As more well-known tech companies get listed without an IPO successfully, more buzz grows about the shiny process that allows them to do so — direct listing.

Unlike in a standard IPO, in a direct listing, the company sells its shares directly to investors without investment banks acting as intermediaries in the process.

The stock’s opening price is, therefore, a consequence of market-driven price discovery, as opposed to set by banks or underwriters, that select the level based on a collection of indications of interest that investors put into an order book.

Spotify was a widely discussed example back in 2018, Slack followed with another high-profile direct listing in 2019, and Airbnb is expected to do the same in the near future as well.

But the latest company to achieve this is Palantir, the data analytics firm co-founded by the controversial investor Peter Thiel.

Despite a small drop in its first day of trading and versus its highest private valuation, Palantir pulled an overall success by quoting at a $15.8 billion market cap on its debut.

So why do I argue that Palantir’s debut is the best proof of why direct listings aren’t the ideal process for new shareholders?

Palantir said it from the start — they are different

Founded in 2003, Palantir was until a few months ago a notoriously secretive company.

In part, because some of its main clients are government agencies like ICE or the CIA. The latter was even one of Palantir’s first investors, through their Venture Capital arm, Q-Tel (who knew that the CIA had a venture fund, right?).

But as confidential fillings started unveiling the firm to the world, their management team was adamant in saying — they are unlike any other Silicon Valley company.

After stating back in 2019 that “Silicon Valley is in a bubble”, Palantir’s CEO and co-founder Alex Karp went one step further in a letter to investors, claiming that engineers in the Valley “do not know more about how society should be organized or what justice requires”.

In Palantir’s CEO’s view, the company is a completely different beast to other Silicon Valley behemoths, because they do not mine consumer data to sell advertising. Instead, their software is used to “enable more effective surveillance by the state”.

Palantir does recognize working with government agencies on surveillance software may earn them unfavorable media coverage — one of its founders Peter Thiel is no stranger to controversy, as he serves as one President Trump’s closest business allies — but they are happy to stand proudly alone.

Especially because their CEOs believe they share “fewer and fewer of the tech sector’s values and commitments”.

But hey, there’s nothing wrong with differentiation, right? That’s a key trait of the investment case of any company aspiring to go public, tech, or otherwise.

The only issue is that the same uniqueness is used to justify exceptions that may be harmful to minority shareholders who will now be able to buy into the stock.

Palantir threw the corporate governance rule book out of the window

Palantir’s CEO view is that investors are better off investing in founder-driven companies. So the company went to great lengths to make sure it stays that way — by setting up a unique three-class structure that guarantees the three founders will hold 49.99% of Palantir forever.

Even if they sell the shares.

Called out by the SEC, Palantir clarified in a revised filing that indeed their shareholder structure may eliminate any weight public shareholders could have on company-changing decisions. By concentrating at listing their voting power on its three founders, Palantir is effectively stripping its new shareholders of the ability to have an input into the company’s future corporate governance.

In yet another move to ensure the company’s three founders continue to run Palantir with as little outside influence as feasible, they have also flagged to the public they will have a full year without an independent-led board of directors, despite having already appointed three independent directors that could be a step in that direction.

Demanded by the NYSE, most companies choose to comply with this rule at launch — precisely because it shows new shareholders there are checks and balances in place to prevent the management team to go untamed. Palantir, however, will maximize this rule’s transition period, extending the unprecedented corporate governance setting at IPO.

Ultimately, Palantir was very transparent at every step of the way in saying that minority shareholders have little sway in how the company will be run.

In fact, Palantir doesn’t even have an investor relations page.

What’s the big deal?

It’s true that, in some part, tech firm founders have protected themselves through special voting rights for a while.

Snapchat sold shares with no voting rights back in 2017. Zuckerberg remains protected by an outsized voting power versus his ownership of Facebook shares.

But the jury is still out on whether having companies run as “uncontested monarchies” without any input from shareholders is the best avenue for long term value creation.

In fact, examples like Snapchat’s IPO were the driving force for bankers and institutional investors to push for the reduction of the impact of special voting shares.

Palantir’s direct listing allowed the founders to impose more restrictive limits on voting power without needing to go through the tough questioning that an IPO process would guarantee.

The floodgates have been open, and it could get dangerous

Palantir has proven that by opting for a direct listing rather than a traditional IPO, it successfully diminished the level of scrutiny on its corporate governance framework.

In turn, this allowed them to get away with a shareholder structure that grants the founders control of the company, even if they hold as little as 6% of the company.

With very limited pushback.

The danger lies not in Palantir’s exclusive track record in the stock market, but in the signal it sends to all aspiring public companies across the world — you can get away with very unfriendly shareholder structures if you go public via the direct listing route.

As NYT’s Deal Professor put it, Palantir did it, but everyone else took notice as well.

We, the potential minority shareholders, might be the ones left to deal with fallback if it becomes the norm.