Facebook Can’t Copy This Snap Innovation

May be haunted by 1980s Steve Jobs, Alphabet and Facebook offered the public dual classes of stock to concentrate voting and thus control with the founders. Snap’s initial public offering was the first to issue only non-voting shares which upset large investors like pension funds and mutual funds. Arguments can be made on both sides, but missing from the discussion, like disappearing messages, is that technology disrupts incumbents and the status quo.

Snap founders, Evan Spiegel and Bob Murphy, want total control for “long-term stability” and to avoid, among other things, an unwanted take-over. Large investors take issue with the lack of votes since it doesn’t allows for holding management accountable. For example, investors may prefer an acquisition of Snap since it would increase their investment return. In addition, large institutional investors fear that other Unicorns will also adopt Snap’s non-voting share innovation.

Large investors also don’t like the potential lack of transparency at Snap. Snap filed under the JOBS Act as an “emerging growth company” which allows companies to limit public disclosure on such matters as executive compensation. In addition, Snap can choose not to have its internal controls reviewed by auditors, a requirement of the Sarbanes Oxley Act, intended to avoid future audit failures of the early 2000s. This is important because Snap already had problems with its internal controls.

While Snap’s decisions are still to be decided, the initial reaction from the public markets is positive. On its first day, Snap stock increased forty four percent over the offer price. In the prospectus, Snap warned investors that non-voting shares may not trade the same way as shares with voting rights; this means the non-voting shares may trade at a lower price and trading could be limited. Comcast didn’t seem to mind the non-voting issue either as it made a $500 million strategic investment in Snap.  

On March 9th, the SEC looks into the issues raised by Snap’s public offering, but one advantage for Snap is lower costs. Kurt Schacht, who will be part of the discussion, said, We’ll try to explore both sides. Is this is a slap in the face of corporate governance, or is this the market efficiency of the future?…”.

Snap Employees Paid Half

Like Snapchats, Snap employee salaries will soon disappear.  On March 2nd, Snap employees earned about $400 million in restricted stock units (RSUs), per the prospectus. That’s $400 million of taxable wages, part of which goes to the taxman and what’s left goes to the employees. Normally, when employees are paid cash, then paying taxes is simple. Since the taxman does not take stock, then paying the taxes is harder with RSUs.

When employees get stock, then either all or some of the stock is sold for cash to pay income taxes; for Snap employees, some of their RSUs are being sold for cash. With the cash, taxes will be paid to the government. Snap is assuming its employees will owe the highest rate of the tax (47%) on the RSUs. So as of the IPO date, California will be geting $40 million and Federal government will be getting $160 million in income taxes from Snap employees.


Going Down on Snap

After Snap’s stock soared today, the Chicago Board Options Exchange (CBOE) quietly announced the listing of options on Snap Inc. stock. Trading in Snap options starts on Friday, March 10th, about one week after Snap’s initial public offering. It’s the first time anyone will be able to short Snap, or win when the stock price is going down.

Options are unilateral financial contracts between an option buyer and option seller. An option gives the buyer the right, but not the obligation, to purchase or sell stock. Option holders have the right to purchase or sell a specific number shares of stock at specified price during specified exercise period. Listed options traded on an organized exchange and thus are different than stock options given to workers in exchange for services.

For the right to buy or sell stock, the option buyer pays the option seller a premium. Trading in listed options – selling or buying options – allows an individual to express a view on a particular stock’s direction. For example, if you think a company’s stock price is going down, then you would sell a call option. By selling the option, you receive a premium which you keep when the stock prices goes up and the call option is not exercised.

Snap joins Facebook in having listed options so soon after its initial public offering. The CBOE  started trading Facebook options on May 29, 2013, about one week after its first public offering. CBOE also listed LEAP options on Facebook stock which have a five year exercise period. Listed options usually have a nine month exercise period. So may be Snap LEAP options will follow too.

Disclaimer: This post is for educational purposes only and should not be used for investment purposes. Short-selling should only be done by experts.