Preference stacks

Lots of talk at the moment about preference stacks, and how crowd investors can get reduced to nothing unless companies are sold for the most enormous multiples. Could someone from Monzo comment on the current share structure, and how the crowd would fare at exit? Not that I’m expecting that to be soon, but be interesting to know whether we are already under such a risk.

For the uninitiated, could you expand on what preference stacks are, please? :pray:

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Wouldn’t the small print from crowdcube say ?

Here’s a good example…

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It might when you invest, but anything can happen later. That’s why a good current situation won’t necessarily last, but at least it reduces bad surprises.

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Do you have any other examples you can share that actually relate to what you said in your original post:

The example you’ve posted there is of someone who got shares as options when they worked for the company. So while it may be illustrative, it’s not directly relevant to your initial statement and doesn’t support the ‘lots of talk about crowd investors’ part.

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The principle is the same. Anything that is, or can become, an ordinary share carries this risk.

I’m afraid my other examples have been in person. Saw Peter Cowley mention it in a talk to crowd investors last night.

The share certificate you can download from Crowdcube states they are “Ordinary Shares” if that’s of any help.

Yeah I knew that - hence the question :wink:

As far as I remember, the letter that appears before each share class for Monzo shares only denotes which funding round it originated from.

And as far as I remember, all shares are treated completely equally bar one point, which is that Monzo employee share options (which I think are allotted to the Ordinary share class), can be authorised by Monzo to be sold during VC fundraising. This was mentioned in this blog post: https://monzo.com/blog/2017/11/20/share-options/

The threat you’re alluding to is still possible (but it is with practically any privately owned company).
It would involve Monzo proposing a change to the articles of association of the company, which would involve creating a new share class and finding a way of legally moving crowd investors only to that class by “splitting”. The vote would have to be passed, which would likely have to be most of the VC’s + senior team to make a majority. After that, future fundraising could dilute only crowd owned shares. See: The Social Network

You should take solace that this won’t happen with the following points:

  • Monzo is not a morally bankrupt company. They are a progressive, ethical, transparent company.
  • This would have to be passed by a lot of people/companies, all of which must lack morals.
  • The reputational damage would be so astronomical that the blowback is not likely to be worth what the crowd owns (likely <1%).

I’d personally say the likelihood of it happening is close to 0%.

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That is largely irrelevant, as the crowd do not have a controlling stake, and anyone with preference shares would be crazy not to vote in their own favour. Also the whole “blowback” thing might happen among crowd investors, but would be unlikely to be noticed by the other 3m+ people who care about Monzo.

The good news is that I just found this from the prospectus, which appears to show that there are no preferred shares anywhere, so hopefully it stays that way at least for a while. :smiley:

See:

The mainstream media have picked up stories for far less. You’d be very unwise to not expect the media would have a field day if something like that ever happened. Also, for an institution whose business relies almost entirely on reputation, it’d basically be corporate suicide.

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There’s nothing morally bankrupt about owning and exercising preference shares, especially where a company would cease to exist without your support. It’s pretty rare not to have any prefs, especially for VCs, but it’s pretty impressive if that’s the case.

Which firms have you seen go under due to the press picking up on some minority shareholders being annoyed?

Brewdog a good example of this. TSG investment has compound return guarantee. If that is not met then small shareholders are progressively wiped out to meet the guarantee depending on the exit price. Hopefully it’s not going to happen as Brewdog growing faster than the guarantee but you never know.

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Actually I thought they were a great example of the whole issue. Are you sure they’re still growing that much?

I happened to bump into their Head of Investor Relations in a departure lounge a couple of years ago and took the opportunity to ask him this very question. He said “We get that question a lot and we’re not allowed to talk about it…” If he can’t talk about it, I would fear the worst.

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I think it’s worth considering that Monzo’s popularity has been driven by it’s loyal cohort of early users, many of whom are investors, and this is a genuine USP. Even YC invested saying that it was it’s community that would continue to drive it’s growth. I doubt they would go to the effort of doing something as destructive as this to it’s crowd investor community.

Also, i’ve invested in three rounds, and hold ordinary A2, C and D shares, so wondering how they would move against a group of investors across these classes…?

Agree it would be crap for the crowd, and cause a bit of noise, but I’ve seen banks survive a lot more - e.g. HSBC caught running a global money laundering operation. As far as I know, they are still profitable, although hopefully some of their bigger cheeses are maturing behind bars.

Not sure I get your point about the “different” share classes. As was alluded to above, they are all Ordinary shares - they just have different names for the different rounds. If Monzo found themselves needing extra investment from people who insisted on preference, then AFAIK they could just issue preference shares, which would then go straight to the top of the stack in time for exit. This may require a vote, but the crowd only own 4%, and if the company depended on it, they’d be mad to vote against anyway.

Yeah considering their current crop of investors, i doubt they’d need to raise with investors that demanded preference shares. Monzo is hot property in the VC world, hence the impressive collection of VCs that has backed them.

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So far the growth in volume has been very strong. Just need to see a good valuation on listing in a couple of years!