On Wednesday, Bloomberg reported that food delivery service DoorDash is considering becoming a publicly-traded company next year. However, the firm, which has never made a profit, isn’t seeking to launch an initial public offering (IPO). Instead, its leadership is considering bringing the company to the stock market via a direct listing.
However, DoorDash’s plans might be complicated by a new investigation into its business practices.
Why DoorDash Wants a Direct Listing, Not an IPO
DoorDash has several reasons for favoring a direct listing over an IPO. For one, the company is hesitant to undergo the scrutiny required for an investor roadshow. With a direct listing, the firm wouldn’t have to issue new ownership shares. Nor would it need to market itself to new backers.
Furthermore, the firm’s executives also want to reward its long-time investors. If the company made an IPO, its stakeholders wouldn’t be able to sell their stock for 90 to 180 days. With a direct listing, early investors could unload their equity to the public right away.
Lastly, DoorDash doesn’t need the cash infusion of an IPO. Private equity firms and investors poured $1.1 billion into the company this year alone.
This wouldn’t be the first time something like this has happened. Other tech firms like Spotify and Slack went public via a direct listing for similar reasons. It’s also worth noting that highly valued firms like Peloton and WeWork have struggled after failing to live up to the hype of their multibillion-dollar IPOs.
Currently, DoorDash has yet to file for a public listing with U.S. regulators. In August, the company reportedly sought out $400 million in underwriting ahead of a planned 2020 IPO.
New Legal Challenge
Before going public, DoorDash will have to grapple with a new legal challenge. On November 19, Washington D.C. Attorney General Karl Racine filed charges against the company for engaging in deceptive trade practices. The District of Columbia alleges that the firm misled consumers about its tipping program from July 2017 to September 2019.
During that period, the service employed a controversial payment model wherein it used customer tips to subsidize its Dashers’ wages. After Recode published a story about the practice, the firm amended its policies to ensure that drivers received their entire gratuity and their minimum delivery earnings.
Racine believes that DoorDash deceived the public by not clarifying how its tipping system worked. As such, he’s suing the startup to recover millions in gratuities that it allegedly did not disperse to delivery personnel.
DoorDash told CNBC that it rejects the claims outlined in the D.C. Attorney General’s brief. The company contends that its Dashers have always received 100 percent of their tips. Moreover, the firm argues that an independent third-party organization reviewed its records and can affirm that it follows its stated payment policy.
It’s worth noting that DoorDash faced another lawsuit regarding its business practices in 2017. Two years ago, a group of Dashers sued the firm for misclassifying them as independent contractors. The corporation ultimately settled the matter with a $5 million payout.
Meanwhile, a host of franchises and independently-owned restaurants have also filed lawsuits against the delivery service.
Currently, DoorDash is being buoyed by a host of investor capital. However, the firm will have a hard time going public if it continues to fight lawsuit after lawsuit while maintaining an unprofitable business model.