A couple of days ago, the New York Times wrote a story that aims to explain why Snap founders Evan Spiegel and Bobby Murphy have retained such a hold on voting power in the company — power that its shareholders will not enjoy.
It’s a great account and wonderfully written by a reporter I respect greatly. But I don’t quite buy it.
According to four sources who spoke to the Times, the reason that Snap’s founders are denying shareholders any say in the running of their company can be traced to Jeremy Liew, a venture capitalist with Lightspeed Venture Partners who wrote Spiegel the company’s first check, for $485,000.
It was 2012, Spiegel and Murphy were still Stanford students with a fast-growing phenomenon on their hands, and reportedly, they quickly regretted the term sheet that they signed with Liew. The reason: the agreement gave Lightspeed the right of first refusal to invest in a future round of funding and the ability to increase its share of the company in that round. In fact, Lightspeed could take 50 percent of the future round.
These sources say the terms effectively gave Lightspeed veto power over investment at Snap and made Snap unattractive for other investors who might not be able to take as large a stake in the company as they’d like. Indeed, the Times says Snap was so irked by this pact that it later struck an agreement with Lightspeed, providing it with warrants to buy future shares at a discounted price in exchange for dropping its right-of-first-refusal and other clauses that bothered the founders.
The unflattering story is surely an embarrassment for Liew, who has used his early check in Snapchat to substantially raise his profile in recent years. You can guess that competing firms that don’t have a stake in Snapchat are relishing the moment.
Still, it stretches my imagination to believe that because of Lightspeed’s shenanigans, the founders determined they would never cede control to investors again or, more to the point, that their decision has much to do with the firm.
For one thing, as much as other investors may envy Lightspeed – it owns more than 8 percent of Snap and stands to make more than $1 billion off its IPO – I think most would tell you privately that the terms Lightspeed presented to Snap are far from the most onerous they’ve ever seen.
A related point: VCs are in business to make money. Founders who think otherwise are living in a fantasy world. As far as venture deals go, Liew was just doing his job, and I’m sure Lightspeed’s institutional investors would tell you he did a fine one at that.
Which begs another issue. Didn’t Lightspeed make it impossible for other VCs to invest? Well, no. Maybe they couldn’t buy as much as they’d like, but that’s not illegal. It mostly deprived them of bragging rights and, of course, upside.
Okay, but Spiegel was duped, though, that much is clear, isn’t it?
I can’t know, obviously, and Liew isn’t talking about the Times story — not to me anyway. (I reached out earlier today and he hasn’t responded.)
But it is worth asking how gullible Spiegel was four years ago and why — though we’re constantly being told, and we believe, that he’s a genius — we’re so quick to accept that he was taken advantage of by a greedy VC. If he were a student at a small Midwestern college, the child of teachers, I might be more inclined to believe it. But Spiegel was a student at Stanford in 2012, then and now the epicenter of the tech universe. More, his parents are both Ivy League-educated attorneys. I’m guessing he received some legal advice before striking a deal with Lightspeed, and it probably was not terrible even if it created sour feelings later.
You may disagree with me. (Trust me, plenty of my colleagues do.) But I do question the narrative that the Times was told.
I don’t own Snap shares, and because of my job, I can’t buy them when they are public, so its decision to offer shares with no voting power won’t impact me directly. But there are plenty of institutional investors who are genuinely perturbed by Snap’s charter. In fact, institutional investors are so upset that earlier this month, a dozen of the biggest pension funds in the U.S. reportedly sent a letter of objection to Snap. The executive director of The Council of Institutional Investors went so far as to warn that Snap could “open the floodgates” for more companies to evade accountability.
Will they buy Snap’s shares anyway? Probably.
But if they wind up unhappy afterward, I hope they’ll know better than to blame Jeremy Liew.
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