BUSINESS

Snapchat app maker Snap Inc. filed papers Feb. 2 to move forward with what’s expected to be the biggest initial public offering ever for a Los Angeles company.

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Snap's roadshow schedule: 7 cities in 2 weeks

Snapchat maker Snap Inc. plans to start pitching its stock to big-time investors Friday, kicking off a nearly two-week sales process leading up to an expected New York Stock Exchange debut.

Business Insider posted a detailed schedule of where Snap executives and the company's investment bankers will be heading:

  • Friday: Mid-Atlantic
  • Feb. 20: London
  • Feb. 21: New York City
  • Feb. 22: New York City
  • Feb. 23: Boston
  • Feb. 24: Midwest
  • Feb. 27: Los Angeles/San Francisco
  • Feb. 28: San Francisco

The meetings with representatives of mutual funds, hedge funds and other investors capable of making big purchases is known in the industry as a roadshow. These buyers will get first dibs on Snap shares. Most smaller funds and individual investors who want to buy Snap shares for their personal portfolios will have to wait until the stock market listing goes live in early March.

Analysis From the filing

How much money Snap's existing shareholders could reap in the IPO

The maker of Snapchat is putting about a fifth of the company up for public sale to investors over the next couple of weeks.

Some of the shares in Snap Inc. are coming from the company itself. And at a proposed price of $16 each, selling all of them would bring the company nearly $2.5 billion, including an extra allotment set aside for after the initial rush.

But up to $1.1 billion in additional shares are being sold by either company officials or investors who were able to get an early stake in Snap through private deals in the last five years.

Of those investors, San Francisco venture capital firm Benchmark is selling the most valuable chunk: $320 million. Unloading those shares would represent 8% of Benchmark's stake, leaving the firm holding onto about $1.9 billion worth of Snap shares. It would have 2.7% voting control over the company.

Possible incomes among other venture capital firms include $139 million at Snap's first investor, Lightspeed Venture Partners, for selling 5% of its holding; $17 million for General Catalyst for also selling 5%; and $3 million for SV Angel for selling 4%. Several other unidentified shareholders also plan to offer parts of their investments, according to a securities filing Thursday.

Snapchat co-founders Evan Spiegel and Bobby Murphy would each get $256 million from selling shares. Spiegel also stands to receive about $589 million worth of shares — at the $16 price — over the next several years once the IPO is completed. That bonus will slowly give Spiegel, the chief executive, more voting control than Murphy, the chief technology officer. Immediately after the IPO, they each would have about 44% of votes.

Snap Chairman Michael Lynton, who recently announced his resignation as head of Sony Entertainment, is cashing out of as much as $2 million in shares. He's expected to keep additional shares valued at $47 million.

From the filing

Snapchat company sets IPO targets: $3.7-billion windfall and $22-billion valuation

 (Kris Tripplaar / Sipa USA)
(Kris Tripplaar / Sipa USA)

Snap Inc. set a starting price range of $14 to $16 per share for its initial public offering, which at the top end could value the Los Angeles technology company at more than $22 billion.

The IPO of the Snapchat mobile app developer is expected to be the largest ever for a Los Angeles firm and the biggest since Alibaba and Facebook.

The share prices, which were disclosed in a securities filing early Thursday, are nonbinding. But they set the stage for Snap officials, led by Chief Executive Evan Spiegel, and investment bankers at Morgan Stanley and Goldman Sachs to hold discussions with investors around the world about their interest in betting on the nearly 6-year-old company.

Analysis

No major L.A.-area start-up investors stand to profit from Snap IPO

Snapchat cofounders Evan Spiegel, left, and Bobby Murphy. (Timothy A. Clary / AFP/Getty Images)
Snapchat cofounders Evan Spiegel, left, and Bobby Murphy. (Timothy A. Clary / AFP/Getty Images)

Of the nearly $3 billion that Snap Inc. has raised from investors for technology and hiring ahead of next month’s expected IPO, almost none of it has come from Los Angeles financiers.

The county’s leading venture capital firms — the investors that technology entrepreneurs often turn to for money and advice — knew the photo-messaging app had become a hit among teenagers. But for a variety of reasons, they passed on financially supporting the company.

Between Snapchat’s founding at Stanford University in spring 2011 and its rise to the global stage in 2013, Los Angeles firms had a short window to get a sizable piece of the company.

