Young investors are piling into Snapchat but they're overlooking a huge issue
Young investors are piling into Snap.
The firm is among the top stocks of investors under 30 on the mobile trading app Robinhood. And the brokerage firm TDAmeritrade attributed a boost in activity during the first quarter of 2017 to a high number of Snap trades fueled by first-time traders.
In many ways, that's not surprising. Snapchat's users skew younger, and many individual investors like to invest in companies they interact with as consumers. For example, Facebook and Netflix, two other millennial favorites, are also popular on Robinhood.
But in one respect, Snapchat is very different from Netflix, Facebook, and pretty much every other publicly-traded company: Investors in Snapchat don't have any say in how the company they own is run.
Typically, shareholders can vote on big company decisions such as mergers, or for the election of new members to the company's board, or on executive compensation packages.
But that's not how Snap is structured. Instead, the stock Snap sold to investors in its initial public offering this year comes with no such rights.
So who has all the voting power?
Founders Evan Spiegel and Bobby Murphy, as well as a handful of original investors in the firm.
With a combined voting power of 88.5%, Spiegel and Murphy essentially have complete control over the company.
In the tech and media industries, it isn't unusual for company founders to wield more power than other shareholders. Instead of offering all investors one vote for one share, companies like Facebook and Google give Mark Zuckerberg, Sergey Brin and Larry Page, several votes for each share the own. It means that Zuckerberg accounts for about 60% of the voting power in Facebook even though he doesn't own that much of the company.
The argument for this is simple. Facebook wouldn't be Facebook without Zuckerberg, so investors ought to be okay with him having final say over key decisions.
Spiegel and Murphy get to keep the monopoly of power they hold over Snap, even if they leave the company.
According to the firm's SEC filing :
"Mr. Spiegel and Mr. Murphy, and potentially either one of them alone, have the ability to control the outcome of all matters submitted to our stockholders for approval, including the election, removal, and replacement of directors and any merger, consolidation, or sale of all or substantially all of our assets. If Mr. Spiegel's or Mr. Murphy's employment with us is terminated, they will continue to have the ability to exercise the same significant voting power and potentially control the outcome of all matters submitted to our stockholders for approval."
You could argue that this is okay because the vote of a shareholder with just 10 or 100 shares doesn't matter much anyway.
But that's another thing about Snap. The huge institutions that own millions of dollars worth of its shares also have zero say.
As Jared Dillian of Mauldin Economics put it, " NBC Universal bought $500 million worth of stock, and Spiegel would be wise to listen to them, but if he doesn't want to, he doesn't have to."
Spiegel and Murphy don't have to listen to anyone. So, as Scott Galloway -a marketing professor at the NYU Stern School of Business and the founder of business intelligence firm L2 - put it, investors in Snap are essentially handing their money to two 20-somethings in the hopes that they alone can bring the social media company to new heights and viability.
"Investing in Snapchat is something that no one responsible should ever do. Snapchat is the equivalent of driving drunk," Galloway said in a recent interview with Business Insider.
"When you buy a share of Snapchat you're giving a 26-year-old money with absolutely no recourse," he added. "No shareholder rights whatsoever and you're investing in a company whose losses exceed its top-line and also has probably the world's most agile and competent company in the world - Facebook has decided that they will kill Snapchat no matter what."