Snap Inc.'s founders spend big on outside talent, but aren't keen to share voting rights

In late 2014, the company then known as Snapchat 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.

Luring and retaining executive talent like Khan does not come cheap for the Venice social media company, whose two young founders, Evan Spiegel and Bobby Murphy, are big on paying their executives handsomely but reluctant to share voting rights.

Khan’s compensation last year, including salary and bonus, amounted to $5.5 million, according to Snap Inc.’s filing Thursday announcing its intention to trade shares on public markets. On top of that, Khan received over 7 million restricted shares valued at $145.3 million — a hefty reward, but one that comes with barely any voting rights.

“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.”

The dual strategies gleaned from Snap’s S-1 filing suggest Spiegel and Murphy place a high value on hiring experienced executives but intend to retain complete control over their firm’s direction.

Stomel said Snap’s executive salaries were about double what other tech companies are paying in both the Los Angeles market and the Bay Area.

Companies used to be able to pay 20% to 30% less in L.A. compared with Silicon Valley because the cost of living was moderately lower. But Stomel said that started changing over a year ago as the tech scene and investment capital in Southern California grew more robust — upping demand for engineers and executives alike.

“Companies are paying salaries comparable to the Bay Area now,” Stomel said.

Among Snap’s other well-compensated executives is Timothy Sehn, Snap’s senior vice president of engineering. Sehn’s compensation last year was $1.4 million. He also 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.

For comparison, Facebook’s 2012 initial public offering filing shows Chief Operating Officer Sheryl Sandberg and then-Chief Financial Officer David Ebersman earning $295,833 in base salary.

Spiegel, 26, made about $1.5 million in salary and bonus last year. Murphy, 28, 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 expect, the pair stand to gain over $5 billion each.

The pair will also retain nearly all voting power at Snap. After a company goes public, a percentage of voting power is typically transferred to investors. But in Snap’s filing, the vast majority of such privileges are 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 within the tech community, especially in the last decade. Never has it been done prior to an IPO, Snap said.

“We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange,” the company’s filing said.

Last year, Facebook created a new class of stocks called Class C shares that effectively enabled Zuckerberg to keep control of the company despite his and his wife’s pledge to give 99% of their Facebook shares to charitable purposes over the course of their lives.

LinkedIn co-founder Reid Hoffman has about 11% of the shares of the networking company’s Class A and Class B stock, which gives him about 53.2% voting power, as of December 2015.

Snap has three classes of shares — each representing the same percentage of Snap ownership, but differing in voting rights. Class A shares have no voting rights. Each Class B share comes with one vote. Class C shares are entitled to 10 votes. Spiegel and Murphy split ownership of all 215,887,848 Class C shares, essentially giving them total control of the company. 

For instance, Benchmark Capital Partners, Snap’s largest shareholder other than Murphy and Spiegel, has 65.8 million votes. Murphy and Spiegel combined have nearly 2.2 billion votes.

“It reflects the insecurity of founders who don’t want to be voted out,” Pachter said. “It’s a tech thing, and it’s the notion of infallible founders.”

The idea has reportedly angered Snap’s institutional investors who would be beholden to Spiegel’s and Murphy’s decision-making with little recourse.

“Telling us to wait for nature to take its course is a banana republic-style approach,” Anne Simpson, head of corporate governance at CalPERS, told the Financial Times.

Investors will have to decide if the founders’ unfettered power is worth the risk. Spiegel is seen in the tech world as a visionary creating a media and entertainment giant for a new generation. But the company’s $520 million in losses last year serve as a reminder that Snap still has to prove it can turn a profit. 

Giving founders great control can have its benefits, but the idea of anointing an executive “the dictator for life goes bad when Evan starts to do bizarre stuff,” said Erik Gordon, a business and law expert at the University of Michigan’s Ross School of Business.

“When Evan climbs Mt. Shasta and has a vision that Snap should be an animal rights organization, then you’re gonna be in real trouble, and that’s a serious risk,” Gordon said. “But on the other hand, if you have more confidence in an entrepreneur who has built a company than in hedge fund activists who didn’t build that company, then it can be appealing.”

Times staff writers James Rufus Koren, Samantha Masunaga and Tracey Lien contributed to this report.

david.pierson@latimes.com

Follow me @dhpierson on Twitter

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