CHAPTER 13

Slack, San Francisco, 2019

With its coffers full, Slack enjoyed the financial flexibility to pursue a direct listing. As it worked with its bankers to prepare documents for the SEC, one of the things it needed to figure out was who was going to work with the trader on the floor of the exchange to collate the buy and sell orders it expected on the morning of the listing.

For Spotify, Morgan Stanley had been the only financial advisor assigned the role of advising the designated market maker, due to McCarthy’s long-standing relationship with Kwan and Grimes. Spotify’s prospectus left no room for ambiguity and gave Morgan Stanley a role that put it in position to see most of the trading flow in shares—61 percent of the volume on the first day and then still large percentages in the following days.

When it came time for banks to pitch for Slack’s business, Goldman Sachs and Morgan Stanley recommended that there be only one advisor to the designated market maker. One entity should consolidate most of the trading interest—which would make coming up with the clearing price smoother, they said. The role was analogous to an IPO’s stabilization agent, a prestigious position that gave an underwriter a loud voice in the decision to exercise the over-allotment option, or greenshoe, and responsibility for stabilizing the stock in the aftermarket. There was only ever one stabilization agent.

Slack executives had been friendly with well-known Goldman banker George Lee, who helped earn Goldman the lead position on the direct listing by telling Slack’s executives he wanted the deal to be his “swan song” before moving into Goldman’s C-suite. Morgan Stanley once again acknowledged that they were sitting behind Goldman. The bankers argued that they’d developed expertise around advising the designated market maker, knew the objectives, and should run that process.

Slack leaned toward selecting Morgan Stanley for that role, in part because of its experience handling Spotify’s opening trade, whereupon Goldman changed its mind and pushed for more than one firm to be named in the prospectus. Goldman had realized that it now needed to fight for the lucrative mandate. It saw that advising the designated market maker—like serving as the stabilization agent in a traditional IPO—could be a very lucrative role. The title encouraged investors to go to the designated bank if they wanted to buy and sell the company’s shares; and the more volume that passed through its doors, the more information the bank would have about who owned the shares at any given time. If someone wanted to buy, the bank’s traders would know who wanted to sell. If someone else wanted to sell, the bank’s traders would know who wanted to buy. There was also ancillary business that the information conferred, such as administering the brokerage accounts for the employees or handling wealth management services for VCs or company executives. Put simply, the bank that controlled the opening trade controlled more information. And on Wall Street information was money.

As the bankers began to put together the company’s prospectus, they each pushed Slack’s executives to list them as the first-named advisor. As the drafts came together, both of the banks were listed first at various points as advising the NYSE floor trader. That wasn’t good enough for Goldman’s bankers, and they kept pushing the company to list them first.

Goldman’s insistence led Slack CFO Allen Shim to dig into the topic some more. He spoke to executives at Spotify and Citadel Securities. Shim began to believe that Goldman’s explanations leaned toward preserving its reputation and status, as opposed to the mechanics or eventual success of the transaction, according to someone familiar with his thinking.

When Slack submitted its draft registration statement to the SEC months later, the language had changed. “Morgan Stanley and our other financial advisors” would advise the designated market maker. Goldman Sachs, however, commanded the coveted position of leading the overall transaction.

The task of ushering Slack into the public markets would once again fall to the same three banks that had run Spotify’s direct listing: Goldman Sachs, Morgan Stanley, and Allen & Co. They had earned $36 million for that work.

As Slack’s direct listing plans took shape, two of Silicon Valley’s buzziest startups also prepared to go public. In December 2018, Uber Technologies and Lyft filed paperwork with the SEC to list through traditional IPOs, leading the Wall Street Journal to proclaim that 2019’s crop of IPOs could surpass the record set during 1999, when the dot-com boom led companies to raise $108 billion.

Already in 2018, thirty-eight tech companies valued at more than $1 billion sold shares to the public, the most since 2000. Companies raised $61 billion by the end of the year. The Wall Street Journal put it colorfully: “The parade of unicorns entering the stock market turned into a stampede in 2018 as tech companies listed shares at the fastest pace since the dot-com boom.”