At Upfront Ventures, the largest start-up investor based in Los Angeles, associate James Bailey urged managing partner Mark Suster to take a meeting with Snapchat. But Suster dismissed the app as a tool for sexting and marital infidelity.

CrossCut Ventures and Clearstone Venture Partners didn’t have enough free cash to make a bet on Snapchat. For many firms, including Baroda Ventures, CT Ventures and Rustic Canyon Partners, a chat app with no business plan didn’t fit the profile of a company they’d back.

“We did not see the real revenue potential back then,” CT’s Alex Suh said.

From the filing

Snap poached a top Instagram exec in 2014. But it ended in an expensive resignation

Emily White left a senior position doing business deals at Instagram to become Snapchat's chief operating officer at the start of 2014.

But a year later, she resigned as it turned out that Chief Executive Evan Spiegel preferred keeping more direct control of operations.

That lesson didn't come cheap. Snapchat maker Snap Inc. recorded nearly $44 million in stock-based compensation expenses during the quarter White and another key figure resigned in 2015, the company disclosed in its stock offering documents. That was more than double Snap's stock-related expense in all of 2016.

The disclosure suggests that White received stock options as part of her employment that were to gradually become available to her to exercise over several years. She resigned before some options had vested, but Snap decided to grant them to her anyway as part of her departure.

The same went for Mike Randall, a former Facebook executive who had spent six months running Snapchat's ad sales team before leaving.

But the bulk of the $44 million is tied to White, according to a source not authorized to speak about the details. It's unclear if White maintains Snap shares, but they would have almost doubled in value since she left.

White, who now serves as a board member of Lululemon and Zayo Group, didn't respond to requests to comment. Snap declined to comment.

From the filing

What's a daily user? Facebook and Snapchat have different definitions

Just as Snap and Facebook disagree on what counts as a video view, the two social media agents disagree on how to calculate usage.

Snap says it counts daily users of Snapchat by taking an average of daily usage over an entire three-month period. Facebook considers only the final month of the quarter when taking the average.

Using Facebook’s counting method, Snap sees a slight bump in the number of daily users than by its own math — for example, from 158 million to 161 million in the last quarter of 2016. But the company said in a regulatory filing that it believes looking across an entire quarter "provides a more meaningful metric."

Snap also isn’t giving out data about people who use the app at least once a month, even though analysts who follow Facebook like to compare daily and monthly usage to see whether people are becoming more immersed in the service.

For the record, Snap considers a fraction of a second of a video playing as a view. Facebook defines as a view as three seconds of playback.

From the filing

Snapchat turns into a broadcast platform in the developing world, and that's bad for business

The launch of Instagram Stories last year coincided with a dip in Snapchat usage. (Instagram)
The launch of Instagram Stories last year coincided with a dip in Snapchat usage. (Instagram)

Facing questions about slowing user growth, Snapchat maker Snap Inc. said it was more susceptible to competition from apps like Instagram in developing countries where cheap Androids outnumber expensive iPhones and high-speed mobile data plans aren't an option.

In a regulatory filing last week, Snap revealed that it didn't add any users outside of North America and Europe during the last three months of 2016 compared with the prior quarter.

On Thursday, the company took a fresh try at explaining what might have happened.

Snap said software bugs had made its Android app difficult to use, the effect of which was felt more starkly in developing countries where iPhones are a rarer sight.

In addition, slower mobile networks limit Snapchat usage to when people are connected to Wi-Fi. That largely turns Snapchat into video-watching app in places outside of North America and Europe. People don't use it as much to upload videos of their own and talk to friends. Losing the communications aspects of Snapchat makes usage more sporadic.

"This consumption-heavy engagement means that a smaller percentage of [daily users] are creating content, which more closely resembles a broadcast model where a few users share content with a broader group of followers," Snap said. "This means that user engagement in these countries is more susceptible to competition by broadcast-oriented platforms."

When Instagram released a feature in August aimed at getting users to sit back and watch videos, it represented more direct competition in the developing world, which might explain why Snapchat struggled to add users in the months after. In those markets, there simply wasn't as much reason to tune into Snapchat as in North America and Europe, where its communications tools are popular.

The new details were among some of the highlights in an amended document filed with the Securities and Exchange Commission. Other new points include:

  • Snap acknowledged a bump in advertising revenue during the third quarter of 2016 because of the Summer Olympics.
  • Snap said it recently granted board member Joanna Coles 52,736 shares of its stock that will vest over the next couple of years. The deal brings her pay in line with other Snap board members.

