every sale because, even before the cost of advertising, it was selling merchandise for approximately one-third the price it paid to obtain the products.[5]

> Pets.com was insanity. It IPOed 15 months after it was founded and had no fundamentals of any kind.

> Snap is 6 years old and has hundreds of millions of users.

When you say fundamentals, that usually goes hand in hand with a business model that will promote profitability, which Snap has been unable to prove.

EDIT: They incurred a net loss of $514.6 million ending 2016. That is not a sound business.

Good point. There is still a lot of uncertainty with Snap, but it is certainly in a better position than Pets.com. For me the worrying issue is the flat user growth at the end of 2016 and the new competition from Instagram.

Snap had $400 million in revenue in 2016.

Los Angeles already has an established and healthy "tech scene" although it's not a tech industry per se. Film and aerospace industries require extraordinary tech resources.

Out of the 1900 employees, how many are actually going to become millionaires at a company like Snapchat?

Snapchat has 1900 employees? That's way more than I expected.

For comparison, that's 5x the size of Valve, and around 2x the size of Riot Games. Snapchat is doing nowhere near the amount of work being done at either Valve or Riot, as far as I can tell at least. So is this just a case of "growing because we have money", or is there in fact a legitimate reason behind such a large workforce?

Why are you comparing Snapchat to video game developers? They are a social media company and advertising platform and are pioneers of a new technology (AR). They should be compared to their peers.

I guess because physics based lighting engines with online realtime interaction are more complex than social networks and messaging.

lol. Is there anyone at Valve currently writing physics based lighting engines? I'd imagine scaling social media messaging pipelines are a bit more complex than designing new hats and weapon skins.

It's confirmed that Valve has multiple games in development, so yes, there are people working on physics engines. Not to mention that there are in fact people there who understand physics engines, or else how would they fix bugs in their existing games?

On top of their games, they have Steam, which I'd argue is more complex to scale than a "social media messaging pipeline".

This thread has brought up a rather unknown bias a lot of non-game software engineers have, that game dev is rather easy compared to other software. Having been on both sides of the coin I gotta say they're equally challenging problem spaces

I have the opposite bias actually: I think developing a game is much more complex than writing a SaaS app. And I truly respect a full-stack game dev (art, music, design, development, networking) waaay more than a full-stack web dev. The former are quite rare admittedly.

Valve does not rely on advertising, and therefore does not require hundreds of salespeople, marketers, and ad account managers.

Why do you make that sound like a bad thing? I'd say good on Valve for finding a reliable and scalable revenue stream.

How does my post make it sound like a bad thing? My tone is completely neutral. I was explaining why there are so many employees.

My apologies, you are right.

More complexity does not mean you need more people.

Especially one with over 100 million active players per month.

In 2014, LoL had 27 million daily active players. Snapchat has an estimated 150 million daily active users.

But a typical game in LoL is nothing like typical Snapchat usage. Games are live and constantly changing, and therefore require complex state management, synchronization between the participating clients and the server, as well as low latency game updates.

As for Valve, the ~300 employees maintain three entire AAA video games, each with their own online communities and supporting backend infrastructure. Valve also controls the largest online game marketplace in the world with around 70 million active users AFAIK. Oh, and since you brought AR up, Valve is a pioneer of room-scale VR technology, and actually has a device on sale in the real world.

Yeah but why compare Snapchat to Valve? They are not compeitive, they do not cross domains, if we're talking about the efficiency and quality and other metrics with regards to Snapchat I think they should be compared with their own class.

You make it sound like I'm comparing an oil services company to a hedge fund here.

Both Valve and Snapchat are software companies. Both companies hire from approximately the same talent pool. Most of the people they hire end up writing software, which consists of a frontend and a backend. In the case of Valve, the frontend is a game or the Steam store, while the backend is the infrastructure to support the game/store (servers, databases, etc.). As for Snap, the frontend is the website/apps (Android, iOS, etc.), while the backend consists of servers, databases, etc., just like Valve.

Yes, the companies deliver different products, and they definitely may have many differences, but the core is the same in both cases: providing a software-based platform to users. In addition, both companies likely face the same challenges when it comes to scaling, given the similarities in their backends. That's why I think it's fair to compare the two.

While it doesn't provide a lot of insight, their S1 filing provides a good overview of the breadth of their offering, where they hope to expand, and their philosophy on hiring: https://www.sec.gov/Archives/edgar/data/1564408/000119312517...

Also, I don't think the comparison to Riot, Valve or any other game developer is useful. I am sure Snap is tackling plenty of knotty technical challenges, not the least of which is their forthcoming Spectacles. Also increased complexity != increase in headcount. If I had to guess, I would surmise that Snap employs a lot of people in ad sales and far more in customer service/messaging than any developer.

> Also increased complexity != increase in headcount.

Why not, exactly? Unless you are saying that Valve/Riot employs smarter people than Snap, I can't see really why a less complex product requires more people to develop and/or maintain it.

> If I had to guess, I would surmise that Snap employs a lot of people in ad sales and far more in customer service/messaging than any developer.

Advertising would definitely be a source of overhead, but customer service? Does Snap even have a support line? And why do you assume that services like Steam or LoL don't also require customer service?

They went from 600 to 1900 employees in 2016. It's not clear what all people are doing, but Snapchat has to manage a lot of relationships with advertisers and their content partners. It would be interesting to see a breakdown of technical vs non- technical staff, but I couldn't find that in the S-1.

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