The companies would have to overcome a somewhat novel challenge. With President Donald Trump and the Democrat-controlled House at loggerheads over Trump’s proposed border wall, the two sides had allowed the government to run out of spending authority. A government shutdown began on December 22.

Officials at the SEC, responsible for reviewing IPO prospectuses, among other filings, were among thousands of government employees to be furloughed. That meant they couldn’t review companies’ registration statements. The website for SEC filings, nicknamed EDGAR, also went quiet. IPO plans were in flux until the agency could get back to work.

In January, news reports suggested for the first time that Slack was considering a direct listing, though some of those same reports questioned whether the company had what it took to complete a successful offering. Slack was an enterprise software company, one that sold its services to corporate employers looking for tools to help their employees work more efficiently. Spotify dealt directly with consumers. The two companies’ customer bases told the story: Spotify had seventy-one million subscribers when it went public; Slack had around ten million using its product.

As rumors about Slack’s listing picked up steam, columnists and tech pundits began scrutinizing the company’s valuation and competitive positioning. A January 17, 2019, Reuters Breakingviews column did some back-of-the-envelope math to suggest that Slack’s true valuation was potentially 41 percent below that of its last private round, and below that of half a dozen of its publicly traded peers. Nearly every article mentioned that Slack competed against Microsoft, Google, and Cisco in the increasingly crowded workplace collaboration industry.

One article in the Financial Times ran with the headline “Slack Faces Challenge from Big Tech.” The newspaper suggested that the proportion of companies using Teams had jumped to 21 percent, outpacing Slack’s 15 percent, and that by the end of 2020, 41 percent of companies would be using Teams, as opposed to 18 percent using Slack.

The criticism wasn’t new to Butterfield, who gave a quote to the FT that he’d been offering for some time, to the effect that there was enough room for a small, focused company to compete against large incumbents with multiple business lines. Butterfield’s analogy often cited Microsoft itself in its early fight against International Business Machines. “We think the switch from inbox-based communication to channel-based communication is more or less inevitable,” Butterfield said.

As Slack’s board dug in on the direct listing, they strived to understand what elements they could borrow from the Spotify transaction and which parts of their direct listing they would have to design themselves. One of the key differences was the concentrated nature of Slack’s investor base. Venture firms Accel, Andreessen Horowitz, and Social Capital together owned roughly 45 percent of Slack, which could make having enough shares to trade on the first day an issue.

Unlike Spotify, which made it relatively easy for employees to sell their shares and had a more diverse shareholder base that it had counted on to sell shares in the direct listing, Slack hadn’t embraced the secondary market. Spotify had also relied on record labels owning roughly 17 percent of its stock to sell some shares during its early hours as a public company. Slack wouldn’t have that luxury. Venture capitalists would have to sell some of their shares on the day of the direct listing. The idea was relatively foreign to them, for two main reasons.

A traditional IPO was typically a very passive transaction for venture capitalists. One or two may have sat on the company’s board and perhaps even on the committee that made the final determination of the IPO price. But VCs were usually prevented from selling shares or distributing them for six months because of an underwriter-imposed lockup.

Once they were free to trade, venture capitalists preferred to distribute the shares to limited partners, passing on the responsibility of deciding how and when to exit the position to the pension funds or sovereign wealth funds that had given the VCs the investment funds in the first place. Distributing the shares offered several other advantages. It was tax-efficient. There weren’t transaction costs like commissions. And VCs could distribute the shares at a high price.

Venture capitalists didn’t have trading desks or the expertise to know when or how they should trade the shares in the aftermarket in a way that would maximize their returns. They also couldn’t distribute the shares prior to the listing. The agreements with their limited partners prohibited them from making a distribution until the shares could be declared a liquid asset. A liquid asset was usually defined as one that was quoted or traded on one of the primary exchanges.

The confluence of factors presented a problem for Slack’s direct listing. The company’s venture capital backers would have to figure out how to sell their shares in the direct listing.

