How SPACs are changing the IPO game: Equity ownership of founders a big consideration

SPACs are hot right now, and one of the reasons is they can keep more equity in the hands of founders. (GeekWire Illustration / Canva Image, adrian825)

A few weeks ago, a longtime GeekWire reader sent a note expressing shock that Sana Biotechnology co-founder and CEO Steve Harr only owned 4.9% of the company after the completion of the IPO.

Given that the Seattle biotechnology company was on the cusp of a blockbuster stock market debut and now is valued at more than $6 billion, I responded that 4.9% of $6 billion seemed pretty good to me. After all, having a small slice of a big pie is often financially better than a big piece of a small pie.

That dialogue started an interesting back-and-forth about how much founders should own at the time of their IPOs, a discussion that has become even more interesting in light of the SPAC phenomenon that’s rip roaring through the startup and venture capital ranks.

That’s because a SPAC — a special purpose acquisition company — can expedite the path to liquidity for founders, early employees and executives.

Instead of pursuing a later-stage round of funding from venture capitalists or private equity investors — say a Series C or Series D round — a founder can choose to merge with a SPAC, essentially leapfrogging into the public markets earlier than they anticipated.

One result of this super-charged pacing is that the founding team can enter the public markets retaining larger chunks of equity. That’s an appealing lure, and one of the reasons why these so-called “blank check” companies are all the rage among the entrepreneurial set.

After all, those later stage funding rounds often result in the founding team losing equity. In other words, their pie piece shrinks.

Founders usually don’t like that. And so when a SPAC comes knocking, they can motivate to jump into the public markets faster.

Sujal Patel
Veteran Seattle entrepreneur Sujal Patel is taking his company public via a SPAC.

For example, take Seattle-based Nautilus Biotechnology. Last month, it decided to go public via a SPAC led by Arya Sciences Acquisition Corp III that would ultimately value Nautilus at $900 million.

Founded in 2016 by veteran Seattle entrepreneur Sujal Patel and Stanford University professor Parag Mallick, Nautilus only recently began sharing more details on its product vision. Patel, who previously led Seattle data storage company Isilon Systems to an IPO and later sold it to EMC for $2.25 billion, told The Information (subscription required) last week that the SPAC deal was faster and more efficient than hitting up venture capitalists for more money.

Since the Nautilus deal is still in the works, the ownership structure is unclear. But given the stage of the company and the fact that Nautilus bypassed the later rounds of venture capital, it’s likely that Patel and Mallick are hanging on to a larger ownership slice than if they’d chosen the VC path. Patel declined to comment for this story.

Patel’s SPAC foray is interesting, in light of the last company he guided onto Nasdaq. Like Nautilus, Isilon also went public five years after it was founded. The 2006 Isilon IPO filing listed Patel’s stake at 5.8%. Meanwhile, Isilon’s venture capital backers together owned nearly 80%.

The founder equity advantage recently played out with Luminar Technologies, which went public via SPAC in December and is now valued at just over $9 billion. Austin Russell, the 25-year-old founder and CEO of the Orlando, Fla. maker of autonomous vehicle software, held a 35% stake at the time of the stock market debut, making him a billionaire on paper the day the stock started trading.

Porch CEO Matt Ehrlichman. (Porch Photo)

And you can see this at play with Porch Group, the Seattle software company that went public via a SPAC in December. The 9-year-old company is now valued at $1.54 billion, and founder and CEO Matt Ehrlichman’s 20% stake is worth $308 million, with additional shares to be granted via an earnout if the entrepreneur hits future milestones.

SPACs still dilute the ownership stakes of founders and CEOs. For example, Ehrlichman owned 43% of Porch Group prior to the company’s SPAC merger.

However, the speed at which SPACs happen and when they occur in a company’s life cycle means entrepreneurs can hop into the public markets holding more equity.

For example, check out the the equity stakes of Washington state founders and CEOs who guided their companies to more traditional initial public offerings in the past two years.

  • Adaptive Biotechnologies CEO Chad Robins: 6.3% ownership prior to the IPO. (5.5% after the offering)
  • Accolade CEO Raj Singh: 6.4% ownership prior to the IPO. (5.2% after the offering)
  • Athira Pharma co-founder and CEO Leen Kawas: 9.3% prior to the IPO. (5.8% after the offering)
  • Sana Biotechnology co-founder and CEO Steve Harr: 5.6% prior to the IPO. (4.9% after the offering)
  • Silverback Therapeutics CEO Laura Shawver: 3.6% prior to the IPO.* (2.5% after the offering)
  • ZoomInfo co-founder and CEO Henry Schuck: 22.4% prior to the IPO (23.2% after the offering. Note: Combined voting shares)

*Note: Shawber was named CEO eight months prior to the IPO. The company’s co-founder Peter Thompson, who previously served as CEO and works as a venture capitalist at Silverback investor OrbiMed Advisors, held a 35% stake. 

The types of on-paper paydays seen by Russell and Ehrlichman highlight one of the reasons why SPACs are so attractive to founders. They are often faster, lighter weight, and in some instances allow the exec team to get liquid quicker before stock dilution takes hold.

And this gets to a larger question: What’s an appropriate amount of ownership for a founder to hold at the time of the IPO or SPAC?

That’s complex, notes Seattle venture capitalist Greg Gottesman.

Gottesman is a managing director at Pioneer Square Labs and co-founded Rover, which is planning to join the public markets via a SPAC valuing the online pet sitting business at $1.35 billion.

“Your percentage as a founder can vary meaningfully for a number of reasons,” notes Gottesman.

Those factors include:

  • The number of founders
  • Did the company bootstrap or raise outside funding?
  • How many outside rounds of financing occurred before the SPAC or IPO?
  • Was the company founded as part of a startup studio or accelerator?
  • How long did it take to go public?
  • Did the board refresh the equity of the founders with new option grants?

And Gottesman offers a bit of sobering advice amid this craziness.

“The other key thing to remember is that an IPO is a financing event, just one with a lot more fanfare,” he said. “It still may take a long time for the CEO or investors to achieve liquidity post-IPO, so focusing on the percentage or value of a founder’s equity stake post-IPO is interesting but may have little to do with ultimate value.”

He notes that Amazon founder Jeff Bezos was not the richest person in the world after the IPO, pointing out that “the value of his equity increased dramatically over time.”

Even still, SPAC mania continues. Just today, GeekWire reported on another SPAC, this one being led by Seattle entrepreneur Mark Vadon, the co-founder of Zulily and Blue Nile. And former Zillow CEO Spencer Rascoff today led a $300 million SPAC to the public markets under the name of Supernova Partners Acquisition Company II.

SPACinsider tracked 248 SPACs last year, a more than four fold increase over 2019. And this year the SPAC frenzy is accelerating with 204 SPACs generating gross proceeds of $64 billion. (Need I remind you we are just two months and two days into 2021).

In a story in The New York Times this past weekend titled Anyone Who’s Anyone Has a SPAC Right Now, reporter Steven Kurutz noted that Ciara Wilson, Serena Williams, Billy Beane and other celebrities are involved in SPACs, with the subhead of the story noting that the “once obscure financial maneuver becomes a celebrity flex.”

The buzz is indeed growing. A Seattle area investment manager bluntly told me last month: “this SPAC thing is off the charts.” We’ve chatted with startup attorneys and venture capitalists who say they can’t recall a time when things were so busy, in part due to the SPAC boom.

In fact, one entrepreneur and investor I connected with for this story apologized for not returning my email for several days.

The reason? He was too busy working on a SPAC.



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