Snap discloses a mostly all cash acquisition after yesterday’s earnings call. Released today, Snap’s first 10-Q details the $20 million purchase of a company operating a “cloud-hosted platform for building content online”. Acquisition of the undisclosed company occurred in March 2017. Snap hopes the acquisition will enhance its own platform.
But you wouldn’t know a diamond…if you held it in your hand. Those words were sung long ago, but those words should be said today.
Snap’s first public stock offering is two months away. Afterwards, there will be two types of stock – voting and nonvoting. Reportedly controlling 74% of the voting stock will be Snap Inc. co-founders, Evan Spiegel and Bob Murphy. Some say (paywall) that’s too much control, but like diamonds there is another facet.
Some people like voting stock; especially people who pay taxes such as founders and angel investors. It is the fast growing company that is mostly likely to have a high valuation, greatly appreciated stock, and large tax bills for selling founders and investors. When a company is sold and voting stock is received by the sellers, then the transaction is tax-free for awhile.
Here is the math: angel investor invests $1.00 in Newco and receives one share. Five years later that the one share is worth $100. Selling the one share produces $99 of taxable income for the angel investor. If instead of receiving cash, the angel investor got voting stock, then the tax bill can be paid later.
Structuring sales with stock are mostly likely when individuals shareholders have large unrealized gains. Snap’s purchase of Vurb is an example. Based on public information, the $100 million transaction included stock and cash. Most of the founders were individuals rather than funds.
Evan Spiegel and Bob Murphy may be starting out with lots of voting shares, but after some acquisitions, that amount will become less meaningful. For example, after the acquisitions of Instagram, Whatsapp, and Oculus, Mark Zuckerberg’s control dwindled so much that Facebook needed to issue new non-voting common stock. Snap Inc. founders may indeed want control, but there always another side to every story, diamond, and in this case, voting stock.