Slack’s three largest VC investors—Accel, Andreessen Horowitz, and Social Capital—agreed to jointly hire Cooley LLP to advise them on what they could or could not say to one another. The three firms had struck a gentleman’s agreement that they would each agree to sell up to 15 percent of their holdings on the first day. It wasn’t a legal or contractual agreement, but rather an understanding that if Slack was going to go ahead with a direct listing, its investors would provide some shares to sell.

The government shutdown finally ended on January 25, setting the mark for the longest in history. With government officials back to work, the SEC began to process the backlog of filings.

On February 4, Slack said it had filed confidentially with the SEC to list shares to the public. That month, Peloton, the maker of internet-connected stationary bikes, started interviewing banks for its own IPO, joining a charge of unicorns that now included Slack, Uber, Lyft, and Pinterest preparing for the public markets. Palantir and Airbnb waited in the wings, though neither company filed with the SEC.

As the months went by, Slack’s investors huddled with Morgan Stanley to gain an understanding of how they were going to sell shares in the direct listing.

On Friday, April 26, the company released its much-anticipated listing prospectus, publishing its financial results for the first time. Annual revenue in the twelve months through January had risen 82 percent to $400.6 million, up from just $105 million in 2017. Losses remained elevated, $140.7 million during the twelve months through January because of continued investments in marketing and sales, but better than the $181 million the prior year. Daily active users surpassed ten million at the end of January. Paying customers grew by 50 percent, to 88,000.

Slack also said it still had $841 million of its $1.2 billion in venture funding in the bank.

The filing gave a rundown of the company’s largest shareholders. Accel owned 24 percent, while Andreessen Horowitz held another 13.3 percent.

Butterfield and Cal Henderson, a cofounder and the company’s chief technology officer, owned 8.6 percent and 3.4 percent of the company, respectively. According to calculations conducted by the Financial Times, Accel’s stake was worth $3.1 billion, while Butterfield’s was worth $1.1 billion.

Slack said that it would list on the New York Stock Exchange with two classes of stock, a setup that was becoming more popular because it locks in the supermajority voting rights for the founders. The Class B shares had been trading in the secondary market within a range of $8.37 to $23.41 in the year ended January 31. The shares had traded privately at $23.50 in March. They were trading even higher on some secondary exchanges.

The following Monday, the We Company, owner of WeWork, joined the rush to enter the public markets, announcing a confidential filing it had submitted to the SEC the previous December. (The document would only become public later, in August, when media outlets and institutional investors questioned the sustainability of its business model. WeWork later pulled its IPO.)

On May 13, Slack held its investor day from San Francisco, putting on a presentation it streamed to the internet for anyone to see. Butterfield opened with a similar joke to the one made by Vogel about the SEC’s safe harbor provision. The Slack executive said it was one of his favorites, and then read the first couple of lines as fast as he could before stopping to let the audience look at it.

Once Butterfield got into the meat of the presentation, his pitch was simple. Slack or other corporate messaging apps would eventually replace email. “This shift is inevitable,” Butterfield said. “We believe every organization will switch to Slack or something like it.”

Slack also posted financial estimates for the three months through April. The company brought in revenue of about $134 million, an increase of 63 percent over the previous year’s period. Slack also shared some worrying figures, however. The company’s paid subscription base grew just 8.6 percent in the fiscal fourth quarter from the prior quarter, below the average of 11.2 percent over the last seven quarters.

As Slack readied for its public debut, other high-flying tech startups were struggling to navigate the public markets. Shares in Lyft and Uber traded below their IPO price. Pinterest plunged by 15 percent in after-hours trading on Thursday, May 17, after the company reported a first-quarter loss of $41.4 million. Its shares were still above their IPO price, as were Zoom Video Communications Inc.’s, though shares in the videoconferencing company had given up many of their gains.

Nonetheless, May became the busiest month for IPOs since September 2015, with companies raising $15 billion. Another ninety-seven private companies in the United States had a value of $1 billion or more.

On Tuesday, June 11, 2019, Slack provided guidance to investors that it expected its revenue to surge as much as 50 percent—to $600 million—in the current fiscal year. It also said it would begin trading the following week under the ticker symbol WORK.

The following Wednesday, June 19, the New York Stock Exchange published its reference price for Slack—$26—valuing the company at $15.7 billion.

