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4 Things You Need to Know About Slack's Upcoming IPO

By Evan Niu, CFA – Apr 29, 2019 at 2:49PM

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The wildly popular enterprise chat client is about to go public.

Popular workplace chat app Slack finally filed its hotly anticipated S-1 Registration Statement with the SEC last week, giving prospective public investors the first look at its books. Slack has become such a hit that Microsoft has replicated nearly all of Slack's features in its competing chat app, Teams, which launched back in 2016.

Here are four things to know about Slack's forthcoming public debut.

Slack interface

Image source: Slack.

Following in Spotify's footsteps

When Spotify went public last year, the music-streaming company opted to go the rare route of a direct listing, where shares just begin trading on an exchange without all of traditional pomp and circumstance tied to a typical IPO. Slack is similarly planning to go public via a direct listing.

In cutting out investment bankers, companies that use direct listings are able to save money on fees, but the stock may be more volatile in the absence of investment bankers pegging a value on shares in the form of an offering price. It's entirely up to the market.

One notable reason Spotify wanted a direct listing was unique to the Swedish company: It had cut an onerous convertible debt deal with private investors, and a direct listing allowed it to bypass some of the particularly adverse terms. That situation does not apply to Slack, but everybody likes saving money on banking fees.

Most organizations use Slack for free

At over 10 million daily active users (DAUs), Slack's user base is quite large. However, a very small proportion of these users pay to use the service. Slack doesn't explicitly disclose how many users are associated with paid plans, but instead notes how many total "Paid Customers" it has.

The company defines a paid customer as any organization that has at least three users on a paid subscription plan. Some of these organizations may have just a few dozen users, while others have thousands. The largest paid customers have tens of thousands of DAUs. There are currently 88,000 paid customers -- more than doubling over the past two years -- but over 500,000 organizations paying nothing at all.

Chart showing number of paid customers over the last eight quarters

Data source: S-1. Chart by author.

That's somewhat similar to Dropbox, which went public last year. Dropbox has long attributed most of its growth to word of mouth, saying its registered users are its "best salespeople." Echoing that sentiment, Slack writes: "Our growth is largely due to word-of-mouth recommendations. Slack usage inside organizations of all kinds is typically initially driven bottoms-up, by end users."

Slack does spend more aggressively on sales and marketing compared to Dropbox. The enterprise chat company spent $233.2 million on sales and marketing last fiscal year, or about 58% of revenue. Dropbox spent just 32% of its top line on sales and marketing last year.

Spending $50 million per year on Amazon

Like many modern companies, Slack depends on Amazon for its cloud infrastructure needs. The company relies entirely on Amazon Web Services (AWS) and recently amended its agreement with AWS, which includes minimum annual spending commitments of $50 million through July 2023 for a total of $250 million.

As of the end of January, when Slack's fiscal year ends, the company's remaining obligation was $212.5 million. Slack also notes that it currently only utilizes AWS data centers in the U.S., which may limit its ability to grow internationally, as some organizations may prefer local data centers.

Second-class citizens

Slack will also adopt a dual-class structure, an unfortunately all-too-common corporate governance practice in tech these days. Class A shares, which will be sold to the public, will get one vote per share, while Class B shares, which will be held by company insiders, will get 10 votes per share.

The company has not yet disclosed how the voting power will be broken down between the two classes, but in general dual-class structures are designed to allow insiders to retain oversized voting power. CEO and co-founder Stewart Butterfield currently holds 8.6% of all Class B shares, but that number will ultimately change as Class B shares are converted to Class A shares for public sale.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of AMZN and SPOT. The Motley Fool owns shares of and recommends AMZN and MSFT. The Motley Fool has a disclosure policy.

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