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Snapchat Authorizes Mystery Share Sale

This article is more than 9 years old.

Amid reports that Snapchat is entertaining a major investment from Chinese web giant Alibaba, the company appears to have quietly agreed to sell a sizable chunk of itself.

Snapchat authorized the sale of 17.4 million preferred shares in a Delaware filing made Monday, according to documents seen by private company data firm VC Experts and shown to Forbes. The shares represent roughly a 3 to 5% stake in Snapchat, according to VC Experts analyst Justin Byers.

What’s odd about the filing is that instead of being priced at something like $3.41 a piece — what the shares went for during Snapchat’s last funding round in December — the shares are just $0.001 each.

Why would a company valued at $10 billion sell shares at a pittance? Because the stock is probably tied to some other investment. And the nature of that investment is a mystery, Justin Byers says. “It could be tied to some milestone or debt or other agreement.”

Startups who've done something like this in the past tended to tie their issued shares to some sort of special treatment or conversion in the event of an IPO. Zynga, for instance, used to issue super-cheap shares to the employees of companies it bought, shares which they could convert to common stock once Zynga went public in December 2011.

Snapchat probably doesn't have plans for an IPO any time soon, but Alibaba certainly does, with a public offering expected some time after Sept. 1.

That points to the possibility that Alibaba’s rumored investment in Snapchat could be paid not just in cash, but shares that Snapchat could convert after Alibaba’s IPO. And Alibaba (or someone) may have made such an investment already.

Snapchat couldn’t be reached for comment, and based on the filings it it hasn’t necessarily sold the shares yet but only authorized their sale.

There’s another oddity from the filing, though. The 17.4 million shares were actually increased from a much smaller 1.2 million Series E Preferred shares authorized last month, according to a July 3 filing, and for the same low price. For some reason, between then and last Monday Snapchat decided to authorize another 16.2 million Series E Preferred shares.

Why the surge in new shares? That’s also a mystery to Byers. But the Snapchat founders do appear to be positioning themselves for some sort of big event.

In the July 3 filing Snapchat also embarked on a 1 to 10 stock split while the founders voting shares still maintain multiple board seats and make up approximately 56% of the total authorized preferred shares. Positioning themselves, in other words, for greater voting control in a similar manner to Mark Zuckerberg as Facebook got bigger prior to its IPO.

Snapchat has been through at least five rounds of funding, raising a total $163 million. It’s last major round was in December 2013 when it raised $50 million in Series C funds from hedge fund Coatue Management at $3.41 a share — not long after it had snubbed a $3 billion offer from Facebook.

The company has also been solidifying its business model lately to boost revenue from its current level of $0. Snapchat is not only interested in selling ad space but also becoming a peer-to-peer mobile payments operator like Venmo: the company recently filed two trademark applications with the U.S. Patent and Trademark Office seeking exclusive use of its brand-name “Snapchat” in the context of an app “for processing electronic payments to and from other” according to research firm PrivCo, which has seen the documents, and earlier reports.

Any no-revenue startup valued at $10 billion would be under extraordinary pressure to monetize. For now, Snapchat is not only getting its business plan in order but quietly putting the mechanics in place for a major new investment.

Ryan Mac contributed to the reporting on this story.