Author: db

Snap Common Stock and Structuring Lessons for Startups and Those Aspiring to an IPO

Does the non-voting feature of Snap’s Class A common stock offer lessons to startups or corporate governance gurus?

No.

Even before Snap’s Form S-1 filing a few weeks ago, commentators were shocked and appalled that Snap dared to offer non-voting shares to investors willing to purchase non-voting shares.  There are people who believe deeply in “best practices” and one-size-fits-all corporate governance rules. Erin Griffith at Fortune’s Term Sheet newsletter has declared that “This isn’t a rational investment.”

Griffith then goes on to describe how Snap and companies like it need to constantly change to be ahead of trends, and describes why Snap management needs the freedom to operate:

“Aside from pent-up IPO demand, Snap’s selling point is its ability to repeatedly tap into the next trend before its competitors. Ben Thompson calls this the “Gingerbread Man strategy.” (As in “Run, run, as fast as you can, you’ll never catch me, I’m the gingerbread man!”) By the time competitors start ripping them off (ahem, Facebook…), it doesn’t matter. They’re already working on the next thing.”

By the time the IPO closes, there will be about 4.5 billion shares of Snap outstanding of various classes.  Does anyone really expect that owning even a few million voting shares would have made a dent in their ability to be heard?

The demand for this offering is not based on their ability to bend Evan Speigel’s ear and provide ideas about kids messaging.

At their last shareholder meeting, Google* had about 294 million shares of Class A with one vote per share and about 49 million shares of Class B with 10 votes per share.  Management controlled almost 60% of the vote.  How meaningful was the Class A vote?  Feel empowered when you filled out that proxy?

I remember when Twitter was applauded for the plain vanilla structure of their common stock, as it was compared to the then-recent Facebook IPO, which had voting rights similar to Google.

Since their IPOs:

  • Google went from $50.12/share on August 19, 2004 to $831.66 as of this writing
  • Facebook went from $38.23/share on May 18, 2012 to $136.16 as of this writing
  • Twitter went from $44.90/share on November 7, 2013 to $16.10 as of this writing

Even Enron, the poster boy for all that is bad in corporate behavior, had state of the art governance structures in place:

“Whatever its flaws, the committee followed all the rules laid down by federal regulators, stock exchanges, and governance experts regarding director pay, independence, disclosure, and financial expertise. Enron collapsed in large part because the rules didn’t accomplish what the experts hoped they would.”

This is not to say that “oppressive” structures lead to good results.  It is to say that structures that deemed “not rational” by commentators may have a purpose that benefits shareholders.  Maybe one-size doesn’t fit all.

Snapchat doesn't care about your opinion.

Reg CF’s Crowdfunding Green Shoots

SEC notes early Regulation Crowdfunding results

Regulation Crowdfunding finally went live in May 2016 to much fanfare.  Detractors saw the beginning of a new age of fraud.  Optimists saw the beginning of a free flow of capital to small companies and a flow of riches to investors traditionally shut out of private, early-stage investments.

The answer?  Who knows?

What we do know is that the SEC released some early stats about how Reg CF has been doing since last May.

First, there are 21 funding portals. Each one of those portals is competing for the business of facilitating funding for private companies.  It will be really interesting to see how these early-stage portals survive.

Of the 163 deals that have been initiated, 33 have been completed.  There was no indication of how many are still pending or how many have been withdrawn.

The amount raised is approximately $10 million. *chicken-scratch on back of envelope to get about $300,000 per deal*

It will be educational to see if the SEC breaks out those numbers on a per-deal basis since a simple average does not tell us much.

Did one very successful deal account for a large part of the $10 million?

Did one or more deals stop at a few thousand?

How many of them are restaurants or breweries?  There seems to be a lot of those when I look at the portal homepages.
Early equity crowdfunding results from Reg CF and SEC

Insider Trading Law Tightens Up for Tippers and Tippees

The Supreme Court speaks about insider trading, and it is not good for tippers and tippees.

I’m still going through the backlog of recent stuff.  Here’s an important update on insider trading.

For the first time in a long time, the Supreme Court provided new guidance on insider trading laws. The government had suffered a few high-profile defeats in this area over the last few years, but Salman v. United States provided more insight into indirect liabilities for insider trading while providing more ammunition to the government to go after indirect (tippee) insider trading defendants.

In Salman, A was an investment banker in Citigroup’s healthcare investment banking group. Over time, he regularly tipped off B, his brother. B also provided the information to other people, including C, B’s friend who was also A’s brother-in-law. A tangled web and all that . . .

In the classic Dirks case, a tippee, in this case C, is exposed to liability to insider trading if the tippee participates in a breach of the tipper’s fiduciary duty. The test is whether the insider will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, a close, personal relationship can create an inference of benefit.

In 2014, the Second Circuit in Newman, a case involving a more distant relationship between the traders and the insider information, did not permit the inference without proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.

The Ninth Circuit and the Supreme Court disagreed.

