Robinhood files IPO filing showing co-founders Tenev and Bhatt set to make billions

By Sergei Klebnikov, Eliza Haverstock and Antoine Gara

Robinhood, the pioneering commission-free stock trading mobile app, filed its much-anticipated initial public offering on Thursday afternoon, disclosing $ 959 million in revenue for 2020 as the retail industry exploded, up 245% compared to 2019.

The S-1 file also revealed an incentive restricted stock plan that could net co-founders Vlad Tenev, 36, and Baiju Bhatt, 34, billions of dollars in the years to come. At the end of May, Robinhood’s board of directors approved grants of 22,200,000 and 13,320,000 restricted shares to Tenev and Bhatt, respectively, which will vest more than eight years after its IPO depending on the performance of the shares. of the society.

If Tenev and Bhatt each hit price-based stock milestones, which range from Robinhood hitting $ 120 per share to $ 300 per share, the total price could be worth around $ 7.5 billion. Tenev is expected to earn around $ 4.7 billion, while Bhatt is expected to earn over $ 2.8 billion.

Tenev and Bhatt, who met as undergraduates at Stanford University in 2005, are already billionaires, first appearing on the Forbes list of billionaires last year, when the app was valued at over $ 11 billion in a fundraising round in August 2020. (Each co-founder has an estimated 10% stake in the company, which gives them a net worth of $ 1 billion, respectively, according to Forbes estimates. Robinhood’s S-1 file did not disclose details of its ownership structure.)

Another nugget from Robinhood’s IPO filing is the disclosure of a thorough investigation into the trading restrictions it put in place amid a spike in memes stocks in early 2021.

According to his S-1, CEO Tenev and others at the company have received information requests and subpoenas related to trading restrictions on stocks such as video game retailer GameStop and the movie chain. AMC Entertainment. These requests came from the United States Attorney General’s Office for the Northern District of California, the United States Department of Justice, the SEC, FINRA, the New York Attorney General’s Office, and other attorney general offices. States. Robinhood said in its prospectus that “a related search warrant has been executed by the USAO to obtain Mr. Tenev’s cell phone.”

The surveys highlight how Robinhood’s IPO and rising valuation comes at a time of rapid growth and deep problems for the company.

Since the onset of the coronavirus pandemic, Robinhood’s business has grown almost exponentially, bringing the total number of active users to 18 million, as millions of hidden millennials have turned to the mobile trading app. free to trade stocks and options during quarantine. Robinhood’s valuation also exploded after several fundraisers, with the company raising a total of $ 5.6 billion since the start of the year, according to Crunchbase. Secondary stock offerings in February, ahead of Robinhood’s IPO, have now given the company a valuation of up to $ 40 billion.

The app is at the center of an unprecedented increase in retail, especially with options. The total number of users now compares to established players like E-Trade and Charles Schwab after tremendous growth in 2020 and the first half of 2021. Strong user growth has helped Robinhood’s quarterly revenue almost eight times since last month. start of the pandemic from just $ 77 million in the fourth quarter of 2020 to $ 552 million in the first quarter of 2021.

Most of Robinhood’s income comes from trading in speculative markets. He made $ 285 million in income from options and cryptocurrency trading in the first quarter, which is two-thirds of his overall trading income. Additionally, trading Dogecoin, a speculative cryptocurrency created as a joke, accounted for 34% of Robinhood’s cryptocurrency trading. Other businesses are growing rapidly. Securities lending, the lending of clients’ shares to short sellers for a fee, generated $ 35 million in revenue in the first quarter, an increase of 448%. Interest earned on margin assets increased 254% to $ 27 million.

Due to its rapid growth, particularly in the riskier parts of the market, Robinhood has been besieged by technical issues and regulatory inquiries into the adequacy of its offerings.

A day before Robinhood’s IPO filing was approved, the company was fined nearly $ 70 million with regulator FINRA, which revealed how the company lost money. users’ money due to chronic outages during trading days and incorrect margin calls on millions of options. trades. “Despite Robinhood’s self-proclaimed mission to ‘demystify finance for all’, for certain periods since September 2016, the company has negligently communicated false and misleading information to its clients,” regulators wrote in a statement. Press release. Announced yesterday, the fine is the largest ever ordered by FINRA.

In June 2020, Forbes first reported that a 20-year-old Robinhood client committed suicide after seeing a negative balance of $ 730,000 in his account due to options trading. Two days later, the founders of Robinhood released a statement committing to tighten eligibility criteria, educational resources and UI upgrades for customers who trade options. The client’s family, Alex Kearns, sued Robinhood in February in a wrongful death lawsuit, brought in part because they felt the brokerage’s remedies were insufficient.

There is also a close examination of how Robinhood makes its money. Last August, a Forbes The survey explained how Robinhood generated the bulk of its trading income through extraordinary speculative options trades. Much of Robinhood’s business relies on selling its clients’ orders to titans like Citadel Securities. The so-called PFOF or “order flow payment” made up the bulk of the company’s revenue in the quarter a year ago, Forbes found, with options trading being the most lucrative. According to its S-1, over 80% of its income came from a handful of algorithmic trading companies Citadel Securities, Susquehanna International Group, Jump Trading, Wolverine Holdings and others.

In mid-December, the Securities and Exchange Commission fined Robinhood $ 65 million for failing to disclose, until the end of 2018, its trade agreements with these trading companies. Robinhood has neither admitted nor denied the SEC accusations. Litigation is an ongoing story for Robinhood as it becomes public. Its S-1 lists a total of 49 lawsuits and regulatory investigations into options trading, account takeovers, trading interruptions and its trading restrictions even.

To solve its pervasive problems, Robinhood has invested heavily in a much needed compliance and customer service infrastructure. However, these operational expenses come at a cost. In 2020, operating expenses climbed 246% to $ 945 million and in the last quarter alone, those expenses reached $ 463 million.

Robinhood’s flyer increases the risk that its user base has already peaked, according to its S-1. The latest figures for monthly and daily active users are down from their highs of around 20 million and 10 million, respectively. Today, monthly users stand at 18 million and daily users at 8 million, as of March 31, his record says.

Today, Robinhood competes with major discount brokers including Fidelity, E-Trade, TD Ameritrade and Charles Schwab, all of which have reduced their trading commission fees to zero. Robinhood’s startup rivals include Webull and Acorns, which announced a $ 2.2 billion PSPC deal in late May.

While Robinhood’s upcoming IPO may get the most attention, fintech startups of all kinds are clamoring for a taste of the public markets this year. Two examples: Debit card issuer Marqeta completed an IPO in mid-June that made the founder a billionaire, and Flywire, a company that helps organizations accept payments in foreign currencies, made the ‘subject to an IPO at a valuation of $ 3.5 billion in May. The first three months of 2021 set a quarterly record for fintech exits, according to CB Insights.

There is more to be had, especially for the founding couple of Robinhood. Launched in 2013 with the mission of “democratizing finance for all”, the co-founders of Robinhood are set to earn billions from their app as it becomes public. If Robinhood himself becomes the next big stockpile of memes to trade, he’s going to get customers to shop around. Robinhood said in its prospectus that it would reserve up to 35% of its IPO for clients to buy from the brokerage.