The next morning, Butterfield rang the bell at the New York Stock Exchange.

He also sat down for an interview with CNBC’s Andrew Ross Sorkin before the stock started trading. Wearing a buttoned-up slate-blue suit over a white t-shirt, he sat on an outdoor stage that the network had set up across Wall Street from the NYSE, at Federal Hall.

Butterfield spoke rapidly as he answered Sorkin’s questions about why Slack had chosen a direct listing. Behind the Slack founder, the marble facade of the NYSE building was draped in a purple flag bearing his company’s logo. Butterfield was minutes away from becoming a billionaire.

“The big thing for us was—in a traditional IPO, it’s the company that’s offering shares and you might raise, you know, a billion dollars, or something like that,” Butterfield said. “When you raise a billion dollars you dilute existing shareholders by issuing new shares. So we’re not doing that, we are just opening it up for trading.”

Sorkin pointed out that the chief reason Slack could do this was because it had about $800 million in the bank. “So this is unusual, not a lot of companies can actually pull this off,” he said, adding, “but also, you’re rewriting the model to some degree. Wall Street, I imagine, did not like this.”

Butterfield, his voice rising in pitch, pushed back.

“Everyone says they like it. We’ll see… I don’t know how much they really like it,” he said, smiling softly before going on.

“I think there are a lot of investors who are used to a model where they get this small allocation and they wanted a big one,” he said. “In a direct listing, at least they have the opportunity. I mean, I think you saw that with Spotify, some early institutional investors taking huge positions on Day 1, whereas in a traditional IPO they might have only got $25 or $50 million.”

Sorkin moved the conversation to fees, asking Butterfield how other companies considering something like this—and he name checked Airbnb—should think about the fee savings.

“The savings weren’t that great, to be honest, and that’s certainly not the motivator,” the founder said. (The company would pay its advisors $22 million, compared to the $85 million that Snapchat paid its advisors when it went public in a traditional IPO in 2017.) Butterfield explained that the company liked the direct listing because it didn’t require issuing new shares to raise money it didn’t need. The stakes of existing investors weren’t diluted. “The big one for us was not having to raise the capital.”

Butterfield stared off-screen for a couple of moments before continuing his answer. “One of the hopes for a company like us is that there is not too much volatility. And we are hoping that with this model, where there are many sellers and many buyers, supply and demand, we reach a market clearing price a lot earlier.”

Sorkin mentioned the fact that there is no lockup in a direct listing. Butterfield, for example, could sell shares if he wanted to. The founder said that SEC rules forbade him from buying and selling at whim, and acknowledged that he was selling a small stake in the direct listing. Sorkin then asked whether the direct listing—the fact that Slack was soon to be public—would change the company.

Butterfield demurred, shaking his head. “It’s a big day. It’s a nice moment, especially a nice moment for the team to show some appreciation and recognition from one another for all the hard work.

“We spent the last couple weeks writing thank-you notes to customers and sending them out so that they hopefully would arrive around today. But we’re low-single-digit-percentage penetrated into what we think is an enormous market. There are ten million daily active users, but there are a couple hundred million whose working lives are mediated by email and they would all be better off with Slack or something like it. So that’s the focus.”

Sorkin wrapped the segment by asking Butterfield about valuation, and how investors should think about the company’s slowing growth.

“I’m not going to give them advice on that—we’re still in the quiet period—but I would say this. In fiscal 2017, $105 million in revenue, ’18 was 220, last year was a little over 400. We’ve guided to 590, 600 for this year. So those are big numbers, and these are numbers that wouldn’t have been private companies’ numbers before. We are beginning to get to scale, so the percentage growth, you have to balance that with the absolute number of dollars coming in.”

At just past midday in New York City, Slack’s shares began trading at $38.50. The opening price indicated a 22 percent gain from its highest private market price, a modest premium. Later that afternoon they hit $42, giving Slack a market capitalization of more than $24 billion once all shares and options were counted. One hundred thirty-seven million shares changed hands that day, with the share price closing $38.62.

The listing made Butterfield’s shares worth an estimated $1.6 billion.