Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Imagine you designed and built a home from scratch, starting from a vacant lot in an untested neighborhood. You erected a beautiful roof and four walls, and the house could really turn into something special. But it still needs a lot of work. It's not entirely clear how much the home will be worth in five or 10 years. 

Against all odds, you're about to sell this promising but under-construction house for a giant windfall, at least on paper. Or rather, you are about to sell a small portion of your house to a new group of minority owners and occupants. The transaction will slap a giant value on the home you built from nothing. The new tenants get no say in future paint colors or anything else about the house. 

Not Cheap
Snapchat's revenue multiple at its IPO could be higher than other tech companies at the point they went public
Source: Bloomberg Intelligence, eMarketer and Gadfly calculations
Note: Calculations based on potential Snapchat IPO market value of $22 billion, and eMarketer's estimated 2017 revenue for Snapchat of $935.5 million.

But still, you're all in this together. The new occupants and minority owners will share in what could be a huge upside if the home climbs in value. The money the new occupants are paying will go directly to help build new wings and floors on the home -- all of which are needed before its big value is justified. 

Now imagine before the sale, the home's original architects and owners get a bit greedy. They decide to sell a portion of their ownership in the young house. And the head architect and boss is getting a special house sale bonus for some reason. The house doesn't benefit from the windfall going to the original homeowners. The new occupants don't benefit, either. It doesn't look great, right?

If you made it all the way through this parable, you know that I'm talking about Snapchat. 

Based on the initial terms for Snapchat's IPO disclosed Thursday, the company could collect $2.3 billion from selling shares in home sweet home Snap Inc.,   valuing it at more than $22 billion including the value of existing equity held by employees and others. That's a nice chunk of change to keep building Snapchat.

But the company's architects and original owners -- co-founders Evan Spiegel and Bobby Murphy, plus early company investor Benchmark -- are on track for a windfall of more than half that amount, or $1.3 billion, directly from the IPO.

That consists of $256 million of Snapchat stock that Spiegel and Murphy each plan to sell, $171 million that Benchmark plans to sell and a special IPO stock award to Spiegel valued at roughly $600 million. 

Cashing In
Snapchat's two founders and early investor Benchmark stand to collect a combined $1.3 billion from stock sales and a special bonus tied to the company's IPO
Source: Snapchat IPO filing
Note: Values calculated here assume Snapchat sets its IPO price at $16 a share.

While it's not unusual for technology startup founders and early investors to sell stock in an initial public offering, it never looks great. These are the people who know the company best, and they're selling a little of their stakes while they're asking new investors to buy shares. It's understandable if you're a twentysomething like Spiegel and Murphy and would like to buy a (non-metaphorical) home or take your new fiancee on a nice honeymoon. 

Shares held by Spiegel and Murphy are on track to be valued at $3.4 billion each on Snapchat's first day as a public company, so the amount of money they're reaping from IPO sales and Spiegel's fresh stock award are a drop in the bucket.

But if that's the case, why bother to cash out at all when the optics are so ugly? Snapchat's original owners are already asking investors to take a leap of faith, and the amount of money Spiegel and his pals are pulling out from the IPO is a leap too far. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That figure assumes the IPO shares are sold at the high end of the initial price range the company has set, at $16 each, and that Snapchat sells 145 million IPO shares, before possible additional stock sales related to the offering. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net