$MSTR Initial Preferred Stock Thoughts
Trigger Warning: Long Post.
Alright, lots of questions and info flying around out there so we might as well dig in a bit on the structure of the offering even if we don't have the final version yet.
There is a lot of optionality that comes with this offering, and I think with time people are really going to appreciate the power of having the Preferred class of stock for MSTR.
The Basics
The initial offering is for $250M and will be comprised of 2.5M Preferred shares under the ticker $STRK. This is most likely to feel out the initial market demand for this offering, and I will not be surprised if the offering is larger once the initial interest has been registered. The initial offering price (liquidation value) is set at $100 for this offering, and the offering is available to retain investors as well as institutions, funds, etc.
Each Preferred Share of stock is convertible into 1/10th of a share of Class A Common stock. This effectively creates a "strike price" on the offering at $1,000.
Dividends
The dividend on the Preferred Stock is 8% of the liquidation value. For simplicity you can think of this like the "par" value on a bond, and the dividend is locked against that value and not floating.
What this means in practice is that because the offering is price $100, the dividend is set at $8 annually. The dividend in practice will be paid on a quarterly basis at $2 per share.
This differs from what people typically look at as yield, so it is important to understand that distinction. Because the dividend is fixed at the offering price, if STRK trades at $200 then the "yield" will effectively be cut to 4% (but the dividend is still $8 per share).
The dividends have some optionality through both a toggle and a payment in kind mechanism. This basically means that MSTR can pay the dividend in either cash, Class A common stock, or a combination of both. In practice, the dividend will likely be paid in cash which will allow MSTR flexibility in how they deploy the ATM for any funding needed, but the optionality is there for either form of payment.
MSTR does retain discretion on whether dividends are paid, but in the event they are scheduled but not paid those dividends to accumulate and are still owed to the holders at a future date. There is a compounding effect built in here (i.e. additional dividends would be owed on the unpaid dividends), but we don't need to go that granular for now.
How will the Dividends get paid?
The dividends will get paid through either the cash flow of MSTR, the sale of common stock using the ATM, or other financing methods. More on this later.
Maturity Date
There is no maturity date, these are truly perpetual.
MSTR Early Conversion Call Provisions
There are also no early conversion provisions for MSTR (nothing like the 130% we have become accustomed to with the converts). Essentially, these are truly perpetual at the discretion of the Preferred Stock holders. There are some clean up clauses in the offering which would allow MSTR to call conversion on the remaining stock if they get down to $62.5M (25% of initial offering value) outstanding, but that's really it. The only other potential trigger is major changes in tax laws impacting the treatment of Preferred Stock, so this truly is at the discretion of the holders.
Premium
This offering is effectively collecting capital at a common stock price of $1,000 per share. As of the time I am writing this, the MSTR common stock share price is $337.40, so this means that MSTR is collecting capital at a premium of 196.4%.
For those wondering how I arrived at this, it's really quite simple. You simply take the total offering value of $250,000,000, and then you figure out how many shares of common stock the offering is convertible into. Since there are 2.5M preferred shares, and those shares are convertible into 1/10th of a share of Class A common stock, that means this offering has 250,000 shares of common stock associated with it once converted.
So from there we simply divide the offering by the common shares associated with it, and we arrive at $1,000 per share at the capital raising price.
Now the first thing you should notice about this is that it is MASSIVELY accretive to the Bitcoin per share metric. Far beyond even the best converts we have seen which had a 55% premium associated with them. But as I'm sure you can imagine, it isn't going to be quite as clean as using the 196.4% at face value. After all, there are dividends to pay here.
But what is important even with the dividends, is that they will now have the ability to either utilize cash flow for the $20M in annual dividends on this initial offering, or they have the ability to sell common stock at future values to fund the dividend payments.
For scale, raising $20M with the Class A Common Stock ATM essentially equates to MSTR turning on the ATM for 2 minutes. You'd never even notice.
So what is exciting about this?
Well for starters, the premium is initially huge. Even if common stock is used over a long period of time to fund the dividends, this has the potential to be massively more accretive than any convertible offering has been and definitely more accretive than the Class A ATM.
Now some of you likely picked up that they can actually issue these preferred shares in the future via an ATM offering. What you may not have considered is the long term ramifications here while you were sifting through all the yelling about "more ATMs!", or "this is just introducing even more ways to dilute!", or whatever the talking points were filling your feed.
But let's think about this logically for a minute. Once this offering is completed, MSTR could come back to the market with an S-3 filing and open up an ATM allowing them to issue more Preferred shares on this same structure. However, as with all ATM, they would be able to sell those shares at whatever the market price currently was.
So if the Preferred is trading at $115 per share, MSTR would collect $115 for every share they sell into the market now. This doesn't change the dynamics of the dividend, that share that they sell still only gets the 8% on the $100 liquidation value, so $8 annually.
But that's not even the exciting part really (and it will take a bit of time before they can likely use an ATM here due to some volume requirements needing to be met).
The exciting part is they just opened a potential off ramp from using the Class A common stock ATM for constant Bitcoin accumulation.
