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3 Red Flags for Snap's IPO

Written By Alexandra Perry

Posted March 1, 2017

Well, it is finally here…

Snap Inc will begin publicly trading tomorrow morning, making it one of the most anticipated and controversial stocks of 2017. The market’s reaction to Snap’s IPO will set the trend for tech investing for the remainder of the year.

That’s a lot of pressure for an animated ghost.

For Snap, the journey to IPO has been turbulent, to say the least. The company has been heavily criticized by investors and competitors alike.

Snap’s IPO is considered a pivotal moment for the company – it will be the most appropriate gauge of investor confidence in CEO Evan Spiegel.

But, as we’ve seen with a number of highly touted IPO’s, not all that glitters is gold. In the case of Snap, there are some red flags that investors should take into account before buying in tomorrow morning.

No game plan to reduce growing costs

Snap is spending a lot of money with no immediate plan to reduce costs.

Snap’s founders have tried to hide this truth on the whirl-wind of an IPO tour. But the market knows it and might not be so forgiving.

The problem is that Snap’s costs scale alongside their users. Snap insists on using incredibly expensive hosting services provided by Amazon and Google – even though most of its competitors have built their own hosting platform.

This lack of a clear plan should be alarming to any investors trying to determine whether the company will survive.

Stock without representation

Snap’s IPO is atypical in a lot of ways. But perhaps one of the more alarming factors is Snap’s plan to sell stock without any voting rights.

That alone should be enough to shake investor confidence.

When an investor buys stock tomorrow, they sign away any right they have to present opinions about Snap’s executive decisions. Stockholders will have no say in corporate pay or board compensation.

And according to the Council of Institutional Investors, companies with a controlling shareholder tend to underperform those without.

And then there is the founder

2017 has already taught us a lot about public image.

From the widespread disdain for President Trump’s tweets to the instantaneous Internet rage in response to Travis Kalanick’s fight with an Uber driver, the public has proven to be unforgiving toward leadership lacking social grace.

So where does that leave Snap CEO Evan Spiegel, who trailed a slew of controversial emails out of his college dorm?

Not anywhere good…

Spiegel made misogynist comments, indulged in illegal drugs and harassed women he considered overweight. Though he issued a public apology, the emails were enough to make investors – already wary of rogue founders – cautious.

It is up to the founder to maintain the public image and protect the company from media rage. It is not good when the founder has a track record of bad behavior.

So now it’s time to sit back and watch the fireworks. Regardless of whether you choose to invest, Snap’s IPO is a milestone for the tech industry and social media startups.