“Junk Equity” Comes to Haunt $30-billion Startup

Snap Inc. tried to turn Big Investors into zombies. It didn’t work.

Snap Inc., the parent of Snapchat, was dealt another blow today. FTSE Russell, which owns numerous indices for stock markets around the world, including the US Russell 3000, 2000, and 1000 indices, said today that it would exclude Snap from its indices because of Snap’s share structure that denies public investors the right to vote.

Though Reuters reported the story after the market had already closed, the shares of Snap fell 3.5% today to $13.40, a new all-time low.

Shares are now 21% below the IPO price of $17. Back then, on March 2, Snap was considered “too big to fail.” It would have such a massive market capitalization that it would be included in all major indices, including the S&P 500 and the MSCI USA Index. Fund managers would be forced to buy Snap shares to keep their funds in line with the indices. Given the relatively small number of shares traded, this buying pressure would push up the price even further. It was simply a matter of creating a lot of artificial demand.

That was the hype – and hubris. The IPO raised $3.91 billion, of which $1 billion went straight to founders and early investors. On day two of trading, shares spiked to $29.30, which gave the company a market capitalization of $30 billion. Whoever sold anywhere near this price was king. Whoever bought is still ruing the day.

But on the third day of trading, news broke that a group representing large institutional investors had asked stock index providers S&P Dow Jones Indices and MSCI Inc. to exclude Snap from their indices due to the non-voting shares it sold during the IPO. Despite all the hype, Snap was never eligible for the S&P 500; it would have had to have several profitable quarters in a row, which is a pipe dream. But the hype didn’t specify that. And MSCI has since expressed its reluctance about such an inclusion.

Other companies, including Facebook and Alphabet, have also issued non-voting shares, but along with voting shares, and shareholders can still vote in watered-down form. Snap was a pioneer: it sold only non-voting shares in the IPO, the infamous class A shares. Public shareholders have no say in the company’s strategy, the pay of its executives, the board of directors, and other matters the owners of a company would want to influence.

All the power rests with the founders who have class C shares and some early investors with class B shares. They’d turned public shareholders into official zombies. And it went downhill from then on.

On July 9, Snap shares plunged another 9% to $15.47 after Morgan Stanley downgraded it to a lowly “equal weight” due to weakness in its advertising business and ferocious competition from Facebook. This wasn’t any downgrade. It was a downgrade by one of the lead underwriters of Snap’s IPO.

The company was valued at $24 billion after the IPO. It soared to $30 billion on the second day of trading. And by today it had plunged to $15.8 billion. In less than five months, 47% of its market cap, or $14.2 billion, has evaporated, and it’s still ludicrously overpriced.

FTSE Russell explained that it would require constituents of its indices to have over 5% of the voting rights in the hands of “unrestricted shareholders.” Reuters:

FTSE Russell Chief Executive Mark Makepeace told Reuters that the new rule would keep Snap out of its indexes. He said Russell plans to seek further feedback from clients.

If Snap shares aren’t in the indices, funds that track indices will not buy the shares. Since much of the stock ownership these days is via index mutual funds and ETFs, this eliminates a lot of artificial demand.

There are numerous operational and financial reasons to stay away from Snap at its current market valuation – in part because, according to Snap’s S-1 filing, it is likely to lose money until the end of its days. But these are fundamental reasons that no longer matter in these crazy days of ours. So it’s good to know that institutional investors don’t want to become public zombies with Snap’s non-voting shares.

Anne Simpson, an investment director at the California Public Employees’ Retirement System (CalPERS), said it best in March: Publicly traded shares without any voting rights in a company totally controlled by just two guys should be labeled “junk equity,” she told an SEC Investor Advisory Committee on this topic. “You’re constraining the capital markets in a way you’ll come back to regret,” she said. “Innovation, we’re interested in that; but this is an immature attempt to avoid accountability.”

“If Snap gets away with this, issuing non-voting shares will become pandemic, and shareholders will become helpless dupes,” I wrote at the time. Perhaps Snap will not get away with it.

