Slack Week: What to Look Out for During This Unicorn’s Direct Listing
June 17, 2019 | Blog

Slack Week: What to Look Out for During This Unicorn’s Direct Listing

Slack Technologies will be completing its much-anticipated direct listing on June 20. Beyond the attention the company will receive due to its status as a Silicon Valley darling, Slack’s transition to the public marketplace is important because it will arrive via a direct listing, marking the first of 2019 and the only such event for a unicorn company since Spotify’s direct listing last year. We recently outlined the details of a direct listing in our Slack Company Report. While a direct listing can be considered risky for a variety of reasons, Slack may benefit substantially from the interest public investors have shown in enterprise software-as-a-service (“SaaS”) companies. In fact, the ten SaaS and cybersecurity companies that have completed IPOs over the past twelve months are trading on average 90 percent above their IPO prices, with performance ranging from increases of 14 to 185 percent. This segment includes companies such as Zoom, CrowdStrike, Elastic NV, and Tenable. We’ll have to wait and see if Slack performs in line with the rest.

Reference Pricing

The day before Slack begins trading, the NYSE — in conjunction with Slack’s advisors — will announce its final reference price. Slack disclosed its recent history of private secondary transactions in the firm’s registration documents. Amongst a variety of other factors, those trades may influence the ultimate price chosen. In May 2019, the most recent time period disclosed, the volume-weighted average price paid for Slack shares was $26.82. Given that the share price during the company’s Series H round was $11.91 in August 2018, it appears private investors believed Slack’s valuation warranted significant appreciation in the subsequent nine months.

Start of Trading

For direct listings, one significant risk is illiquidity, given that book-building activities will be occurring as soon as markets open, though this risk is somewhat mitigated by the strong performance of recent SaaS IPOs. The absence of a potentially notable pop, as seen with traditional IPOs, may also hamper Slack’s retail demand. Another concern with a direct listing is insufficient demand for the company’s shares once it begins trading, given a lack of substantial marketing and no formal allocation of shares associated with traditional IPOs. Additionally, with no 180-day lock-up period for existing shareholders, there is an increased chance of substantially more supply than demand for Slack’s shares. All of this could result in heightened volatility in the early hours and days of trading. The only reference point we have for unicorn direct listings is Spotify’s 2018 listing, for which opening day trading volume represented approximately 19 percent of eligible shares outstanding. Given the relative success of Spotify’s listing, we’ll look to see if Slack can achieve the same level of liquidity. As illustrated in the chart below, after opening 25 percent above its reference price, Spotify’s daily volatility remained within +/- six percent for the following sixty days. It seems that — at least for Spotify — dramatic volatility was a concern that did not come to fruition.

Spotify 60-Day Stock Performance

Six, Twelve, Eighteen Months from Direct Listing

While the primary focus this week will be upon how Slack’s direct listing fares, it’s important to note that this event is more representative of a first step down the long road of being a publicly traded company. As such, the need to achieve profitability may be accelerated, as public investors could be less patient than private ones. Furthermore, any perceived or real loss of competitive advantage or market share to competitors, both large and small, may substantially affect the company’s share price and associated valuation nearly immediately. To more aptly track these and other considerations, we’d suggest following the company, its future earnings calls, and associated guidance.

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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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Copyright SharesPost, Inc. 2020. All rights reserved.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

This article does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Securities referenced in this article may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2020. All rights reserved.