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Palantir's public listing and voting structure, here's what you need to know

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss Palantir’s public debut, and the company’s public offering saga with Tech Crunch Managing Editor, Danny Chricton.

Video Transcript

ALEXIS CHRISTOFOROUS: We are watching two tech names today going public through direct listings-- big data company Palantir and workplace productivity app Asana. Now, Asana set a reference price valuing the company at around $3 billion. Palantir, though, could be valued at more than $20 billion by the time trading is done today. Here to talk about Palantir is Danny Chricton, Managing Editor at our sister publication, Tech Crunch.

Danny, I know that you have been tracking this Palantir public offering saga for months now. You've talked to a number of insiders and stockholders. They have a unique voting structure with this direct listing. In some ways, it almost seemed like this 17-year-old company is really kind of reluctant to go public. Can you explain for our audience what that process is like, what that voting structure is going to be like within Palantir?

DANNY CHRICTON: Of course, so I think, you know, over the last decade, most Silicon Valley companies have sort of defaulted to a two class voting structure, so a publicly traded class, where each share has one vote, and then a sort of insider class of trading, usually class B, which has 10 votes per share. And that was super controversial 10 years ago, but it's definitely become the norm, and we see that in most new tech IPOs today. Palantir pioneered a three class voting structure, a class with one vote, a class with 10 votes, and then a special class F for founder shares, which would have a variable number of votes to ensure that the three founders of Palantir, Alex Karp, Stephen Cohen, and Peter Thiel, would have basically, in the long term, complete control of the company, even if they were selling their own shares.

And we've never seen something like that before. It's unique to Palantir. No one's sort of ever pioneered a sort of three class structure, particularly with a class that has variable number of votes. And so for the last couple of weeks, we've been trying to figure out A, what exactly it means, and B, what does it portend for the future of corporate governance with so little control from actual shareholders?

BRIAN SOZZI: Danny, based on your reporting and what you know about the company, can Palantir be a successful public company given this corporate governance? And I ask that, because part of being a public company is taking input from stock analyst, taking input from shareholders. But if you're the three founders, who cares about any of those groups?

DANNY CHRICTON: Well, that's right, and I think a lot of shareholder advocacy groups have complained over the last couple of weeks. There were many questions at Palantir's investor day about the situation. What makes us unique is even when you have the two class structure with one vote and 10 votes, ultimately, the power of the founders to control the destiny of their company comes from their ownership in those shares. As they sell their own 10 vote per share options, they lose their voting power. What's unique in Palantir's case is that in the most extreme case, the founders may only own 2% or 3% of the shares of the company but control almost 70% of the voting power of Palantir.

And so for a lot of retail investors, I think the question you have to ask is, what happens when the owners of a company and the people who are in control are not the same? We're not used to that in public markets where mostly companies are democratized and most shares have exactly one vote. And so as a retail investor, I'd be very cautious, and frankly, you know, there's a little bit of a ceiling on the share price here, because I think a lot of pensions and larger institutional investors are going to be unwilling to sort of buy into this corporate governance structure.

- Danny, I want to ask you about the reference price, because in a traditional IPO, you have the IPO price. That's where investors get in before the shares list. Here we have the reference price, that's supposed to track where Palantir shares are trading on the private secondary market. So a month ago in their S1 prospectus, they said that these shares were trading at $9.29, but now the reference price is $7.25. That's a 22% drop in one month. Is there really investor appetite for these shares out here?

DANNY CHRICTON: I think that's a good question. I mean, you know, in the last 18 months for Palantir, the share price internally has averaged somewhere between $5 and $5.50. And so a 7.25 reference price is legitimately above where it was up until the last three months when the company was going IPO. But, you know, as you mentioned, the $9.16 price we saw on September 1 and then the rumors in "The Wall Street Journal" last week that said that they were looking at a $10 reference price give a sense that the markets may not have had as much appetite for these shares as maybe Palantir expected. Obviously, we'll know more as the company trades today, but I definitely don't think they got the valuation they were looking for.

ALEXIS CHRISTOFOROUS: Danny, one of the things that makes a direct listing so attractive is that it doesn't come with a lock up period that mandates how long investors need to hold onto their shares before they can sell them, yet, Palantir is pioneering this idea of a lock up period along with a direct listing. Why do you think they're doing that? What does that tell you?

DANNY CHRICTON: Well, obviously, when we've had other direct listings, Slack and today's Asana, a lockup is not included in that. Palantir did pioneer this, and I think a lot of it has to do with control. The company does have a shockingly large number of shares. Asana has a total cap table of about 150 million. Palantir fully diluted is nearly two billion shares. And so part of the answer is just controlling a little bit of the insider demand to sell.

I've talked to a lot of insiders and other shareholders, existing shareholders of Palantir, and, you know, there's just been a lot of fatigue. And so I think Palantir was concerned that in the opening weeks of trade, a lot of these insiders would sort of just dump their shares trying to get out. And that doesn't mean, by the way, that the company is poorly run or has huge operational problems, but this is a 17-year-old company. Many insiders have been there for a bulk of that period of time, and they're really looking to get out. And so I think Palantir, by using a lock up, is just trying to moderate that demand to sell over the coming months.

ALEXIS CHRISTOFOROUS: Yeah, looking for an exit strategy. We know it well. Danny Chricton, Managing Editor at our sister publication, Tech Crunch, thanks for your reporting on this.