Next week will kick off a new problemita. The 150-day “lockup” period ends on Saturday. In August, frustrated employees and investors holding 308 million class A shares can ask for the shares to be registered, which might take a couple of days, and then they can sell the shares. More shares could be registered later. In total 957 million shares could be sold after the expiration of various lockup periods. By comparison, Snap sold only 200 million shares during the IPO.

This could be another big drag for current shareholders to look forward to. Thankfully, for them, Snap is one of the most shorted stocks out there, and shorts buy shares during a sell-off to take profits, thus providing some support.

There is nothing wrong with a young company like Snap struggling to find its niche, struggling to grow users and revenues, struggling with giant competitors like Facebook and Apple out to crush it. It’s always tough to start something new, and the folks at Snap have done some amazing things, albeit by burning huge amounts of investor capital at a breath-taking rate.

What’s wrong is the hype emanating from Wall-Street and from the startup-culture that creates deca-billion-dollar valuations out of nothing via artificial demand and pump-and-dump operations for small companies that may never make any profits, in order to lure other people’s money into it so that both groups can exact their pound of flesh and abscond with it. The amounts of other people’s wealth thus being transferred into their pockets are not trivial.

Investors who bought the hype are left holding the bag. Read…  Another Former $2-Billion Startup Gets Rolled Up

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  53 comments for ““Junk Equity” Comes to Haunt $30-billion Startup

  1. beowulf says:

    Who buys this crap? What a joke. Who would ever buy a stock that so arrogantly denies shareholders any say whatsoever in how the company is run? And who the heck deploys capital with absolutely no regard to company fundamentals and basic concepts like FREE CASH FLOW. Companies like this and their valuations are truly a work of absurd art.

    • jon laughing says:

      That would be your local, national, international investment advisor or pension fund manager. They are so well tuned into the intricacies of the new investments that they know what’s best for you. Please get with the programme!

    • chip javert says:

      Millennial Snap users were the target audience for the stock. Have not seen any analysis on who actually bought the stuff.

  2. Guido says:

    So what I am reading is this: one can have a bogus company but if I don’t share the loot with the powers that be, the company is screwed. Kinda like paying off the mafia bosses. No?

    • R2D2 says:

      Mafia bosses moved to Wall Street long ago. It is a much cleaner operation; you don’t have to carry guns, you don’t have to deal with police, you don’t have to worry about other mafia bosses gunning you down, and hopefully you won’t have to kill anyone.

    • chip javert says:


      A more cogent analysis is it’s bad to sell naive people what they perceive to be “ownership shares” that are actually little more than lottery tickets. Some of them may actually figure this out.

      I could do my standard rant here regarding naive people should only invest using index funds, but I won’t. As Forrest Gump said “Stupid is as stupid does”.

  3. nick kelly says:

    I don’t know enough about this to comment with confidence but I believe Canada is a haven of dual class shares (voting and non-voting)

    I believe auto parts giant Magna has been one and plane maker Bombardier is another.

    The latter almost went bankrupt in 2015, before getting an injection from Quebec and Feds. Boeing is alleging illegal subsidy.

    The lenders to Bombardier have been trying to get family to let go of control with A shares but this has been a battle.

    Repeat: I am not knowledgeable on this subject, except that Canuck dual class shares have been controversial.

    • Wolf Richter says:

      There are plenty of companies listed in the US with voting and non-voting shares, such as Facebook and Alphabet. But Snap is the only company in the US to ever sell ONLY non-voting shares to the public, with owners retaining nearly all the power and early investors retaining a small portion of the power.

      But this may be normal in some countries, including Canada, as you suggested.

      It would be great if knowledgeable readers could chime in to confirm this situation in Canada and provide some detail, specifically regarding Bombardier and Magna.

  4. mean chicken says:

    Ugh. Well so far, FB chart looks similar to SNAP. I’m not suggesting snap can or will recover though, I imagine 1st they’ll have to demonstrate a means of becoming cash-flow positive..

    • chip javert says:

      First Snap will have to demonstrate they can survive the next few months of literally being devoured by FaceBook.

