After Reddit IPO, clock is ticking on CEO's 'strange' bet on the stock's performance

By Jeremy C. Owens

Already one of the most highly paid CEOs in the U.S., Steve Huffman will get a bonus of more than $20 million if Reddit's stock can maintain a $5 billion market capitalization, which would only increase his outsize voting power over the company

Now that Reddit Inc. is a public company, Chief Executive Steve Huffman is set to make millions - and even more if the stock manages to hold its value.

As a founder of Reddit (RDDT) and its chief executive for nearly the past decade, Huffman holds a confusing maze of stock and options in the company. His compensation has received a lot of attention in the run-up to Reddit's initial public offering - in its IPO paperwork, Reddit disclosed that Huffman received $193 million in compensation last year, which would make him one of the most highly paid CEOs in America.

For context, only one CEO of a public company had 2022 compensation higher than Huffman's 2023 total, according to Equilar. Alphabet Inc. (GOOGL) CEO Sundar Pichai received nearly $226 million in compensation; the next highest total in 2022, at just more than $182 million, belonged to Hertz Global Holding Inc. (HTZ) CEO Stephen Scherr.

But that $193 million includes shares that Huffman won't see for years and may not ever receive at all, thanks to the vagaries of how executive compensation is calculated. As far as the options he's already received go, about half are dependent on Huffman remaining in his position at Reddit for the next few years, and the other half require the share price to gain strongly to make them viable.

Huffman is cashing in on Reddit's IPO immediately, though. The CEO planned to sell 500,000 shares in the offering - about a third the number of shares Reddit sought to sell to its users - for $17 million. And he received even more shares than that, roughly 562,000, that he earned through a 2016 equity award.

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And then there's perhaps the strangest CEO award in at least a decade. Beyond the $17 million in cash and roughly $19 million in stock that Huffman is receiving as a result of Reddit's offering, he will receive shares worth more than $22 million at the IPO price - but only if Reddit can maintain a $5 billion market capitalization for two weeks out of next five months or so.

According to the IPO prospectus Reddit filed with the Securities and Exchange Commission, Reddit's stock must maintain an average closing price that reflects a $5 billion market cap for 10 consecutive days in order for Huffman to receive more than 660,000 shares. And, in a footnote buried deep in the prospectus, there is a deadline of Aug. 14, so if Reddit does not hit that number in that time frame, Huffman would not receive the shares.

MarketWatch asked Reddit earlier this week to confirm the deadline and other aspects of Huffman's compensation, but representatives noted that there is a quiet period associated with the IPO and declined to answer. After Reddit stated its IPO price and Huffman gave an interview with CNBC, MarketWatch asked again and received no response.

It seems odd that a company would so richly reward its chief executive for maintaining a market cap that is about half what the company was reportedly privately valued at less than three years ago, and less than the some $6.5 billion market capitalization Reddit earned in its IPO. Incentives for executives are expected to be much harder to obtain than that in order for them to receive millions in stock.

"It's strange, it's unusual," said Olga Usvyatsky, an accounting expert and former vice president of Audit Analytics. "Typically when you see a performance metric, it's supposed to be at least somewhat challenging. There is supposed to be difficulty in achieving that metric. ... Unless the stock plummets significantly, that metric will be achieved."

Mary Ellen Carter, an accounting professor at Boston College who specializes in executive compensation, agreed.

"I have not seen something like this, and this does sort of seem like it's a target that's not really a meaningful target. It seems like what the board wanted to do was just give him the shares," she said in a telephone interview Thursday.

More on the Reddit IPO: Live updates from the first day of trading

For Reddit to obtain a $5 billion market cap according to the standards stated in the IPO prospectus, shares must trade roughly between $30 and $32 at the low end, though the target could move based on if Reddit sells the additional shares available to underwriters, known as an overallotment or "greenshoe." Reddit sold its shares in the IPO at $34 apiece, and shares jumped as much as 70% in their first day of trading Thursday before closing at $50.15, which was 47.5% higher than the IPO price.

But the shares are far from guaranteed to stay at that level. Take Instacart as an example of how Huffman might not receive these shares. Instacart's parent company, Maplebear Inc. (CART), went public last year, and like Reddit, it was a mature technology company that had put off an IPO for years as it sought to improve its financial performance.

When Instacart went public at $30 a share, shares shot up 40% in their first day of trading. But the stock dived lower than the IPO price within a week and stayed lower than that price for roughly five months - the same period of time that Huffman has been given to achieve the incentive.

Receiving those shares would certainly boost Huffman's personal net worth, but they are also important because of the power they convey to the CEO. Huffman would receive class B shares, which would give him 10 votes apiece, while the stock that Reddit is selling to its users and the general public conveys only one vote per share.

Huffman already owns more than 4 million class B shares, which give him about 3.3% of the company's voting power. But he has also reached voting agreements with two of Reddit's largest investors - former owner Advance Publications, the parent company of Conde Nast, and Chinese gaming giant Tencent Holdings Ltd. (HK:700) - that collectively give him 43.7% voting control of Reddit. If he is able to obtain many more class B shares, he could have a majority of the voting power.

While this stock structure has grown increasingly common in Silicon Valley over the past couple decades as tech companies have sought to give their founders as much power as possible, it seems to go against Huffman's own rhetoric regarding Reddit's IPO. He has repeatedly sold the IPO - including Reddit's pitch to get its users to invest - as a way for users to be owners of the company who can determine its future path.

"We want this sense of ownership to be reflected in real ownership - for our users to be our owners. Becoming a public company makes this possible," Huffman wrote in a letter published within the IPO paperwork. "With this in mind, we are excited to invite the users and moderators who have contributed to Reddit to buy shares in our IPO, alongside our investors."

For more: Why this Reddit moderator is buying into the platform's IPO

"We invited a number of our users and have a healthy retail component beyond that. And our goal there was to bring in, I think - as is the ethos of Reddit - level the playing field, bring people in on the same terms that professional investors would. And so it's a free market," Huffman told CNBC on Thursday morning.

While Huffman is free to pitch his IPO as a democratic, community-minded effort, the fact that he's selling his own shares to investors while racking up millions in shares with higher voting rights belies his stated goal to "level the playing field." As Reddit is structured as a public company, Huffman is the "god mod," with more power than anyone and a growing number of supervoting shares that will only increase if Reddit's stock doesn't tank in the days ahead.

For more on the Reddit IPO, check out this week's On Watch by MarketWatch podcast, hosted by Jeremy Owens.

-Jeremy C. Owens

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03-23-24 0611ET

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