  • Snap added British bank Connaught and UBS Securities as additional underwriters of its IPO.

From the filing

Snap says shareholders won't have a 'say on pay' for executives

Snap won't be required to solicit the advice of shareholders on how much to pay its executives or to share some annual data with them, the company noted Thursday.

In an updated registration filing with the Securities and Exchange Commission, the Snapchat maker more clearly pointed out some of the drawbacks of buying its stock. Snap plans to issue only nonvoting shares as part of an initial public offering in the coming weeks. And shares with no votes are not subject to federal proxy rules designed to give shareholders a say in corporate matters, Snap said.

That means Snap won't be required to hold an advisory vote polling shareholders about executive pay packages. The say-on-pay policy was one of the top reforms passed after the late 2000s financial crisis.

Shareholders also wouldn't be able to submit proposals at annual company meetings, though they at least would get an invitation to attend and ask questions.

Snap won't have to file annual proxy statements containing data about its executives and board of directors. But some of the data may be included in other regulatory filings, and Snap said it would share any information with nonvoting shareholders that it provides to holders of voting shares.

Shareholders with votes would include co-founders Evan Spiegel and Bobby Murphy and the venture capital firms Benchmark Partners and Lightspeed Venture Partners.

But if Snap does "not deliver any proxy statements or information statements to" those shareholders, "then we will similarly not provide any proxy statements or information statements to holders of our" nonvoting shares.

From the filing

Snap reaches $1-billion cloud computing deal with Amazon Web Services

Snap is hedging its reliance on Google for online storage and computing resources with a $1-billion agreement with rival Amazon Web Services.

Videos and photos posted to Snapchat move through computers operated by Google as the traverse the Internet under a five-year, $2-billion agreement between the companies. On Thursday, Snap said it has signed a similar deal with Amazon as a backup.

Analysts have questioned Snap's usage of computing vendors because costs could get out of hand as its social media and entertainment service grows. Many companies, including Facebook, have developed their own infrastructure. Though Snap said it might go that route, the company described working with third parties as a better use of its limited cash.

Still, the hosting costs likely accounted for about a third to a half of Snap's $925 million in expenses last year.

Snap said it has worked with Amazon since last March. Amazon is scheduled to receive $50 million from Snap this year, $125 million in 2018, $200 million in 2019, $275 million in 2020 and $350 million in 2021.

Analysis From the filing

Snapchat's young users are its greatest asset — and one of its biggest risks

 (Al Seib / Los Angeles Times)
(Al Seib / Los Angeles Times)

Snap’s ability to court a young demographic with its Snapchat app has been one of its defining characteristics and the pillar of its success. But its reliance on users younger than 25 also is one of its biggest liabilities.

“It’s the rocks many ships have crashed on,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, who has studied companies that staked their success on the loyalty of young customers.

“Think of all the teen retailers that were fabulously successful five to 10 years ago that are now in terrible shape. Look at Abercrombie and Fitch,” Gordon said.

Snap knows this. In its S-1 — a form that companies planning to go public file with the Securities and Exchange Commission — Snap pinpointed as a risk the fact that the majority of its users are 18 to 34 years old, a demographic that “may be less brand loyal and more likely to follow trends.”

Whether the company succeeds in the long term or falls on the sword of youthful disloyalty will depend on whether it is touched by the “age effect” or the “cohort effect,” Gordon said.

From the filing

How Snap's co-founders will stay in control

Even after Snap goes public, co-founders Evan Spiegel and Bobby Murphy are set up to essentially keep total control of the company.

After a company’s IPO, a percentage of voting power typically is transferred to investors. But Snap’s filing shows that the vast majority of such privileges would be retained by Spiegel and Murphy. That gives them room to steer the company how they see fit without meaningful oversight from shareholders.

Michael Pachter, research analyst with Wedbush Securities, said the move to largely consolidate voting power between the two co-founders is not unusual in the tech community, especially in the last decade. But never has it been done before an IPO, Snap said.

From the filing The founders

Two of these guys run Snap now. The third sued them.

Reggie Brown, Bobby Murphy and Evan Spiegel. (Court filing)
Reggie Brown, Bobby Murphy and Evan Spiegel. (Court filing)

Snap's origin story is similar to those of many other successful tech start-ups: Some college friends start with an idea, and after a lot of hard work and luck, it becomes a popular and growing business. Usually some disputes pop up along the way.

