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Snapchat & Shareholder Voter Rights: Why It Matters

snapchatLong before Snapchat went public, experts were warning that anyone who bought stock in the company would have no voting rights.

Snapchat never hid this fact. When they released their IPO plans, they specifically outlined that most shareholders would not get to vote on company decisions. Yet, they still expected to raise $3 billion by going public and selling stock.

Why would they do something like this?

For Snapchat, it’s all about control.

Examining the Problem

Snapchat is merely following in the footsteps of its predecessors. In the last few years, tech companies have given more and more voting rights to founders and co-founders, and less to regular stockholders.

Here’s how shareholder rights normally work: both public and private shareholders can get voting rights, but only if they own a certain percentage of stocks in the company. This percentage depends on the number of shares offered, and how many are owned by an individual.

It is rumored that Snapchat had over one billion stocks to sell. Let’s just round that down to one billion for clarity’s sake. Under normal laws, someone (either as an individual or as a group) would have to own about 10-15% or more of those shares in order to have voting power. That means that they would have to own at least 100 million shares.

When the stocks were made available publically, they opened at $17 a share. That means that $1,700,000,000 would have to be spent in order to have a voting share in the company. That’s under normal circumstances.

Since there are very few people who would invest that kind of money in a tech IPO that relies on vending machines to make part of its money, Snapchat will have to get its money through multiple shareholders. In order to entice buying, normal tech companies would have given voting power to each shareholder, even if the vote only counted a little.

Not Snapchat.

When you buy stock in Snapchat, you’re basically saying you trust the founders to run the company in a way that’s going to benefit you. That is not a good idea.

Comparing Snapchat to Other Tech Companies

Before we start comparing, let’s go over where Snapchat got this idea from.

Lately, tech companies like Google and Facebook have been giving their founders “super votes.” Super votes means that one stock counts as an above-average amount of votes. One stock may be worth 70 votes. This means that if the founder owns a majority of shares in the company (and he usually does) he has majority votes. That basically means he can do what he wants.

Theoretically.

For Facebook and Google, this power is tempered off with several factors. First, the shareholders of these companies are still allowed to vote on issues that affect the company. The vote may not count as much as the founders’ votes, but they still count.

Secondly, these companies are run by people who actually know what they’re doing. They’ve got a history of running billion-dollar companies.

Third, and finally, they have people around them that prevent them from going crazy with their voting power, like executives and a board of directors.

Snapchat doesn’t have any of this.

The only thing it has is two young executives with super votes. People who buy into the company are buying a bag of air. The price can go up, sure, and you can sell it off, but you can also argue that an inflated bag of air is more valuable than a smaller bag of air.

Cutting Through the Smoke

Snapchat is the biggest IPO opening since Facebook. That sounds positive. The shares have been doing their usual dance, but they’re still valued above their original offering – as of this writing. That’s also positive.

What isn’t positive is why experts are steering clear of it. The main reason is even if one of the founders leaves, he will still have majority voting rights.

This article is not for or against investing in Snapchat. But a shareholder should be aware of what he’s buying when he invests in a company. If having no voting rights doesn’t bother you, by all means, invest in this company.

This doesn’t mean that the company won’t become successful either. It does mean that if the company starts to fail, you, as a shareholder, do not have the right to vote on the next step the company should take. You can complain, but it may not do any good. The company doesn’t have to listen to you. You basically have no rights, even though you’re investing into the company.

Think about that.

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