But now let's say they used the preferred offering. If they are issuing with an ATM, they will be selling those preferred shares at $115. So that means we need to divide that $2B by $115 to figure out how many shares of preferred we sold. I'll skip all the numbers, and just tell you it is 17,391,304 shares of preferred stock.
Let's just for fun say the Common stock is trading at $450 and the Preferred is trading at $115.
If they use the Common stock ATM, they will sell $2B worth of shares meaning they sold 4,444,444 shares of common stock to acquire that $2B in Bitcoin.
But that doesn't translate to how many common shares they essentially give up. As we know, preferred is convertible to common at 1/10 per share. So if we divide that total by 10 it means that we have "effectively" issued 1,739,130 common shares to raise the $2B.
That is 2,705,314 LESS CLASS A SHARES initially to raise the same $2B.
Now I know what you are thinking, they still have to pay the dividend. You are correct.
So what is the dividend on that $2B? Well, as we know it will always be $8 per share per year. So since we sold 17,391,304 shares the annual dividend would be $139,130,432.
So in this example, if the share price was $450 and never moved into the future, that would mean they would have more than 8 years before the same number of common shares would be issued from this offering as using the Common stock ATM.
If I assume that MSTR performs at 5% growth a year, this number of years extends out to 11 years.
At 10% it extends to 16 years.
If I assume MSTR performs at 15% growth a year, then I have no idea how far out it goes. I calculated it out to 62 years and it wasn't even close to breakeven yet and I'd be 100 years old so I figured that was far enough for me.
Now that is using linear math, so you can quickly see what happens here if performance early on gets anywhere close to even matching the expectations for Bitcoin over the next 5 years.
There is other flexibility as well. If conditions change they could always utilize convertibles to lock in funding for the dividend payments if so desired and if the premiums are attractive. And given the time frames and current improving political/regulatory changes we are seeing you could see an entire business transformation take place resulting in significantly increased cash flow making all this quite simple. I know people commonly view businesses as static and don't look at future optionality, but I am not one of those people.
These are just examples, but this treasury team is a creative bunch so don't rule out getting surprised over and over again by the structures they come up with.
MSTR is effectively creating 2 complimentary ATM products. One is used for the collection of capital at massively accretive values today, while the other is used to allow flexibility in funding the carrying costs of that capital.
So while there will always be a ton of people bearish on new developments and focusing on ways to make each change in strategy into a doomsday scenario, I find this to be an incredibly beneficial development that creates a ton of future flexibility to operate and execute the strategy.
If the demand is strong, and the market dynamics play out even remotely close to what I think could happen I could see a scenario where these start taking some of the convertible bond space for Fixed Income accumulation due to the lack of any point in time maturity risk.
So I think there is a lot to like here. I will be looking for the final structure/terms to be released and to see what the overall demand is on this first offering, but I'm not expecting any massive changes to the general terms of the offering with the potential exception of the amount raised.
We'll continue digging into the terms, and I'm sure people will start asking what would incentivize these buyers to convert into common, and we'll talk more about that once the offering is finalized. But this is an intriguing development which will give us lots to talk about and model out in the upcoming weeks and months.
As I always say, we may be a lot of things in this community, but bored is not one of them.
$MSTR Convertible Notes - Conversion Eligibility Watch
2027 Notes ($1.05B / 7,330,050 Shares)
Status: Eligible ✅
The 2027 notes have qualified for early conversion by the bond holders. In addition, these have also qualified for early cash redemption by MSTR.
2028 Notes ($1.01B / 5,513,489 Shares)
Status: Eligible ✅
The 2028 notes have qualified for early conversion by the bond holder. For these, it is 100% up to bond holder discretion and MSTR cannot call for cash redemption.
2030 Notes ($800M / 5,341,600 Shares)
Status: Eligible ✅
The 2030 notes have qualified for early conversion by the bond holder. For these, it is 100% up to bond holder discretion and MSTR cannot call for cash redemption.
2031 Notes ($603.75M / 2,594,310 Shares)
Status: Not Eligible ❌
We have had 16 closes above the $302.54 130% trigger price in the last 16 day. We need 4 more closes above $302.54 over the next 14 trading days.
2032 Notes ($800M / 3,915,200 Shares)
Status: Not Eligible ❌
We have had 18 closes above the $265.63 130% trigger price in the last 18 days. We need 2 more closes above $265.63 over the next 12 trading days.
Reminder: This is only tracking eligibility. There is no obligation for the bond holders to convert or for MSTR to redeem for cash (2027 are the only notes eligible for cash redemption).
There are many new people entering the $MSTR space which is great to see, but because of this I think it may be helpful to give a simplified example people can use and conceptualize from their personal life to understand at a high level what MSTR has been doing with their strategy.
Trigger Warning: It's long, but not as long as yesterday.
Income vs. Net Worth
These are 2 concepts that most people understand at least at a high level in their personal lives. For this example, we will consider your income to simply be the salary from your job.
Net worth is slightly more complex but is essentially what comprises your personal balance sheet (if you've never built one, please do). The formula for your net worth is quite simple, it is Assets - Liabilities = Net Worth. This is essentially saying the value of the items you own less any money you owe on those items (or in general).
