Slack Sends Message to Market With Direct Listing

Slack Sends Message to Market With Direct Listing

Slack Technologies Inc. is poised to become the latest of the so-called unicorn companies to go public. The maker of workplace-collaboration app Slack appears intent on taking the road less traveled to the NYSE. Rather than holding a garden-variety IPO, Slack revealed plans last week to list shares directly on the exchange.

With its unconventional listing tactic, Slack is sending an instant message (get it?) to the market that acquiring capital isn’t a problem for the Silicon Valley darling, now valued at a reported $16 billion. Instead, like many of its unicorn peers (the 300 or so private companies with valuations topping $1 billion) Slack seems more preoccupied with preserving control. The company is going with a dual-class share structure that gives Class A shareholders one vote per share and Class B shareholders 10 votes per share.

Recently, tech unicorns like Pinterest and Snap also opted to use dual-class shares. The structure allows Slack to keep decision making concentrated in the hands of founders and venture capital investors for the time being. Co-founders Stewart Butterfield, the current CEO, and Cal Henderson, the chief technology officer, own a combined 12 percent of Slack’s equity. VC investors Accel and Andreessen Horowitz, meanwhile, own more than a third of Slack’s outstanding shares.

Although the direct listing is unusual, even that aspect of Slack’s approach to public trading is not unprecedented. Last year, streaming music service Spotify did a direct listing, an effort that Spotify CFO Barry McCarthy characterized in an interview with The Information as trying “to re-engineer what is broken about the IPO process.”

McCarthy was alluding to the involvement of underwriters – and the underwriting fees they bring with them. In a standard IPO, investment bankers generally discount shares to entice potential buyers in the market, according to McCarthy. There are downsides for existing shareholders, too. The new shares issued in an IPO dilute the equity stakes of existing stockholders. Also, following a traditional IPO, insiders typically face so-called lock-up periods in which they can’t sell their shares.

Direct listings don’t have those drawbacks for shareholders. When companies do direct listings, they simply allow their shares to begin trading. There is no traditional underwriting role here, although Morgan Stanley will play a similar role to the one it performed for Spotify. In Slack’s case, the investment bank will advise market maker Citadel Securities LLC on how many shares of stock to list and at what starting price.

For companies already swimming in cash, that want to satisfy their existing shareholders, and are comfortable flying without the proverbial net of an underwriter to prop up their share price, the direct listing route makes sense. How often can that be said of ventures in the highly speculative tech business, though? Time will tell if Slack and Spotify are outliers or signs of the future in the sector.

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