The Dropbox Inc. initial public offering looks like it will avoid some of the issues that plagued Snap Inc.’s stock market debut, but there are still governance and financial concerns.
Dropbox DBX, +0.00% , an 11-year-old cloud-storage company based in San Francisco, officially filed its long-awaited IPO documents with the Securities and Exchange Commission on Friday. Four years ago, Dropbox was valued at $10 billion on paper, which means it will likely be the biggest “unicorn” to hit the public markets since Snap Inc. last year.
Snap’s IPO was worrisome because of two decisions that the co-founders made: Offering investors no voting rights, and giving a huge stock award to its CEO and fellow co-founder at IPO time. Stock structures that put all the control of a public company in the hands of founders and large stock awards for top executives are nothing new in Silicon Valley, but Snap took it to a new extreme and has paid for it.
While Dropbox‘s prospectus shows it will offer dual-class shares that provide voting control to the co-founders, its approach is slightly more palatable than Snap’s. The company is offering class A shares to the public, which have one vote per share, while insiders get Class B shares with 10 votes apiece. Class B shareholders are led by co-founder and Chief Executive Drew Houston and venture-capital firm Sequoia Capital, which combine to have more than 50% of the current voting power.
“That’s kind of become standard now with these tech companies,” said Santosh Rao, head of research at Manhattan Venture Partners. “They want to control the direction of the company. On a strategic sense it makes sense. But in the case of Snap, it was just too much, they had 90% of the voting rights.”
Still, Dropbox admitted in its filing that the multi-class share structure could keep it out of certain indexes, which made rules banishing companies that take that approach in response to Snap.
Houston and fellow co-founder Arash Ferdowsi also received fresh shares ahead of the Dropbox IPO, but it is nowhere near the outlandish award given Snap’s Evan Spiegel. The “Co-Founders Grant” they received requires steadily increasing share prices to vest, a signal that Dropbox’s board—which includes Qualcomm Inc. executive chairman Paul Jacobs, former Secretary of State Condoleezza Rice and former Hewlett Packard Enterprise Co. Chief Executive Meg Whitman—is looking out for shareholders.
The stock grants for Dropbox cofounders do have conditions: They require share prices to exceed certain milestones before they vest. pic.twitter.com/RH2tZWeGlR
— Jeremy C. Owens (@jowens510) February 23, 2018
While corporate governance appears to be less of an issue at Dropbox than at Snap, there are still plenty of concerns. Rao is worried about Dropbox’s tough competition and slowing revenue growth, which came in at 31% to $1.1 billion in 2017 compared with nearly 40% growth to $844.8 million in 2016. He also cited the company’s much high number of free customers versus paying accounts.
“After so many years, the paying customers are only 11 million out of 500 million, the conversion rate is very low,” he noted.
Dropbox faces huge competitors such as Alphabet Inc.’s GOOGL, +1.64% GOOG, +1.82% Google and its 15 gigabytes of free storage. On the plus side, it doesn’t fully depend on Google or any other large cloud provider to host the files that users upload to the cloud, avoiding large cloud-computing costs that have dogged Snap. Dropbox moved to establish its own storage infrastructure through a deal HPE for equipment and services, while HPE became a large corporate customer as Whitman joined the board.
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Dropbox could lose some potential investors because it waited until the slower part of its growth curve to go public, an issue analysts and IPO experts have warned about as unicorn startups stayed private these past few years. While revenue growth slows, though, Dropbox has managed to trim net losses and has a chance to move to profitability in the next couple of years if it maintains the same pattern.
At first glance, Dropbox appears to be a more mature company than Snap, though still afflicted with its own version of Silicon Valley’s poor corporate-governance practices. It will be interesting to see the response to its approach as we wait for other highly valued startups like Uber Technologies Inc. and Airbnb Inc. to make determinations on their own IPOs.