Hi all,
I was intrigued by Saul’s last portfolio update, especially his 8% SNOW position. We all know that SNOW has incredible financials but also that the valuation is quite stretched. One reason for the high valuation that I heard is that there are very few of the overall shares trading and that the bulk of shares will be released after the lock-up period. I tried to find out how the lock-up agreement works and how many shares could be sold after the lock-up. But I found it hard to decipher the S-1, 8-k and 10-k statements. Here is what I found out so far:
First of all, Snowflake has two classes of common stock: Class A common stock and Class B common stock. Class A common stock is entitled to one vote per share and Class B common stock is entitled to ten votes per share; According to Snowflakes’s prospectus, there were 276.7 million shares outstanding after the IPO, 86% of which are Class B shares, giving Class B shareholders 98.5% of the voting power.
Class A common stock: 36,208,709 shares
Class B common stock: 240,486,119 shares
Total Class A common stock and Class B common stock: 276,694,828 shares
Of those 276.7 million total shares only Class A shares (14% of total shares outstanding) were sold to the public at the offering. Class B shares can also be sold and upon the sale of Class B shares, they lose their 10x voting power and are converted to Class A shares.
Now it becomes tricky. The lock-up expiration works in three steps:
1.) Dec 15, 2020: Current employees with a title below vice president, current contractors, former employees, and former contractors could sell a number of shares equal to 25% of shares. As of July 31, 2020, 25% of the outstanding Vested Holdings held by such holders was 11,295,695 shares.
2.) Dec 29, 2020: All other non-employee stockholders who are not members of the board of directors or our affiliates and whose shares were not included in the First Release, may sell a number of shares equal to 25% of shares. As of July 31, 2020, 25% of the outstanding Vested Holdings held by such holders was 37,904,494 shares.
So these first two steps are already behind us. Shares peaked around $390 on Dec 8th. The market already anticipated a sell-off because of the first lock-up. On Dec 15th, shares went down to $328. On December 29th, shares stood at $304. Currently, we are at $281. As you can see above, 36.2 mil shares were released in the IPO + 11.3 mil from the first lock-up window + 37.9 mil from the second window = 85.4 shares that could be in the market right now (+ any amount of class B shares that are not subject to the lock-up agreements - this is the number I’m not so sure about at the moment).
3.) The day following second public earnings (in March 2021) all remaining shares subject to the lockup can be sold.
The big question I have is how many shares were actually subject to the lock-up in the first place, i.e. how many shares will still be freed up in march?
If I read the above 2 points correctly
under 1.) 11.3 million shares were 25% of shares subject to the employee lock-up = the total amount of shares from that group would be 45.2 million;
under 2.) 37.9 million shares were 25% of shares subject to the non-employee lock-up = the total amount of shares from that group would be 151.6 million
→ this would mean 196.8 million shares were subject to the lock-up of which 49.2 (= 25.0%) can already be sold by employees and non-employees. If my understanding is correct, 147.6 million shares could be sold after the ER in March 2021.
Let’s put this all together:
276.7 mil shares in total outstanding from the IPO (that number already increased to 283.1 million
as of the last earnings report if I read the 10-k correctly)
- 196.8 mil shares were subject to the lock-up
= 79.9 mil shares not subject to the lock-up (I’m not sure if that number is correct!)
- 36.2 mil A-shares sold in the IPO
- 11.3 mil shares from the first lock-up window opening
- 37.9 mil shares from the second lock-up window opening
= 165.3 mil shares that can already be traded in the market right now (58.4% of total shares)
However, I’m not so sure about the 79.9 mil shares mentioned above not being subject to the lock-up. This is because the first two windows explicitly mention no executives and directors, who surely are also subject to some lock-up agreement. I found out that Snowflake’s directors and executive officers own approximately 27.9% of the voting power, which computes to approximately 68.1 million B-shares. I would assume that these shares held by executives/directors are also subject to the lock-up and can only be sold in the last window (March 2021).
With that assumption, there would not be 79.9 mil shares not subject to the lock-up but only 11.8 million at the time of the IPO so my calculation changes to:
276.7 mil shares in total outstanding from the IPO (that number already increased to 283.1 million
as of the last earnings report if I read the 10-k correctly)
- 264.9 mil shares were subject to the lock-up
= 11.8 mil shares not subject to the lock-up
- 36.2 mil A-shares sold in the IPO
- 11.3 mil shares from the first lock-up window opening
- 37.9 mil shares from the second lock-up window opening
= 97.2 mil shares that can already be traded in the market right now
→ 34.33% of total shares could theoretically already be traded in the market at this moment.
Either way, my take away is that there are still a lot of shares not traded on the market yet. Snowflake is a fantastic company with a bright future in my opinion. I want to own the stock at some point. Saul being as bold as he is and taking an 8% position raised my awareness. I’m sure many others on this board have started positions since the IPO.
My big question is to what extent the market is already anticipating the lock-up expiration and will the stock fall further before or after March 2021? Of course, no one can know that for sure but I would be interested in some opinions. Please also correct me if my facts or math above are wrong!!
Thanks and a happy new year to all!
Niki