In Snap’s case, the friends were Stanford University undergraduates Evan Spiegel and Reggie Brown and recent graduate Bobby Murphy.

Snap wasn't immune from disputes. Spiegel is now Snap’s chief executive; he’s been described as the company's visionary thinker. Murphy, now chief technology officer, focuses on the app's technical side. And Brown is long gone.

Brown sued in 2013, saying they stole his idea and ousted him.

Snap’s Thursday filing with the Securities and Exchange Commission reveals what Brown received when the lawsuit was settled: $157.5 million.

The filing reads:

“In February 2013, an individual filed an action against us, our predecessor entity and two of our officers in Los Angeles Superior Court, alleging that we were using certain intellectual property that the individual jointly owned with our founders. In September 2014, the parties entered into a settlement agreement that resolved all claims among the parties. Under the agreement, we agreed to pay the individual a total of $157.5 million and such amounts were recorded in 2014.”

Brown’s attorney did not immediately respond to a request for comment.

From the filing

Confused by Snapchat? Consult these handy diagrams

 (Securities and Exchange Commission website.)
(Securities and Exchange Commission website.)

The concept behind Snapchat is simple: Users send pictures and videos to each other that disappear a short time after being viewed. It's supposed to be intuitive, and for the tech-savvy young folks who make up Snap Inc.'s prime demographic, that may be true.

But people who aren't already using Snapchat may need a little explanation. Thankfully the company's S-1 filing includes some handy schematics.

“The only explanation I’ve ever seen of how to actually use Snapchat is buried in its IPO filing,” one user wrote on Twitter .

The diagrams depict the app’s different looks in different situations, clearly outlining the array of tools users have at their disposal.

Need a Snap instruction guide? Just consult page 92 of the S-1 filing.

From the filing

Hiring outside talent didn't come cheap for Snap Inc.

Snapchat's Imran Khan speaks at an Advertising Week panel in New York on Sept. 26, 2016. (Photo by Slaven Vlasic / Getty Images for Advertising Week New York)
Snapchat's Imran Khan speaks at an Advertising Week panel in New York on Sept. 26, 2016. (Photo by Slaven Vlasic / Getty Images for Advertising Week New York)

In late 2014, the company then known simply as Snapchat announced it had hired a star banker away from Credit Suisse to be its chief strategy officer.

Imran Khan had deep connections in the technology industry, links that helped Snapchat score a $200 million investment from Chinese Internet giant Alibaba months after he was hired.

But luring and retaining executive talent like Khan did not come cheap for the Venice social media firm, which was building critical momentum at the time of the hire.

Khan’s compensation last year, including salary and bonus, amounted to $5.5 million, according to its Thursday IPO filing. Not only that, Khan received over 7 million restricted shares valued at $145.3 million.

“They had to pay a ton to keep him there,” said Josh Stomel, founder of Neohire South, a tech employment agency. “Snap needed smart, senior executives in order to scale. So they gave substantial money that these people wouldn’t find anywhere else.”

Stomel said Snap’s executive salaries were about double what other tech companies are paying in the Los Angeles area.

Among the company’s other well-paid executives is Timothy Sehn, Snap’s senior vice president of engineering. Sehn’s compensation last year was $1.4 million and he owns 2.6 million restricted shares valued at $40 million.

Andrew Vollero, Snap’s chief financial officer and a former Mattel executive, earned a base salary of $300,000 in 2016. And Chris Handman, Snap’s head attorney, earned $475,000 in base salary.

Snap co-founder and Chief Executive Evan Spiegel made about $1.5 million in salary and bonus last year. Co-founder and Chief Technology Officer Bobby Murphy took in about $250,000.

Once Snap completes its IPO, Spiegel’s annual salary will drop to $1 -- a move that puts him in the same league as other dollar-salary honchos such as Facebook Chief Executive Mark Zuckerberg, Google co-founders Sergey Brin and Larry Page and President Trump.

Spiegel won’t need the paycheck since he and Murphy each own about 22% of Snap’s Class A common stock. If the IPO values Snap at $25 billion, as sources familiar with the company predict, the pair stand to gain over $5 billion each.

Analysis

The Snap IPO is a sucker's bet

 (European Pressphoto Agency)
(European Pressphoto Agency)

Some words for anyone expecting to make a mint from Snap: Good luck, sucker.