      The timing of taking this turkey cash-flow positive ranks right up there with the arrival of nuclear fusion.

    • Ethan in NoVA says:

      Snapchat originated from the idea of underage kids taking pictures of their junk and sharing it with each other. The pictures self destruct so the threat of it hanging around / evidence / legal trouble is mostly eliminated.

  5. Tang says:

    Social media, ecommerce companies? Remember the dot com days? Sun Microsystems reaped billions selling the infrastructure pieces. What is the modus operandi now? Tell the world your company has millions of abalones in farms all over China. Or your company has a few million trees in different parts of China. Or there are millions of subscription members registered in your ecommerce social media site and they are growing by the millions every quarter. Problem with filling up the database? Contact an Indian company that provides call center services. Better still, start a small outfit offering say cheap bicycle sharing rental services. Offer a free one month promotion to those who register with complete details on your site. After they sign up limit the free service. You get your your million subscription “customers” in no time. See how your “assets” grow in no time? How can investors check the millions scattered all over? It is their problem. But you can show your millions in your system. And you can concoct details regularly on how these “assets” contribute to your company’s profitability. My suggestion of a name to this scheme “Lehman Dot Com”.

  6. michael w Earussi says:

    I have yet to figure out why all these supposedly smart institutional investors buy into this crap in the first place (if the average person can spot BS why can’t they?). Since when does it make sense to buy a stock you know is going to eventually collapse instead of just sitting on your money until an actual good deal comes along? If these managers were paid based on the money their investments actually made, instead of whatever present formula is now used, maybe they’d be more careful about how they spent their client’s money.

    • chip javert says:

      It turns out the average person definitely cannot spot this BS until it’s in the rear-view mirror. Lots of people who have zero financial/investing knowledge buy this stuff because it promises to make them rich (like AMZN & Google).

      True story: my ex-wife used to argue with me about my BRK/A investments – she only wanted stocks that went up 50% a month.

      • michael w Earussi says:

        I’d like stocks that go up 50% per month too, but stocks that rise that fast tend to come down that fast as well.

  7. Jim C says:

    As most money manager say, everything is awesome, isn’t it? One has been fleeced. No bankers went to jail because they have jail free card and they are too big to jail.

  8. Jerry says:

    This smells very much like 1999 – 2000 dotcom. There were many trying to build communities like geo cities, Friends Reunited, Lycos and where are these high flyers today!!!!!

    Trend with caution. Pump & Dump. I am in IT and there were many reports back then that there was a 10 year shortage of IT personal and with in 6 months I was redundant and so were many of my work colleagues.

  9. Kevin Beck says:

    “…an immature attempt to avoid accountability.”

    The best summation I have ever seen of multiple-class share structures, mostly being implemented by the New Technology companies on the left coast.

    “Hey, look at my new company! I developed a phone app that I’m giving away for free, hoping that I can lure some suckers to embed their ads into the app (that no one will want to look at), with the hope that I can charge them big bucks for ad placement!”

    What happens when you put people in charge of a company where they don’t have to run for re-election? They have demonstrated they can produce something of value, but they don’t know the proper way to monetize it. This is the difference between an entrepreneur and a manager.

    I disagree with the concept of founders’ shares, and with the idea of different voting rights for different classes of investors. This is more a problem when the company doesn’t make a profit and doesn’t offer any hope of payback to later investors. Their only hope is that there’s an adult in the room that can tell them how to make money from their business, and then implement that plan. Or that there’s some greater fool out there that will take their investment away at a higher price.

  10. Zero Unicorns says:

    Its good for the public that Russell is excluding SNAP. The company shouldn’t be allowed to benefit from public money where it only offers non-voting shares. Based on valuation & TWTR comparison and performance alone, its a crummy investment. SNAP’s only hope was to rope in the passive investor zombie money.

  11. Gregg Armstrong says:

    Snap was merely acknowledging that there is no accountability in America for anyone in positions of power, control and influence whether it’s the political parasites, CONporation C-suites, etc. The separation of ownership by shareholders and the control of CONporations was accomplished long ago. CONporations today are beholden to no one, be they shareholders or so-called government “regulators”. Snap merely made it an “in your face” slap that makes the truth too obvious to all concerned.

