This 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".
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.
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.
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-w...
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.
https://www.sec.gov/Archives/edgar/data/1564408/000119312517...
The Class A common stock is non-voting and is not entitled to any votes on any matter that is submitted to a vote of our stockholders, except as required by Delaware law. Delaware law would permit holders of Class A common stock to vote, with one vote per share, on a matter if we were to:
• • In addition, Delaware law would permit holders of Class A common stock to vote separately, as a single class, if an amendment of our certificate of incorporation would adversely affect them by altering the powers, preferences, or special rights of the Class A common stock, but not the Class B common stock or Class C common stock. As a result, in these limited instances, the holders of a majority of the Class A common stock could defeat any amendment to our certificate of incorporation. For example, if a proposed amendment of our certificate of incorporation provided for the Class A common stock to rank junior to the Class B common stock and Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock, with each share of Class A common stock entitled to one vote per share. In this instance, the holders of a majority of Class A common stock could defeat that amendment to our certificate of incorporation. Moreover, if an amendment to our certificate of incorporation would alter the powers, preferences, or special rights of the Class A common stock and either the Class B common Stock or the Class C common stock in a way that would affect them adversely compared to the unaffected class, Delaware law would permit the holders of Class A common stock to vote with the other adversely affected class of common stock together as a single class. For example, if a proposed amendment to our certificate of incorporation provided for the Class A common stock and Class B common stock to rank junior to the Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock and Class B common stock voting together as a single class, with each share of Class A common stock and Class B common stock entitled to one vote per share. In this instance, the holders of a majority of the Class A common stock and Class B common stock, voting together as a single class, could defeat that amendment to our certificate of incorporation.
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So, yes, the class is called "non-voting" but, as I point out, they still do have powers to vote. Just very limited ones. However, I am perfectly willing to admit that you do have a point that this is literally as de minimis as it gets.
This is distinctly unusual. But it is still not zero voting power - just literally as close as delaware law allows.
A very slight softening of the blow. :)
I actually have that on a sticky on my desk. Sadly.
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.
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.
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.
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?
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.
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.
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.
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.
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
it's pretty tenuous, but real nonetheless.
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.