IPO investors looking to pick up shares of Pinterest (PINS) on Thursday should be aware of what exactly they're getting.
In its initial public offering on Thursday, Pinterest is offering 75,000,000 shares of its Class A common stock, plus up to an additional 11,250,000 shares that the underwriters such as Goldman Sachs (GS) and JPMorgan (JPM) among other big banks have the option to purchase.
The implied demand is already indicating a strong groundswell of support for the offering.
"People want to have a chit -- a name that's internet, that's fresh-faced, that's seen as friendly. .. We're itching for something that's new, that isn't Twitter, that isn't Facebook." - @jimcramerApril 18, 2019
However, many retail investors might not actually understand what the "Class A" stipulation means and why it could be something that keeps institutions more cautious on the unicorn name.
Dissecting Dual Class Structure
The main factor separating Class A and B shares is voting power.
"The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting, conversion and transfer rights," a Pinterest company filing states. "Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to 20 votes and will be convertible at any time into one share of Class A common stock."
The balance of power as such will largely be retained by those already atop the San Francisco-based social media company's structure, which is aimed at insulating management from activists and short-term pressures.
"All shares of our common stock outstanding immediately prior to this offering, including all shares held by our executive officers and directors, will be reclassified into shares of our Class B common stock immediately prior to the completion of this offering," an SEC filing explained. "The holders of our outstanding shares of Class B common stock will initially hold approximately 99.2% of the voting power of our outstanding capital stock following this offering."
The structure is a target for scrutiny among institutional investors who typically want a say in how a company is managed before providing bedrock investments for emerging companies.
Many argue that a lack of activist and institutional investor oversight at companies like Facebook (FB) , Tesla (TSLA) , and Snap Inc. (SNAP) have led to lapses in good governance and shareholder protection as scandals have plagued each company. Uber, a notable upcoming IPO, moved to eliminate a potential dual class structure in 2017 after troubles with its former top man Travis Kalanick.
Wei Jiang, a Chazen Senior Scholar at Columbia Business School, told TheStreet that a dual class structure can make a company "instantly unpopular," especially among larger investors.
Lyft (LYFT) was most recently criticized for a share structure identical to Pinterest's proposed model, adding pressure to its shares that quickly eroded after its IPO.
The message [Lyft's S-1 filing] sends is that the Lyft founders can govern the company as supreme monarchs in perpetuity and also that they have a 'let them eat cake' attitude toward their investors," wrote Council of Institutional Investors executive director Ken Bertsch ahead of the listing.
Pinterest could receive even more pointed criticism for some of its more idiosyncratic stipulations, like the fact that CEO Ben Silbermann will retain his class B shares up to 540 days after his "death or permanent incapacity." A beneficiary for his super-majority of shares is not specified in the filings.
Institutional investors not only seek to ensure good governance of companies they invest in, but also to achieve stated goals.
For example, the $354 billion California Public Employees Retirement System (CalPERS) recently began an initiative aimed at achieving greater board diversity.
"Simply put, board diversity is good for business," said Anne Simpson, CalPERS investment director, sustainability. "It is essential in today's global economy that boards avoid 'group think' and ensure there is the breadth of experience, skills and knowledge necessary to meet complex business needs."
Pinterest could come under pressure from these types of investors, as 80% of its user base is populated by women, but less than one-third of board members are women. It's C-Suite is also majority male.
Whether this pressure to address gender parity is constructive or not is subject to speculation, but an investor willing to invest the amount that CalPERS can would likely not feel comfortable getting behind a company like Pinterest without the possibility of making its concerns known.
As such, some of the big boys might not be bellying up to the table any time soon.
In another important note for institutions, investors will be getting less information on Pinterest in the path ahead than is generally required for public companies.
"We are an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933 and will be subject to reduced public company reporting requirements," an SEC filing reveals.
Specifically, the company will be exempt from certain requirements related to executive compensation.
That includes requirements to hold non-binding advisory votes on executive compensation and requirements to provide data on the ratio of total compensation of the CEO to the median compensation of all employees.
"We may take advantage of these exemptions until such time that we are no longer an emerging growth company," company filings state. "We will remain an emerging growth company until the earliest of the last day of the fiscal year following the fifth anniversary of the completion of this offering, the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion..[or] the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 and the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period."
The company noted that the JOBS act also allows the company to delay the acceptance of revised accounting standards until such standards apply to private companies.
So, while the path to profitability and the niche market the company occupies could lead to rapid share growth, it might not be enough to assuage the concerns of institutional investors.
The devil is always in the details.