  12. mvojy says:

    They took Zuckerberg’s idea to the extreme and it didn’t pan out well. Poor Snapcrap.

  13. Scott says:

    If we had an SEC that was actually interested in supporting its mission, this structure would be prohibited. Class C shares do not protect investors; maintain fair, orderly and efficient markets; nor facilitate capital formation.
    From an investor’s point of view, this type of share structure combines the worst of equity and debt investments. Like debt, you give the company money without any say in how it’s run; however, while debt owners have priority in bankruptcy, as well as receiving regular payments, investors in non-voting share classes receive neither. And unlike equity owner, who (theoretically) have a say in how the business is run, owners of this share class have to trust the con men running the company.

  14. OutLookingIn says:

    More of the same, “Bag Holder’s” and “Greater Fool’s”.

    The “Insider’s” are very happy considering the amount of sells to buys, with selling vastly outweighing buying. This is known on the inside as “ringing the cash register”!

    Those who come much too late to the “greed party” get fleeced. When you are a delicious looking sardine, that decides to go swimming with sharks, you deserve the consequences of that decision. The only difference between the big fish and the little fish, is the big fish get bailed out and the little fish are invited to diner. As the main course!

  15. Wilbur58 says:


    I thought the whole issue was that SNAP made it into the S&P 500 and thus a lot of institutional funds were forced to buy it, no?

    Who did have to buy it? Other ETF’s that are pegged to market cap or something?

    • Wolf Richter says:

      SNAP is not in the S&P 500. Tesla is not in the S&P 500 for the same reasons (need to have several profitable quarters in a row).

      Certain institutional investors bought SNAP shares as part of the IPO directly from the company and other holders before trading started. That’s how an IPO works. The company doesn’t actually sell the shares to the public. It sells them to institutional investors (this includes brokerages for their clients). Then these investors sell some of those shares to the public when trading starts.

      I’m sure there are some ETFs and mutual funds that specialize in startups and social media that bought the shares in regular trading. But I don’t think any of the big index funds bought them yet.

      • Smingles says:

        Vanguard owns SNAP in their total stock market ETF (VTI). It’s a negligible percentage, though.

        Fidelity is one of their biggest institutional investors, but I’m not sure in what capacity they actually own shares. I don’t think it’s actually part of any of their funds, but it could be.

        • Wolf Richter says:

          Funds managed by Fidelity and T. Rowe Price were among the late-stage investors in Snap. They invested in Snap at a relatively high valuation after VCs stopped investing but sometime before the IPO. So they probably made some money on the shares and still have them in their funds.

  16. DK says:

    These arrangements like snap , do remind me very much of the 1999 dot com market. The fact that it’s now being called into question via pricing indicates that things are at least being restrained by market mechanisms.

  17. IdahoPotato says:

    Look at the “analyst estimates” for SNAP – 11 buy, 18 hold, Underweight 3, Sell 2.

    Consensus: Hold



    • chip javert says:

      Another way of looking at it, only 11 of 34 say “buy”.

      Stock ratings are closely related to fortune tellers: neither should be consulted, paid or believed. They both exist as artifacts of “free speech”.

  18. economicminor says:

    It appears to me that the biggest pots of money out there with the biggest need for growth are the pension funds. They get screwed by the FED on interest rates and they need income.. So the Banksters sold them CMRE leveraged bonds (MBS). BUT in order to be diversified they also bought into the stock market.. and that appeared profitable so they bought more.. And the Banksters sold them on IPOs so they could make a killing and the pension funds really having little choice because they by law or rules have to stay invested bought them too… and they need the growth.

    The pension managers get paid to invest. Most get bonuses if they actually make money.. And they get the cover that virtually ALL other pension fund managers do the same things.. Pension funds are huge piles of money.

