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MBA Essentials
AUG 23, 2019

The Story behind Slack’s Direct Listing Decision

By Tadahisa Saito, Translated by Melissa McIvor
iStock photo/rambo182

Slack Technologies is the American company that created the popular business-friendly chat app Slack. It’s also a prime example of a fast-growing unlisted unicorn enterprise—or, it was, until it went public on the New York Stock Exchange on June 20, 2019. No company has attracted such attention since Spotify went public in April last year.

The decision for Slack to go public through a direct listing was an interesting one. Startups typically opt for listing shares through initial public offerings, more commonly known as IPOs. With this method, selling new or existing shares allows startups to obtain more funds from and access to a wide range of investors in the capital market, thereby accelerating growth. However, Slack went public through a direct listing, which meant it issued no new shares, nor did it sell any of its existing shares upon its listing on the stock exchange.

Before getting to why the company decided to go against the grain, let’s lay out why startups choose the IPO option in the first place. There are two main benefits.

1. IPOs allow startups to raise more money through the public capital market than venture capitalists, pension funds, etc., which can then be invested in fueling growth.

2. The IPO option can accelerate the acquisition of top-notch human resources by improving name recognition and creditworthiness. All of this allows for smoother business transactions moving forward.

Sounds pretty good, right? So why did Slack choose to go public through a direct listing?

Put simply, the general benefits of an IPO are raising larger funds and promoting a company’s image in the public eye. That’s great—even essential—if you’re starting small. But Slack is a unicorn. It had already raised $1.4BN from venture capital funds, including the SoftBank Vision Fund, meaning the company’s need to procure additional funding for growth was rather low. Slack co-founder Cal Henderson even admitted to the Nihon Keizai Shimbun in June that there was no need for additional procurement.

That left name recognition and credit standing. Slack apps are already widely used worldwide, making these points moot, as well. There was no one left to impress—the world was already convinced of the company’s value.

Naturally, any company in this position would look to the benefits of other options.

By nature, direct listing means no issuance of new shares or sale of existing shares. In essence, Slack managed to leapfrog over the need for securities firms to play intermediary with the acquisition and sale of its shares, not to mention the resulting hefty fees. Direct listing also meant there was no IPO lock-up—the standard six-month (or more) period during which major shareholders are restricted from selling their shares. Finally, with no pressure to issue new shares, Slack avoided diluting the economic benefits for and voting power of existing shareholders.

Venture capitalists follow a particular formula when they create funds for startups. It begins with creating a partnership. Then the fund solicits money from institutions such as pensions and universities. The average lifespan of such a partnership is limited to five to ten years, which means that a venture capital fund needs to collect invested money before its lifespan expires through IPOs or resale.

Direct listing has the potential to greatly improve the liquidity of shares—after all, those stocks that remain unlisted require middle men and negotiation over price (this is called illiquidity). Direct listings make stock prices explicit and shares easy to sell through the stock market. In addition, unlike with IPOs, the lack of lock-up period means shares can be sold right away. When it comes to venture capitalists, direct listing is a better way to go than IPO.

Slack made one other important decision when it went public: it kept the majority of its voting rights within the founder group. Public shareholders gained access to Class A shares with one vote each. Meanwhile, the Class B shares held by Slack’s founders came with a hefty ten votes per share. Such a move isn’t unheard of—in fact, it’s common in IT startups and mimics the strategy of top players such as Facebook and Google. Slack’s justification was simply that its own people know the company best.

That is, they don’t want outsiders interfering with management.

While founders do have a responsibility to satisfy shareholders, investor intervention is hardly an irrational fear—in fact, it’s been a prominent issue under the recent call to strengthen corporate governance. As voices for long-term strategy, investors are both valuable and reasonable, but when they get into the nitty gritty of everyday operations (often with the aim of getting profits to spike fast), problems arise. It might even be said that investor interference causes excessive capitalism, often going against the vision of a company’s founder in the dogged pursuit of profit.

In recent years, there has been a significant rise in large-scale venture capital funds aimed at accelerating startups—unicorns, in particular. While IPO has traditionally been the preference when going public, direct listing is proving to be an enticing alternative.  It would hardly be a surprise to see more direct listings of unicorns like Slack in the months and years to come.