By Jeremy C. Owens
Palantir decided to go with a direct listing instead of an IPO, following other mature startups such as Slack Technologies Inc. /zigman2/quotes/212180539/composite WORK -2.58% , Spotify Inc. /zigman2/quotes/207488629/composite SPOT +12.60% and Asana Inc., which is expected to begin trading this week.
For more: 5 things to know about the Asana direct listing
The most prominent way a direct listing differs from an IPO is that the company does not create nor sell any new shares. For Palantir, though, years of venture-capital investments have created more than enough shares to launch public trading: roughly 1.64 billion, though that grows to 2.17 billion in a fully diluted formula that includes vesting options.
Not all those shares will trade openly at the launch, though. Most of the shares are locked up through the end of the year, a common practice for IPOs but unusual for a direct listing. Palantir said in a news release Friday that it expects a total of 461.2 million shares will be permitted to be sold on the first day of trading, though there are no guarantees that all of those shares will hit the market.
The rest of the Palantir shares will largely become available to sell on the third trading day after Palantir publicly announces its 2020 earnings, which would be expected early next year. In the meantime, strong demand for the limited number of shares could drive prices higher, as they have for recent hot software IPOs like Snowflake Inc. /zigman2/quotes/220991541/composite SNOW -4.24% and Unity Software Inc. /zigman2/quotes/221035391/composite U -4.20%
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Direct listings typically seek a “reference price,” largely based off of previous sales of the company’s stock on the private market. The Journal’s report of an expected $10-a-share price for Palantir stock jibes with recent prices for its shares in private markets: While the volume-weighted average price of shares from January to September was $6.02, that price in August was $7.31, and the average on Sept. 1 was $9.17 before Palantir halted private transfers of its shares in preparation for the direct listing.
There is no guarantee that will be the starting price for Palantir, however. Palantir listed a dozen banks that are acting as financial advisers on the deal, with Morgan Stanley as the main consultant with the designated market maker, which will determine the opening price of the shares.
While Palantir has publicly split with Silicon Valley both physically and metaphorically, it is taking with it the Valley’s approach to stock structure — giving founders extra votes to maintain control of the company after it goes public — and super-sizing it.
The typical approach for companies seeking to ensure their founders retain control after a move to the public markets is to create two classes of shares, and give the class of shares held by founders and important insiders extra votes. This approach is why Mark Zuckerberg rules over Facebook like a king and Google’s co-founders retain control over the company even after they walked away from day-to-day management.
From 2017: Founder-friendly share structures are here to stay
Snap Inc. /zigman2/quotes/205087158/composite SNAP +6.72% seemed to take this to an extreme by offering no votes to common holders of the stock, but Palantir is taking it even farther. The company has established four different tiers of stock, three of which are familiar: Class A stock with 1 vote, class B stock with 10 votes, and preferred shares for certain investors that are not typically counted in the same way as other classes of stock.
Palantir added another class of stock, though, deemed class F for the founders. And the company says the voting rights of those shares of stock can vary, basically meaning the founders can have control whenever they want.
This class of stock has caused much of the confusion around the offering and been the focus of many of the revised versions of Palantir’s SEC filing. TechCrunch’s Danny Crichton has tracked the changing language that Palantir has been adding to try to make sense of the unique stock structure, and it was his reporting on the fifth revision of the S-1 that seemingly caused Palantir to issue a sixth revision striking the language that he highlighted .
Much of the language that was stricken dealt with the variable nature of the shares, including a statement that the founders would unilaterally be able to adjust their voting power. But the underlying nature of the stock remains: The amount of power they hold can be changed, giving the founders control of the company when they see fit. Of course, how that works is still mighty confusing, as you can see in this chart that is the clearest and most prominent explanation of how the class F shares would work in practice, appearing on page 10 of the 300-plus page filing.
Karp, Thiel and Stephen Cohen make up half of Palantir’s six-person board, own all of the class F shares, and sit in the three most powerful seats in the company — CEO, chairman and president, respectively. Yet Palantir’s filing offers little information about the trio beyond the heavily updated legalese involving their voting power.
Palantir actually has its roots at PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL -1.84% , though you wouldn’t know that from the filing, which mentions PayPal only once in describing Thiel as a co-founder. The generally accepted story of Palantir’s founding involves Thiel attempting to take the approach PayPal used to detect and block fraud on its platform and transfer it to antiterrorism efforts for a post-9/11 America. He pulled together some Stanford University students, including Cohen, to start developing the software, then put his former Stanford roommate, Karp, in charge of the company.
Thiel has grown in prominence since then, as he became Facebook’s first outside investor around the same time he was co-founding Palantir and soon launched the Founders Fund to invest in other companies. Additionally, he was one of the few prominent tech names to support Donald Trump’s bid for the presidency, even speaking at the Republican National Convention in 2016, and he reportedly funded a legal attack that eventually took down the news website Gawker.
Karp, whom the Journal called “a self-described socialist” in a 2018 profile, did not have much work history to speak of before Thiel installed him as CEO of Palantir; he had just finished his PhD in philosophy in Germany when he returned to the U.S. and took the job. His description in the filing cites only his educational background and years with Palantir, and the same is true of Cohen, who does not have much of a history beyond the company and his education.