    I’m thinking the crux will come when the CMRE MBS start to collapse. I mean actually… not just empty store fronts but when the empty store fronts cause the actual mortgages to be defaulted upon.. Lots of them. Then the pension funds will be forced to not only declare them as a loss but to start selling stocks to cover their pension costs.. This is when the stock market bubble will start to deflate.

    Whether it bursts and collapses is unknown but human nature is greed and fear. Greed causes institutions to buy risky CMRE MBS and IPOs and fear will cause some to sell to save their own..

    • chip javert says:

      The Fed is not in the business of making pension funds happy. Politicians and greedy unions screwed the funds by demanding more than taxpayers could/would pay.

      This game still has another 5-10 years to play out, but my guess is lots of retired government union workers will be unpleasantly surprised.

      • economicminor says:


        Your assessment of the pension funds is only partially true. In the public pension systems, there were the workers, who typically were asked to work for less than the prevailing wage in exchange for future benefits.. Not always but at least in the beginning… The politicians in order to get decent people for what their budgets would allow, would typically negotiate good benefits to make up the difference. So many people worked decades for less pay with the promise of a good retirement benefit..

        Things went bad for the pension funds for numerous reason. In many cases, the contributions were never adequate.. The projected returns were written into the system and were only good for the GOOD times.. And the politicians gave their top managers and themselves in many cases, outrageous benefits way beyond what the average employee got and never actually funded them.

        Taxpayers wanted good government workers yet never wanted to pay for the actual costs, up front and never. Politicians are great at promises but lousy at follow thru.. Pension managers are able to use Level 3 and hide bad assets…

        Then the bad times set in and pension managers have been doing all kinds of kinky stinky deals with Private Equity funds and Hedge funds and betting on the come line with anything that had a potential to be a winner. I have read that some even put money into VC endeavors. I don’t blame the managers as governments have been unable/unwilling to keep up with the deficits.

        Some pension funds are in much worse shape than others but almost all are heavily into the CMRE MBS and stocks. When the air goes out of any of these bubbles, it appears to me that it will be like dominoes with spikes all falling into other bubbles.

        And I’m not convinced that some of what the FED has been doing is to prop up the markets and the biggest beneficiaries are the government pension funds.. maybe even ones that cover the down wind FED employees that won’t be getting golden parachutes.

        • chip javert says:

          I wish I could believe your analysis about qualified people for governmtent jobs:

          There’s is a long line of people (some undoubtedly competent) waiting for highly-paid, almost no lay-off, high pension government union jobs. That’s the true test of “do we need to pay a lot of money to get qualified folks to do these jobs”.

          These unions contribute big-time to politicians voting for the increases. This used to be called a kick-back, but now it’s a “campaign contribution”.

          Personally, I think voters should have final say (referendum) on public pay plans. Allowing untrustworthy politicians to ruin public finances and ruin retirement for government employees is a very high price to pay. A 50% cut to an 80-year-old pensioner is a nasty thing to do.

        • economicminor says:

          Chip, You are comparing today after years of financial repression and off shoring of our jobs to when this started.

          In the beginning….

          And yes, the unions and the politicians screwed the whole thing up but it didn’t start out that way. But just don’t blame the unions, it was the politicians and the taxpayers who wanted aged very sharp cheese and were only willing to pay for mild.. And the politicians who gave themselves and their department chiefs such sweet deals while hiding the facts in the deep hole of never ending numbers.

  19. illumined says:

    They should have sold to Facebook for $1 billion when they had the chance…..

  20. Smingles says:

    I feel somewhat confident that Facebook waited for SNAP to IPO before completely eating their lunch.

    Nothing SNAP does is truly innovative. The second they went public, Facebook duplicated virtually everything they do via Instagram.

    If you remember, Facebook offered to buy SNAP for $3 billion back in 2013 and were turned down.

    This is Zuck’s revenge. Pretty funny.

  21. TJ Martin says:

    … and that aint even the worst news of the week so far what with today MSNBC Financial along with several major pundits and academics now placing Wall Street on RED alert for a potential impending financial crisis/collapse … all while Bezos is suddenly elevated to the top of the billionaires list .. despite the realities surrounding Amazon . And err … though I cant find it .. this morning the NYTimes had some dire news about some other financial institution about to hit the skids … yet barely a negative reaction coming out of Wall Street

    Sigh .. yeah … the world today makes a whole hell of a lotta sense .. in some alternative reality .