My rationale comes right out of the Snap filing, though it’s in numbers that have seemed to get casually glossed over in the pro-Snap pre-IPO hysteria. The S-1 tells the goriest story of bloodletting this side of Shakespeare’s “Titus Andronicus.”

Let’s start with the bottom line: Snap, which gets all its money from advertising, is an enormous money loser. The red ink has been getting worse even as revenue grows.

When these losses will end is anyone’s guess, including management. Among the risk factors listed in the filing is this: “We ... may never achieve or maintain profitability.” Yes, these risk factors are often boilerplate, but the filing provides no justification for ignoring this one.

And that’s not the only major drawback.

From the filing

How Snap's numbers compare with other tech giants

 (Jae C. Hong/ AP)
(Jae C. Hong/ AP)

As Snap Inc. moves toward its hotly anticipated initial public offering, its finances will inevitably be compared with those of other social media giants like Facebook and Twitter, which filed for IPOs in 2012 and 2013, respectively.

Here's now Snap stacks up on several key metrics sure to be scrutinized by investors.

Daily active users: This measures the number of users that opened the app or used the service in a 24-hour period.

  • Snap: 158 million
  • Facebook: 483 million
  • Twitter: More than 100 million

Revenue: This measures how much money the company brought in during the fiscal year before the IPO filing.

  • Snap: $404.5 million
  • Facebook: $3.7 billion
  • Twitter: $316.9 million

Percentage of revenue from advertising: They're called social media firms, but really they are advertising platforms -- Snap Inc. especially.

  • Snap: 96%
  • Facebook: 85%
  • Twitter: 85%

Profit/losses: It's not uncommon for tech firms to enter public markets while still in the red. Out of these three, Facebook was the only one to post a profit before its IPO.

  • Snap: $514.6 million net loss
  • Facebook: $1 billion net income
  • Twitter: $79.4 million net loss

How Snapchat began

 (Court filing)
(Court filing)

Conceived six years ago by Stanford University fraternity brothers as a silly online service to send photos that would disappear without saving, Snapchat has become a force in technology, advertising and entertainment. Here’s how it happened.

From the filing The founders

Snapchat spends a lot to keep its chief executive safe

Evan Spiegel is a prized commodity -- and his company's filing on Thursday with the Securities and Exchange Commission proves it.

Snap Inc. spent $890,399 in 2016 on personal security costs for its co-founder, the document shows.

The spending was revealed in a section of the firm's S-1 filing detailing compensation for Spiegel, who is known to travel between his firm's beach-community offices in a black SUV.

Snap may have good reason for the expenditure. Among the risks the company said is the potential loss of Spiegel and co-founder and Chief Technical Officer Bobby Murphy.

"Mr. Spiegel and Mr. Murphy are high profile individuals who have received threats in the past and are likely to continue to receive threats in the future," the filing states.

And it doesn't look like Snap will scale back its security spending soon: It's hiring for two full-time security jobs in Los Angeles, according to its website. Qualified candidates must have "physical security, risk management or law enforcement experience ..." as well as "an ability to assess, understand and mitigate threats to the company and people while not stifling creativity and fun."

Snap tells advertisers it reaches users -- even in the bathroom

Snap Inc. uses some colorful language in its S-1 filing with the Securities and Exchange Commission, this screenshot shows. (Securities and Exchange Commission website)
Snap Inc. uses some colorful language in its S-1 filing with the Securities and Exchange Commission, this screenshot shows. (Securities and Exchange Commission website)

A Form S-1 isn't often a place to look for colorful language. The paperwork required by the Securities and Exchange Commission is where companies looking to go public disclose all their finances.

Still, Snap Inc. found a way to include the word "poop" in its filing -- a long-awaited 120,000-word pitch to ordinary investors.

The word shows up in a section about why Snapchat is a powerful advertising tool.

"Advertising is more effective and less wasteful when paired with the right contextual understanding. Smartphones can achieve this because they are personal in a way that other forms of media will never be — we eat, sleep, and poop with our smartphones every day," the filing said.

No stranger to things that typically occur behind closed doors, Snap also made a point to dismiss the notion its app is mostly for sending explicit images.

"When we were just getting started, many people didn’t understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more," the filing said.

For the record, neither "poop" or "sexting" show up on the SEC's database for other filings, which dates to 1994.

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