As Snap Inc. prepares to be a public company, there are concerns investors may not get voting rights, with recent media reports suggesting that may be the case. While it is a red flag, it's not illegal, say experts.

"When it comes to voting rights, I guess it goes to Delaware law, where Snap is incorporated," said Tom Taulli, JD and an author on initial public offerings, including the book, "High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders." "Delaware is very pro-management and if you want to incorporate, it's where the law is on your side."

A recent article in The Wall Street Journal stated that Snap, led by CEO Evan Spiegel, 26, and CTO Bobby Murphy, 28, is looking to raise funds as soon as March, which would value the company at $25 billion. However, public market investors would not get any voting rights with their shares, with the Journal citing sources familiar with the matter.

Illegal or Not?

This has led to some questioning over whether the structure, in which investors get no voting rights, is illegal, but that isn't the case.

"In terms of it being illegal, it's not illegal, but it might be a red flag," Taulli added. "It's definitely rare and generally, Delaware defers to what management wants."

Known for its secrecy about sharing information with investors, voting rights are just another example of Snap doing things slightly different than its tech predecessors, most notably companies like Alphabet Inc. (GOOGL) and Facebook Inc. (FB), both of whom have dual-class structures where management gets more voting rights than public market investors, but voting rights are still offered to institutional and retail investors.

The Journal noted that the setup likely stems from ones Snap had with its private market investors, who also received non-voting shares.

To date, Snap has raised $2.63 billion in eight funding rounds, including those led by hedge fund Coatue Management and venture capital firm Kleiner Perkins Caufield & Byers, according to Crunchbase. (For more, see also: Snap Inc. (Snapchat).)

Discount Unlikely

Though the structure has not been revealed to the general investing public yet (Snap has reportedly confidentially filed its S-1 document in advance of going public), it's unlikely to have an effect on the company's valuation, given the nature of the company and Spiegel, whom is being billed as the "next Steve Jobs," in accordance with his ability to understand what kinds of products his peer group—millennials—want. 

"If it becomes the next MySpace and there are serious problems with the company, then maybe there's a discount, but not at the IPO stage,"  Taulli said. "When fundamentals start to go against you, it's an issue, but when it's a hot IPO, it's at the bottom of the list of priorities." 


Spiegel has been credited with giving new life to not only the social networking space, where Snapchat now has more than 150 million monthly active users, but the hardware space as well.

In the summer of 2016, while simultaneously changing the company's name to Snap Inc. from Snapchat, Spiegel showed off the company's first hardware product, Spectacles, which have gone on to receive rave reviews from product reviewers. Originally selling for $130, the glasses, which let users instantly snap videos with the frames, were re-selling on eBay for as much as $1,000 soon after they became available. (For more, see also: Why Snapchat Quietly Acquired an Israeli Startup.)

For now, the company generates the majority of its revenue from advertising. Research firm eMarketer expects Snap to generate nearly $1 billion in advertising in 2017, up from an expected $366.7 million in 2016.