Lightspeed, a Silicon Valley venture capital firm, was the first institution to invest in Snap, the company that popularized disappearing messages, and it is now set to reap more than $1 billion from what began as a mere $485,000 investment.
But the big money for Lightspeed masks a complicated tale between the venture firm and Snap, the parent company of Snapchat. It is a story that offers a peek into the often opaque world of venture capital, into how start-ups begin and into the politics over money that accompany the relationships between companies and entrepreneurs. It is not a story that many of those involved want to discuss, especially with Snap executives now on a heavily hyped investor roadshow ahead of the public offering.
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One of the biggest questions that Snap has faced from potential investors is why its two founders, Evan Spiegel and Bobby Murphy, have retained such a hold on voting power in the company — power that public shareholders will not gain. Exploring that question helps explain how years-ago dealings with venture capitalists helped lead to this point.
At the heart of that is a Lightspeed venture capitalist, Jeremy Liew, and the terms he embedded in his 2012 investment in what was then known as Snapchat. The terms gave Mr. Liew outsize power over the company's future financing rounds. That ended up irking Snapchat's chief executive, Mr. Spiegel, who took steps to reassert control over the company.
The end result was a largely severed connection. Today, Lightspeed is listed in Snap's I.P.O. prospectus as the company's second biggest venture investor, with 86.6 million shares, or a stake of more than 8 percent, and Mr. Liew has appeared on television shows, podcasts and in technology publications to discuss Snap. Yet he and Snap no longer have a close relationship, and Mr. Spiegel has not been in touch with Mr. Liew in the years since the early investment rounds.
This account is based on interviews with four people who were involved in or briefed on Snap's funding history, and who asked for anonymity because the details are confidential. Representatives for Snap and Lightspeed declined to comment, citing Security and Exchange Commission "quiet period" rules.
Mr. Liew and Mr. Spiegel met in March 2012, when Mr. Liew used Facebook to contact Mr. Spiegel, a Stanford University student who had recently started Snapchat with Mr. Murphy, a fraternity brother. During the meeting that followed, Mr. Spiegel mentioned that his father was tired of paying the bills for Snapchat. Mr. Liew said he could help.
Mr. Liew offered to invest $485,000 in Snapchat, which Mr. Spiegel and Mr. Murphy accepted. The investment was completed in less than two weeks.
What Mr. Spiegel and Mr. Murphy paid less attention to were the exact terms that Mr. Liew had embedded in the deal. Those terms gave Lightspeed the right of first refusal to invest in future rounds of funding and the ability to increase its share of the company in those rounds. Lightspeed could also take 50 percent of future rounds.
Such terms effectively let Lightspeed have veto power over investments at Snap. It also made Snap an unattractive investment for other investors — who would not be able to take as large a stake as they would like in the company.
The provisions soon became an sticking point. A few months after Lightspeed completed its investment in Snapchat, another Silicon Valley venture firm, General Catalyst, became interested in investing in the company. General Catalyst said this month that it had offered Snapchat $2 million to $3 million, putting the company's valuation at $22 million.
Mr. Liew's terms prevented the deal. A General Catalyst spokeswoman declined to comment for this article.