The Supreme Court said that the test is whether the insider personally will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, the benefit can be inferred from objective facts and circumstances such as a relationship between the parties that suggests a quid or quo or intention to benefit the tippee.

The takeaway is that insider trading is not worth it. If caught, it is not that difficult to convict.* It just got easier. If the prosecution can show that there is a close enough relationship between the tipper and tippee, a jury can infer a benefit assuming that the transaction is no different than the tipper doing the trading and gifting the proceeds to the tippee.

*Sort of.  There are some pending articles about some more difficult cases for the SEC and prosecutors.

Interesting (believe it or not) Developments in Delaware Bylaw Law

Case tests company attempt to shift expenses related to stockholder violations of exclusive forum clause in corporate bylaws.

I’ve been out of the blog game for a while, so I am now catching up on older stuff that I find interesting.  Hopefully, it is not completely out of date.  But what could be more interesting than laws about corporate bylaws?

This post involves some recent developments in Delaware bylaws.  The short answer:

  • Exclusive forum clauses are okay
  • Fee shifting provisions, even for stockholder action violating the exclusive forum clauses are not okay.

So far, so good.

Case:  Solak v. Paylocity Holding Corporation, et al.

Brief Background

In response to another case, Delaware made a couple of changes to its corporations statute:

  • Section 115 was added to permit corporations to adopt bylaws requiring claims to be brought solely in Delaware if they are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or under the jurisdiction of the Court of Chancery; and
  • Section 109(b) was amended to provide that bylaws may not impose liability on a stockholder for attorneys’ fees or expenses of the corporation or any other party in connection with Section 115 claims.

Paylocity amended its bylaws to adopt exclusive forum bylaws and to impose liability on a stockholder who brings a Section 115 claim outside of Delaware.  Stockholders were not amused by the fee-shifting provision.

The court said that the plain text of the fee-shifting bylaw violates Section 109(b) despite Paylocity’s arguments that:

  • Section 109(b) must be read with Section 115, thus permitting fee shifting for violations of an exclusive forum bylaw (Court:  No exception in either provision to permit this exception to fee-shifting prohibition);
  • common law permits fee-shifting (Court: Fee-shifting is allowed in private contracts, which are not subject to the prohibition of Section 109(b)); and
  • the bylaw says “to the fullest extent permitted by law,” so it is limited (Court:  There is no extent to which it is permitted, so it is invalid.)

 

GoPro CEO Compensation Misrepresented in Mashable Article

Clickbait headline misstates GoPro compensation.

Mashable published an article by its Senior Business Reporter with the breathless headline “GoPro’s CEO makes $284 million a year. That’s four times as much money as Apple’s Tim Cook.”  It tries to discuss the social consequences of executive compensation and CEO/employee inequity and CEO-CEO inequity.  Someone makes more money than Tim Cook!  OMG! ONOZ!

Mashable claims that “So perhaps it shouldn’t come as much of a surprise that GoPro would pay pretty much any amount of money to ensure that the CEO is happy and engaged.”  Let’s take a look.

Woodman received 4.5 million restricted stock units worth $284.5 million as of the end of 2014, earning him the title of highest paid CEO in the U.S., according to the new Bloomberg Pay Index.

That sounds official and mathematical.  Is it true?

Here is how that grant worked. Woodman got the grant in June 2014. GoPro did not hand him a $284.5 million wad of cash.  It handed him shares as part of an employment contract, of which only 1.5 million were actually his at the time (still a lot, but not nearly what Mashable claimed).  He can get the rest, but only if the stock price hits its targets and he continues working there.  The price targets are $34.03/share and $44.24/share.  That would be 42% and 84%, respectively, higher than the $24/share IPO price.

It was a rich deal for the founder and key employee of what became a very valuable company ($5.9 billion market cap as of this writing).  Some people may refer to this “aligning management’s interests with those of the shareholders.”  Nobody would honestly say he “makes $284 million a year.”

GoPro Logo
GoPro CEO Makes Less Than Mashable Thinks.

Shopify Shows How Silicon Valley Corporate Governance Structures Spread and Become the Norm

Shopify IPO documents outline corporate governance strategies with concentrating voting for insiders.

Shopify filed for an IPO.  It is raising around $100 million (a placeholder figure), but it is too early to know exactly how much of the company this represents.

Shopify Logo
Shopify IPO reveals dual class voting structure.

We do know that Shopify is implementing a dual share voting structure similar to many other tech companies.  While corporate governance activist types decry these types of arrangements, even a Canadian company knows how to protect the voting rights of its insiders.  Proponents say these structures allow for longer term thinking and innovation.

Currently, officers and directors control about 56.5% of the voting rights, with CEO Tobias Lutke holding 14.62%.  The 56.5% number is skewed because this includes investor nominees to the board, including Bessemer Venture Partners (30.3%).

The voting rights will be split up between Class B shares with 10 votes per share and the publicly held Class A shares with 1 vote per share.  The prospectus outlines the risk of concentrated voting.  However, it is not really a risk.  It is the point.

