Afterpay delivers an unprecedented $426m bonanza to its US team — and has yet to turn a profit or pay a dividend

It’s not often that Australian entrepreneurs create a globally noteworthy start-up in the financial services space, but with buy-now pay-later outfit Afterpay we have certainly got that.

As things stand, Afterpay continues to power ahead with a current market valuation of $35.3 billion. This week it announced it was preparing for some form of US listing — the latest chess move that entrances the FOMO crowd.

In terms of funding its growth, Afterpay pulled off a remarkable capital raising last month with a $1.5 billion zero coupon convertible note, which is now trading on the Singapore exchange. Have a read of the full 120-page prospectus for that raising, particularly the 17 Afterpay-specific risks starting on page 12. That section leads off with a long explanation of the various risks under the headline “compliance with laws, regulations and industry standards”.

Remember, this is a company that has never made a profit or paid a dividend. It is effectively equity-funding a risky, unsecured loan book operating largely outside the reach of credit and banking regulators.

The $1.5 billion convertible note is at the very bottom of the queue in terms of security, so it is remarkable that investors were prepared to take it on without any interest payments for five years to compensate for the substantial risk. Then again, that $35 billion worth of market value would have to fully disappear before a default occurred.

Five years from now, it will be fascinating to see where the notes finish up. Will Afterpay end up writing a $1.5 billion cheque and redeeming them on March 12, 2026, or will they convert to ordinary equity at the lofty conversion price of $194.82? The stock closed at $125.03 last night.

With these cheap funds in the bank, Afterpay was able to proceed with buying out some of the minorities in its rapidly growing US business, which is now 91% owned by the company (up from 80% previously).

There was little transparency as to the identity of the US option holders who have just been deluged with more than $200 million in cash and a truckload of stock. However, thanks to some excellent investigative work by The AFR’s Rear Window columnist Joe Aston, we now know. Aston requested a copy of the share register before the US options conversion, compared it with the post-conversion register and then worked out who the biggest US option recipients were.

And boy, talk about some huge windfalls. Thirty of the key US staff in the San Francisco office together picked up a staggering $426 million in effectively free shares.

This absolutely dwarfs the earlier disclosures. As Crikey has previously reported, share windfalls were previously delivered in Australia to people like the Sydney PR consultant Brett Clegg and Scott Morrison’s mate David Gazard.

CEO Anthony Eisen has been doling out various forms of Afterpay equity like confetti to key players for many years now, giving away literally billions of dollars in value through dilution along the way (if you believe the current share price).

From a share selling perspective, it has been a case of so far so good. There have been no losers to date, besides people who sold out too early and left money on the table.

The critics have been wrong so far. For instance, Michael Pascoe argued articulately in The New Daily last year that Afterpay is a high-risk credit provider that has never made a profit, never paid a dividend and probably won’t ever manage either. But still, the stock keeps rising on the back of staggering global growth.

Pascoe was right that Afterpay is vulnerable to a regulatory intervention that overturns its policy of banning retailers from charging Afterpay customers a surcharge to pass on its typical 4% merchant fee.

It is also taking on the global payments industry and facing competition from a host of copycat start-up providers such as Tyro, Sezzle and Zip — but so far it is winning the market share war.

In order to make serious money, Afterpay will probably need to start charging retailers a larger commission, introduce interest changes for customers or crank up its fees for late payments. However, any aggressive move on these fronts would immediately crimp its staggering global growth — primarily in Australia, the US and the UK.

As this week’s update revealed, Afterpay now has a combined 14.6 million global customers accessing the products of 85,800 merchants to the tune of $5.7 billion worth of sales in the March quarter alone.

Afterpay is being valued as a fast growing global technology disruptor, rather than a risky credit provider. But even if the whole thing collapses tomorrow, the two founders have it made: they’ve sold more than $500 million worth of their stock to public investors over the past 18 months.

And now the core group of 30 US-based executives have just received $426 million worth of effectively free shares, further diluting the existing shareholders. This group never need to work again and could very well up stumps and leave, just like many of their predecessors.

As for the end game, the US listing may well open up options for a mega-merger of sorts. When your shares are flying, it makes sense to wheel and deal. And with Afterpay there is a seemingly continuous flow of stock issuing transactions… some of which will hopefully one day deliver profits and dividends.