Would You Hold Snap, Inc. Shares for Over a Year?

All while insiders and early private investors are cashing out?

Evan Niu
Evan Niu, CFA
Feb 28, 2017 at 10:00AM
Technology and Telecom

This just keeps getting weirder.

In addition to a few other bizarre aspects of Snap's (NYSE:SNAP) forthcoming IPO later this week, the social media start-up is now expecting some investors to agree to rather unusual lock-up periods. It's not uncommon for early investors to agree to lock-up periods as a way to signal confidence to the broader market, but it's much less common for companies going public to ask investors of such holding commitments.

Lock-up periods are a way for freshly public companies to manage volatility, as early investors and employees who were given equity compensation are anxious to cash out shares as public investors try to digest whether or not the company is worth their investing dollars. A year is a particularly tall order to fill, but that's evidently what Snap is seeking from some institutional investors.

Snap Spectacles

Image source: Snap.

Who's the one really afraid of commitment here?

In an amended S-1 filed Monday, Snap disclosed that it hasn't reached any firm agreements for a one-year holding period, though not for a lack of trying.

We expect approximately 50 million shares of our Class A common stock purchased by investors in this offering will be subject to a separate lock-up agreement with us providing for a restricted period of one year following the date of this prospectus. These agreements will reduce the number of our shares available for sale in the public market during their term. We may, in our sole discretion, waive any of these lock-up agreements before the restricted period expires. There are currently no binding commitments for investors to purchase these shares or enter into these agreements and the actual number of shares purchased by these investors in the offering or subject to these lock-up agreements may be more or less.

This is strange in and of itself, but it gets even more suspicious when you consider the fact that Snap also amended the lock-up period that applies to its own employees. Lock-up periods of 180 days are pretty standard, but Snap has reduced that to 150 days for employees, which is also the same amount of time that Snap's founders and early investors have to wait before selling shares -- even more shares than they're selling in the IPO.

Even more troubling is the fact that during the IPO roadshow, Snap's management could not lay out a vision as to where the company would be in five years. So while insiders, early employees, and early investors are able to cash out early, Snap:

  • will not allow public investors any votes whatsoever,
  • has incredible financial pressure to grow an advertising business in which it has little experience in order to meet massive cloud spending commitments, and
  • is valued even more expensively than Twitter was at its IPO despite having comparable financials.

Snap wants us to be invested for the long haul?

Public investors need not apply

These agreements that Snap is seeking don't apply to retail investors for obvious reasons. It's not as if the company can ask you or I to commit, but it can ask a handful of institutional investors. Some retail investors will surely get in at the IPO pricing, which has yet to be determined, and allocations will be set when the offering is priced. But public investors should be incredibly wary of a company that clearly has little regard for them.

This is about as bad as it gets in terms of IPOs. Snap's IPO is an overt and shameless attempt for insiders and early investors to cash out on the hype that has surrounded Snapchat amid its growing popularity among teens and millennials. Even if Snap can build a moderately successful advertising business, there is virtually no way that Snap will prove to be a market-beating investment for the rest of us.