If it wasn't clear by now, I'm not a fan of Snap's (SNAP 3.48%) initial public offering (IPO). The offering was severely overhyped and a thinly veiled effort for insiders and early investors to cash out. Joshua Brown, better known as The Reformed Broker, makes a really compelling case (save for the use of Comic Sans to annotate the chart) that the company intentionally kept the IPO float artificially low -- only 200 million shares -- specifically in order to engineer an opening pop. Well done, underwriters. Well done.
Co-founder Evan Spiegel expectedly cashed out as part of the offering, selling 16 million shares at the $17 offer price for $272 million. Yet Snap just compensated Spiegel with a massive equity award for successfully taking the company public. In other words, Spiegel got paid to cash out.
Snap Spectacles. Image source: Snap.
There's more where that came from
In a fresh SEC filing, Snap disclosed a restricted stock unit award that was granted to Spiegel. This award was crafted a couple years back as part of his employment, and was amended in October. From the prospectus:
Under the terms of his offer letter, Mr. Spiegel will be granted an award of RSUs for shares of Series FP preferred stock representing 3% of our outstanding capital stock on an as-converted basis on the closing of this offering, which will be fully vested on the closing of this offering and such shares will be delivered to Mr. Spiegel in equal quarterly installments over three years beginning in the third full calendar quarter following this offering.
...
Our board of directors approved the award to Mr. Spiegel in July 2015 to motivate him to continue growing our business and improving our financial results so that we could undertake an initial public offering, which we regard as an important milestone that will provide liquidity to our stockholders and employees.
How many shares are we talking about? Spiegel just received an additional 37.4 million shares, which more than replenishes the 16 million shares that he sold in the offering. At yesterday's closing price of $21.44, those shares are worth a little over $800 million. The shares fully vested yesterday, too, although delivery will occur over time. In other words, the Snap IPO was a massive payday for Spiegel in more ways than one.
It all adds up
An executive receiving an equity grant or bonus based on a successful IPO is not uncommon, so at face value, this is not a red flag. But when you factor in other questionable aspects about the offering, most notably the lack of voting rights for public investors buying Class A shares, you can't help but wonder if Snap is a) a company with long-term potential and public investors now have an opportunity for a promising investing opportunity, or b) an overhyped startup looking to financially take advantage of said hype while public investors are doomed to suffer an underperforming investment.
Considering the fact that Snap couldn't even answer a basic question about where management sees the company in five years -- a perennial interview question that all job candidates are familiar with -- during the IPO roadshow, I'm going to go with b).