“In addition, because of the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares, the holders of our Class B multiple voting shares, collectively, will continue to control a majority of the combined voting power of our voting shares even where the Class B multiple voting shares represent a substantially reduced percentage of our total outstanding shares. The concentrated voting control of holders of our Class B multiple voting shares will limit the ability of our Class A subordinate voting shareholders to influence corporate matters for the foreseeable future.”

 

 

Understanding The Startup Failure. Its not you its me, or the other way around.

Go Dish
Go Dish

I hear about people’s startup ideas all the time.  Some sound great.  Some leave me doubtful.  Some great-sounding ones fail.  Some not-so-great-sounding ones go on to great success.

Sometimes there is an idea that seems to solve a problem for a business but learns later that the cause of the problem cannot be solved by that business.

Go Dish had an interesting idea based on an identifiable problem for restaurants:  there are times when the dining room is empty and they would like customers.  Go Dish offers same day deals to drive customers to the restaurants when the restaurants need them.

“Unlike traditional restaurant deal services, Go Dish gives restaurants complete control over the discounts they make available throughout the day and week. Restaurants incur costs at all hours, whether they’re serving customers or not. We help them fill the restaurant with more customers, when they want them.” [emphasis added]

Makes sense, right.  There are lots and lots of e-commerce coupon apps out there, so businesses and consumers must want them.  Go Dish seems to fill a need.  What could go wrong?

What if you identified the problem, but misdiagnosed the cause?

Go Dish released a goodbye letter and invitation to various whatevers announcing that they are closing shop.  In the letter, they again recap why they thought they had a winner:

“We embarked on this adventure because we saw a win-win opportunity to send more business to restaurants at their quieter times while helping you guys save a few bucks on lunch here and there.”

It seemed to make sense at the time:

“We’ve sent our restaurant partners over 30,000 customers and received a tremendous amount of positive feedback from restaurants and customers alike … “

But the problem with “quieter times” was not about pricing and incentives for customers.  It turns out people stay away from restaurants during “quieter times” because they have more important things to do based on obligations to others that cannot be overcome with 50% off of tacquito appetizers.

” … but it turns out it ain’t easy for most people to eat at off-peak hours. And everything that gets in the way of sneaking out of the office for an early or late lunch proved too high of a barrier to overcome for the Go Dish model to be sustainable long-term.”

Startup failure and success are not just issues of execution, “solving problems,” and “making the world a better place.”

In Go Dish’s case, a seemingly good idea for a seemingly logical problem missed the mark because the cause of the problem was both different and deeper than expected.  As a result, their solution did not address the actual problem.  I hope all of the other similar coupon companies out there take note.

M&A Broker vs. Broker-Dealer

SEC issues M&A Advisor interpretations.

Securities and Exchange Commission
SEC issues M&A Advisor interpretations.

I have written in the past about the challenges of people looking to facilitate deals without a broker-dealer license. Short answer: You probably can’t get paid.

However, there is an entire industry of business brokers and M&A advisors that seem to get close to the line. In January 2014, the SEC outlined when an M&A advisor could assist in the sale of a privately held company without registering as a broker-dealer. Its been hanging out there for a while, but I figured this was a good enough time to write about it.

First, it defined “M&A Broker” as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”

In addition, a “privately-held company” is not an SEC filing company

The SEC provided a list of several conditions:

  • The M&A Broker will not have the ability to bind a party to an M&A Transaction.
  • An M&A Broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.
  • The M&A Broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
  • No M&A Transaction will involve a public offering.
  • Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933.
  • No party to any M&A Transaction may be a shell company, other than a business combination related shell company.
  • To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  • An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance ofthe M&A Broker.
  • The buyer, or group of buyers, in any M&A Transaction will, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business.
  • Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

There are more details in the SEC’s letter, which we may cover in another post. It will be interesting over time to see if the SEC focuses on one or more elements of the interpretation.

Alternative Fee and Billing Arrangements – Wachtell Edition

This is why they’re Wachtell, and you’re not.

NYTimes DealBook posted the engagement letter from famed corporate law firm Wachtell, Lipton, Rosen & Katz to CVR Energy, Inc. They were engaged to help CVR defend against a takeover from Carl Icahn. They lost.

What is most interesting about the letter is the fee structure. Most attorneys bill per hour. Some litigators bill on a contingency basis and take a percentage of the judgement, if any.

Wachtell takes an initial up front fee (not a retainer). For CVR, it was $200,000. They also estimate, but do not charge (they say), fees that are typically 1% or more on smaller matters ($250 million and less) and .10 of 1% or less on matters over $25 billion. They may also get expense reimbursements.

Per the dreams of other lawyers, they do not provide long-form descriptions of services or detail hours.

When I went solo, part of the reason was to reduce my hourly rate. In addition, I was also offered the opportunity to take equity in some cases, and in some cases I would accept. Wachtell shows that you can creatively structure fees apart from the per hour norm.

In their case, the percentage structure also deals with one problem corporate lawyers have always faced: Investment Banker Envy.