SPACs undergo fast evolution as they outpace traditional IPOs

Special purpose acquisition companies, or SPACs, are all the capital market rage right now, easily outpacing traditional IPOs. But, with great volume comes great pressure.

Why it matters: SPAC structures, which had remained stable for more than a decade, are quickly changing.

Background: SPAC sponsors traditionally get two things upfront...

1. Around 20% of the SPAC's common stock, post-IPO, known as founder shares.
2. Warrants to purchase more common stock, exercisable at a fraction of a common share.

Quick take: This has obviously been a pretty sweet deal for the sponsors, assuming they eventually consummate an acquisition. Not quite money for nothing, but not too far off.

Yes, but: What's happening now is downward pressure on those terms.

• Most of this has been on the warrant side, where sponsors once were able to redeem for upwards of 2/3 of a common share.
• Goldman Sachs, for example, recently dropped warrant coverage on a sponsored SPAC from 1/3 to 1/4, and Kevin Hartz's new SPAC began at 1/4.
• Bill Ackman's recent SPAC, which raised a record $4 billion, did away the upfront founder shares concept altogether. Instead, it gets paid more like private equity carried interest, inclusive of a hurdle rate.
• It's hard to see too many others following him down to zero, but don't be surprised to see 20% become an artifact.

Driving the news: Part of it is simple supply-and-demand competition, given the SPAC spike. But part of it is an influx of a new class of sponsor, including investors who view the SPAC landscape as if it were an orchard in what would later become Silicon Valley.

• "I think this is a revolution, and [changing the terms] could break the backs of lots of these opportunistic carpetbaggers," Hartz says.
• He adds that SPACs are "just in the top of the 1st inning," and that many well-known Silicon Valley venture firms are exploring sponsored SPACs.

The bottom line: If you don't like what you see from SPACs right now, just wait a couple months.