It's not unusual for company founders to cash out some of their shares upon their company going public. After all, it's completely expected that insiders will take advantage of that newfound liquidity to reward themselves for years of hard work getting to the public markets. Popular enterprise messaging and collaboration platform Slack (WORK +0.00%) started trading last month and it opted to take the rare route of a direct listing instead of a traditional IPO, because Slack simply didn't need to raise capital, according to CEO Stewart Butterfield.
Since trading commenced, Butterfield has been selling shares literally every trading day, with a new Form 4 being filed with the SEC just about every day. Here's why investors shouldn't be too concerned about the insider selling.
CEO Stewart Butterfield at the NYSE on direct listing day. Image source: Slack.
Daily selling
Butterfield holds supervoting Class B shares, which get converted to regular Class A shares before being sold. Prior to the direct listing, Butterfield held 41.6 million Class B shares, and converted 900,000 to Class A shares in early June ahead of Slack's debut. He converted nearly 500,000 more shares to Class A on the day that trading started. On the first day of trading, Butterfield sold 1.36 million shares, and like clockwork has sold a chunk of shares every single trading day since. Most days, Butterfield sells 2,500 shares, but did unload a batch of over 111,000 shares on July 1, after converting another roughly 229,000 shares.
The most recent disclosure as of this writing was filed yesterday for trading activity last Friday. Through July 12, the chief executive had converted 1.63 million shares and sold 1.5 million of them to bring in total gross proceeds of $58.5 million. Some of these sales were to cover the tax liability associated with the vesting of restricted stock units (RSUs), and only Friday's sales were part of a Rule 10b5-1 trading plan, which allows executives to set up pre-arranged trading plans without running afoul of insider trading regulations.
At face value, a CEO selling shares every single day doesn't look great, but there are some other considerations to factor in before freaking out.
Why investors shouldn't worry
First and foremost, investors need to appreciate how different the direct listing process is compared to a traditional IPO. In an IPO, a company issues shares while existing shareholders may pitch in shares that they want to sell, and then all of those shares are sold by investment banks to predominantly institutional investors in an orderly process. After the shares are allocated, they begin trading the following day. A traditional IPO is a more efficient way for insiders to cash out enormous sums before shares even become publicly available.
In a direct listing, existing shareholders register a certain number of shares that can be sold, and the shares simply start trading. All of the supply comes from existing shareholders, and there are no lock-up periods. Since the process is less orderly, insiders looking to cash out some of their holdings need to spread out those sales, otherwise the selling pressure of unloading a giant block of shares could impact the market price.
Furthermore, cashing out $58.5 million is actually fairly modest relative to other founder payouts. In comparison, Snap CEO Evan Spiegel cashed out nearly $300 million when the Snapchat parent went public last year. For now, Butterfield's regular sales shouldn't raise too many eyebrows, since they're fairly small and related to how Slack chose to go public. Butterfield is clearly confident in Slack's future, including its ability to compete with Microsoft.
