Slack Technologies Inc., the company behind the eponymous workplace chat and collaboration platform, has filed to go public on the New York Stock Exchange under the ticker symbol SK.
But unlike other recent initial public offerings such as from Lyft, Uber, Zoom and Pinterest, Slack isn’t issuing new shares or using an investment bank to usher it onto the public stage. It’s doing a direct market listing, also known as a direct public offering, or DPO.
That means if you buy Slack stock, you’ll be purchasing existing shares of Slack directly from company insiders and early investors. And good old supply and demand will determine Slack’s trading price.
#dpo-help: Let’s chat
Slack’s DPO plans will have a familiar ring for anyone who tuned into Spotify’s public stock offering last year. The Swedish music-streaming service also opted to bypass Wall Street’s big banks and list its shares directly on the NYSE.
Be aware of the specific risks posed by Slack’s direct listing.
Doing a direct listing may sound like a rogue maneuver, but it’s completely aboveboard: All trading transactions will take place under the watchful eye of the stock exchange, and Slack is still bound by the same rules as companies that go public via the traditional IPO process. (Those rules include filing a registration statement, called a Form S-1, with the Securities and Exchange Commission, which Slack filed in April.)
That said, in addition to the general caveats about investing in a newly minted public company (read an IPO public service announcement here), investors should be aware of the specific risks posed by Slack’s direct listing:
1. Slack’s share price won’t be predictable
With a traditional IPO, investors know how many shares will be offered for sale and at roughly what price. Underwriting banks are hired to establish an initial price range for the stock, and that price range is made public before IPO day.
No underwriting bank is setting Slack stock’s offering price.
With a direct listing, there is no underwriting bank to set an offering price. Slack’s share price will be based solely on supply and demand — how much buyers are willing to pay and how much sellers are willing to accept.
It’s on the investor to determine what Slack stock is worth, but there is some precedent: In a round of funding in August 2018, Slack was valued at $7.1 billion, and during the fiscal year that ended Jan. 31, Slack shares traded for between $8.37 and $23.41 in private transactions. Yet even Slack warns against relying on these numbers, stating in the company’s S-1 filing that recent private trade prices “may have little or no relation” to the opening or subsequent trading price of its shares.
Without outside guidance to help you evaluate a company’s worth, doing your research becomes that much more important before you invest your money. (New to stock research? Learn the basics with our guide on how to research stocks.)
2. The share pickings may be slim
The aim of most companies that choose to do an IPO the traditional way is to raise money to fund operations. To that end, companies typically issue new shares for the IPO to hit a fundraising goal.
Slack is not trying to fill the company coffers through its IPO; no new shares of stock will be up for sale. Instead, its direct listing will give insiders — employees who were granted shares and private investors who backed the company in exchange for a stake in the business — a chance to fill their own.
If there’s a chaotic scramble for Slack shares, keep your cool.
How many stockholders will be hawking Slack shares on the NYSE on opening day? It’s hard to say. Insiders are under no obligation to sell their shares, which could make for scarce supply. Then again, those who are reluctant might be encouraged to unload some shares if Slack’s share price pops early in trading.
If there is a chaotic scramble for Slack shares, keep your cool. One of the most common ways investors hurt their own returns is by letting their emotions drive investing decisions.
3. Not all Slack stockholders will have equal rights
Investors who own stock in public companies are entitled to a say in certain corporate transactions that require shareholder approval. Typically, one share equals one vote on matters such as electing company directors, approving mergers or selling company assets.
But Slack has other plans: The company says it will operate under a dual-class stock structure, effectively setting up a shareholder hierarchy.
In the power seat will be company directors, executive officers and their affiliates who owned their shares before the company’s public listing. They will hold class B shares, which carry more voting power (10 votes per share), allowing them greater say in how the business is run. Investors purchasing stock on the NYSE will get class A shares, which allow just one vote per share.
Share class privileges don’t transfer when Slack insiders sell their shares: They’re required to convert their class B shares to class A before they sell.
Should you join #slack?
Don’t let all this talk about Slack’s unusual IPO plans distract you from the bottom line: deciding if Slack stock is worth adding to your portfolio.
The real work of an investor begins with researching the company and deciding if it fits into your overall investing strategy. (Don’t have an investing strategy? See our guide for how to start investing.)
If you decide to partake of Slack’s IPO — or buy shares at any point down the road — here’s a step-by-step explainer on how to buy Slack stock.