What Snap’s I.P.O. Filing Reveals About the Company

Snap, the parent of Snapchat, disclosed several important aspects of its business in its initial public offering document. The complete filing is here. Below are notable excerpts.

Our advertising business is still young but growing rapidly. For the year ended December 31, 2016, we recorded revenue of $404.5 million, as compared to revenue of $58.7 million for the year ended December 31, 2015, representing a year-over-year increase of more than 6x. Our global average revenue per user, or ARPU, in the three months ended December 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, our ARPU in the three months ended December 31, 2016 was $2.15 compared to $0.65 for the same period in 2015. For the year ended December 31, 2016, we incurred a net loss of $514.6 million, as compared to a net loss of $372.9 million for the year ended December 31, 2015.

Our advertising business is still young but growing rapidly. For the year ended December 31, 2016, we recorded revenue of $404.5 million, as compared to revenue of $58.7 million for the year ended December 31, 2015, representing a year-over-year increase of more than 6x. Our global average revenue per user, or ARPU, in the three months ended December 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, our ARPU in the three months ended December 31, 2016 was $2.15 compared to $0.65 for the same period in 2015. For the year ended December 31, 2016, we incurred a net loss of $514.6 million, as compared to a net loss of $372.9 million for the year ended December 31, 2015.

Prospective investors will be drawn to how quickly Snap has grown its advertising business in roughly two years, with the company showing a nearly sevenfold increase between 2015 and last year. The question is how long the start-up can maintain anywhere close to that kind of growth.

We had 158 million Daily Active Users on average in the quarter ended December 31, 2016, an increase of 48% as compared to our Daily Active Users in the quarter ended December 31, 2015.

We had 158 million Daily Active Users on average in the quarter ended December 31, 2016, an increase of 48% as compared to our Daily Active Users in the quarter ended December 31, 2015.

The company said in its prospectus that it views daily active users as a critical measure of engagement — a measure that is tracked closely by similar companies. (Facebook on Wednesday reported that it had an average of 1.23 billion daily active users in December.)

 

Risk Factors

New legislation that would change U.S. or foreign taxation of international business activities or other tax-reform policies could seriously harm our business.

Exposure to United Kingdom political developments, including the outcome of the referendum on membership in the European Union, could be costly and difficult to comply with and could seriously harm our business.

We plan to continue to make acquisitions, which could require significant management attention, disrupt our business, dilute our stockholders, and seriously harm our business.

As does every company in this kind of filing, Snap laid out a number of potential risks to its business. Among them is Britain’s decision to leave the European Union, what has come to be known as Brexit, which could pose large problems for the company because it recently designated London as its international hub.

Foreign data protection, privacy, consumer protection, content regulation, and other laws and regulations are often more restrictive than those in the United States. Foreign governments may censor Snapchat in their countries, restrict access to Snapchat from their countries entirely, or impose other restrictions.

Snap noted that other countries may choose to censor Snapchat. Moreover, the company pointed out that many of Google’s services, which power a significant portion of Snap’s computer services, are restricted in China. So, according to Snap, it isn’t clear “if we will be able to enter the market in a manner acceptable to the Chinese government.”

Perception in the Early Days

When we were just getting started, many people didn’t understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more.

The company was originally built for users to send self-destructing photographs and messages to their friends. But the company’s ambitions have grown to include user stories, news and branded content.

Compensation for Executives (Even for Security and Travel)

(3) Amounts reported include 401(k) contributions and life insurance premiums paid by us on behalf of the named executive officer.

(4) Amount reported includes $890,339 for security for Mr. Spiegel.

(5) Amount reported includes (i) $328,747 for security for Mr. Spiegel and (ii) $15,766 for personal travel.

(6) Mr. Sehn was not a named executive officer for the year ended December 31, 2015.

Evan Spiegel, 26, one of Snap’s two founders, started the company while he was a student at Stanford. Mr. Spiegel, who is the company’s chief executive and serves on the board, owns a stake in the company that was worth $3.7 billion at the end of last year. His 2016 compensation package came to $2.6 million and included $503,205 in base salary, a $1 million bonus and $901,635 in other compensation that covered his $890,339 personal security budget.

The company’s chief strategy officer, Imran Khan, received nearly $151 million during that same time, largely because of a $145 million stock award when he joined the company from the investment bank Credit Suisse in 2015.

Stock Sale

In August 2016, we repurchased an aggregate of 260,832 shares of Class B common stock from Mr. Horowitz, at a purchase price of $30.72 per share for an aggregate purchase price of $8.0 million.

In September 2016, we repurchased an aggregate of 137,590 shares of Class B common stock and 125,754 shares of Series FP preferred stock from Mr. Spiegel, at a purchase price of $30.72 per share for an aggregate purchase price of $8.1 million.

In September 2016, we repurchased an aggregate of 137,590 shares of Class B common stock and 125,754 shares of Series FP preferred stock from Mr. Murphy, at a purchase price of $30.72 per share for an aggregate purchase price of $8.1 million.

A month before the company first filed initial public offering documents with the Securities and Exchange Commission, its two co-founders each sold stock worth $8.1 million.

Relatively Small Number of Workers

Our employee headcount and the scope and complexity of our business have increased significantly, with the number of full-time employees increasing from 600 as of December 31, 2015 to 1,859 as of December 31, 2016.

The company more than tripled its employee ranks from 2015 to 2016. Yet even with 1,859 staffers, the company has a relatively small number of workers relative to its valuation.

Keeping It in the Family

We have engaged the law firm Munger, Tolles & Olson LLP, or Munger, to provide certain legal services to us. Mr. Spiegel’s father, John Spiegel, is a partner at Munger, although John Spiegel has not personally provided any material legal services to us. We have paid Munger $305,406, $50,000, and $293,908 during the years ended December 31, 2014, 2015, and 2016, respectively.

Snap noted that it hired a law firm that employs Mr. Spiegel’s father. The elder Mr. Spiegel is a litigator who represented Transocean, which operated the Deepwater Horizon rig at the center of the BP oil disaster.

The Investors

 

The company has attracted a number of prominent backers, who are expected to reap handsome rewards — if only on paper — in the initial public offering. Among them are investment firms like Benchmark Capital, which owns about 13 percent of the company.

The company has attracted a number of prominent backers, who are expected to reap handsome rewards — if only on paper — in the initial public offering. Among them are investment firms like Benchmark Capital, which owns about 13 percent of the company.

The Underwriters

Snap’s offering is being led by Morgan Stanley and Goldman Sachs. Morgan Stanley won the desired “lead left” position on the prospectus, which indicates that it is the bank that will play the biggest role in the offering. The bank also led Facebook’s initial public offering.

Snap’s offering is being led by Morgan Stanley and Goldman Sachs. Morgan Stanley won the desired “lead left” position on the prospectus, which indicates that it is the bank that will play the biggest role in the offering. The bank also led Facebook’s initial public offering.