    But hey … your friendly albeit contentious site mate has the answer . The TJ Martin signature series 2010’s financial and political survival kit . A beautifully finished and french polished 3 foot long 2 x 4 in the exotic hardwood of your choice . The directions are simple . When in doubt or nothing seems to make a damn bit of sense .. hold it arms length at waste level with the top aimed directly at your forehead … slam it into your forehead as hard as you can and ….guaranteed … everything for at least a little while will make perfect sense .. repeat as necessary .

    $399.99 + $45 S&H . Buy now and get a second for only $299.99 + an additional $45 S&H ( obviously intended as a fictional moment of humor intentionally resembling a TV sale pitch )

  22. mean chicken says:

    “The Fed is not in the business of making pension funds happy. ”

    This suggests the FED works for someone other than pension funds. Gee, wonder who?

    • chip javert says:

      Well, that’s pretty easy (unless you’re into grassy knoll conspiracy theories…). The Fed exists to:

      o Conducting the nation’s monetary policy in pursuit of full employment and stable prices.
      o Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system
      o Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

      The system isn’t perfect (which one is?), and the black helicopter crowd gets excited about who actually owns it, but compared to what the rest of the world has, it does a reasonable job.

      Politicians cause most of the damage with overspending and mis-allocation of resources. The Fed often has to clean up. You may not (probably don’t) agree, but how would you improve it, and how would you measure that improvement?

      • alex in san jose says:

        Good post. I’m sick of all the black helicopter conspiracies. The Fed is tasked with doing exactly what you said. There were some rather spectacular crashes and quite a bit of turmoil in the US’s monetary system before the Fed was put in place. Since then we’ve had the Great Depression, yeah, and a few recessions but on the whole it’s been better. The FDIC, put in after the bank runs in the Great Depression, was another big leap forward. As a general rule, the more regulation, the better. We were lifted out of the Great Depression by a little good ol’ Socialism and now we’re heading into the same kind of regime that will lead to the same Socialist backlash and recovery.

        People can always set up their own currencies, too, as long as they don’t call them “Dollars”. The crackbrained types who’ve done this so far don’t seem to be able to understand this simple rule, though, so they constantly get into trouble.

        • economicminor says:

          Alex, The FED didn’t do half of what you imply.. It didn’t get us out of the Great Depression, WWII did and afterwards, the expansion that made America Great was because of the Marshall Plan and the fact that the US was the ONLY power left with manufacturing abilities. We put everyone to work supplying the stuff to rebuild the world’s infrastructure..

          Since then, the FED didn’t prevent the inflationary spiral up in the 1980’s or any of the crashes since.. It has no mandate to put 4 trillion on its balance sheet either.. Which is in essence 4 trillion of printed dollars because the debt behind that 4 trillion isn’t in the market… just the dollars.

          You give the FED way to much credit

  23. Jonny says:

    Instagram is way way better than Snapchat in every regard. Especially communicating information. It’s organized better. It has all the same features and then some. It’s easier to find places or things. I would not be surprised if Snapchat ceases to exist eventually.

  24. chris Hauser says:

    i’m a buyer, very very bullish. very bullish, yes.

    i like the idea of ephemerality. all this lunacy will go away and the stock will settle down.

    i like twitter, too.

    like ’em on Facebook, the both!

    and crypto currencies, them too!

  25. Brian M says:

    It is irrelevant whether you receive voting rights in SNAP, because according to my rudimentary back of the napkin calculations:

    “according to Snap’s S-1 filing, it is likely to lose money until the end of its days”

    assigns a value of zero (actually negative if you include rate and opportunity loss of capital) to the stock therefore making any reason to own the stock nonsensical.

  26. dazz says:

    snap is worth 5 to 10 dollars per share how are they going to make a profit maybe augmented reality games but they are all flops except for pokemon go doing just ok

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