The main categories that fall into the assets for most people would be things like cash, investments (401K, IRA, Brokerage, #Bitcoin, etc.), real estate, vehicles, high end jewelry and collectibles. There are many other items that are assets, but these are some of the big ones. When talking assets, it's often worthwhile to split out your "financial assets" from your other less liquid assets. This helps you to focus on categories individually when you are strategically deploying them to create more wealth (i.e. increase your net worth).
So when you are looking at your options to generate wealth, you are focusing on a combination of your income and your net worth. However, society has essentially told us that your value is tied to your salary and that this should be your sole focus. Every year when review time comes all employees stop what they are doing and look at ways to cleverly try to show their bosses their value in an attempt to get a raise. Often, those raises disappoint so people will shift their focus to opening a job search in hopes of increasing their salary that way. It's exhausting (i've done it too). Who has time for investing?
I'll give some unsolicited advice that I don't typically give. For the first decade of your career, hyper focus on your income (salary). This is where your assets will initially be acquired from. However, you have to make sure you don't allow lifestyle creep to take over and eliminate your "net" income (income left after paying your living expenses). This net income is what you can transfer to your balance sheet (through investments, acquiring assets, etc.).
The reason I say the first decade is because when you start out in your career, the most valuable asset you have to create wealth for yourself is time. Time is the magic input for compounding, and the more time your assets have to compound in value year over year the more impactful they will be to securing your freedom. So ignore everyone else buying flashy things or spending your time wondering how they could afford them (I can tell you, debt). Hyper focus on funding your retirement accounts, HSA accounts, brokerage accounts, buying Bitcoin, etc. These assets being in place early gives you a superpower that most people will not understand until they have lost the most value periods of time they have to kick starts the compounding engine.
After a decade of hyper focus on accumulation of assets, you can essentially let time take the wheel (this doesn't mean quit making money, it means that the value of your assets will start to grow without you needing to do much and hopefully eventually in increments that exceed your total salary). The compounding impact of returns will build wealth for you over time without needing to spend all your time worrying about getting a raise, getting laid off or sitting in a job you hate burning years of your life you can't get back. Your assets will ultimately buy you your freedom and time back, and that needs to be the goal. Life is finite, and the more time you have to focus on passions and not on "surviving" will help make the ride overwhelmingly more enjoyable.
Please always remember, it is very easy to look rich. It is very difficult to become rich.
Alright, enough of my own personal philosophy rambling let's get back to how this pertains to MSTR.
How does this apply to the MSTR Strategy?
MSTR has the same setup. The markets have conditioned us to look at companies and assign value based on how quickly they grow their revenue (salary in our personal example) and net income (take home pay). Markets are constantly looking for growth, but because of that most companies don't get to accumulate assets on their balance sheet from these earnings. They need to redeploy them into the company to fund expansion/sales/hiring/facilities/etc. to continue to show growth in the revenue that will indicate to the market that they are on the trajectory to being a "rich" company despite many showing thin margins.
MSTR started this way as well. For the better part of 3 decades, they focused on building their software products, deploying sales and implementation teams to get companies onboarded to their BI product, and each year had to hyper focus on squeezing every dollar out of their platforms and contracts that they could get. But once growth slowed, the markets determined there was little of value here due to the forward looking nature of valuations.
So Saylor shifted his focus. What he did do during the early periods was create a company that was providing him with steady cash flow that was accumulating on his balance sheet as an asset. They had removed meaningful liabilities, and were actually very strong from a balance sheet perspective (company net worth) and very unencumbered by debt.
Now MSTR had a decision to make. Was it a better use of their time to try to foece a 5-10% raise in their salary (revenue) every year even if it meant little in the terms of take home, or was there a different way to generate wealth?
They turned to utilizing their assets. They initially deployed there cash in to a harder, stronger asset that had a better anticipated return (infinitely better than the negative return of cash) which could generate increasing asset value on their balance sheet. If your asset growth outpaces your liability growth, your net worth is increasing. So MSTR decided their time was going to be better spent accumulating assets than spending all their time and capital on sales/growth efforts (obviously they are doing this still, but you get what I'm saying).
Think of it like this. Let's say that their revenue (salary) was $500M and their net worth after all those years of building the business was $1B (i'm making these up for illustration). Where would their efforts be better served in the long run for generating value through trying to generate a 10% return?
Well, if they increase their revenue 10% that means there is another $50M coming in the door for revenue. But there are expenses, so their take home may only be 10% of that amount or $5M. This would mean that they have $5M available to transfer to their balance sheet to put to work.
On the other hand, if they focused on more efficient and opportunistic deployment of the $1B they had available on their balance sheet then this same 10% target would yield $100M but they get to keep all of it (ignoring taxes in both scenarios for simplicity).
This is where compounding kicks in. If the first scenario, that $5M they took home if it gained another 10% the next year would yield $500K in additional value on the balance sheet (total now $10.5M). However, looking at the $100M generated from utilizing the balance sheet instead would generate an additional $10M the next year (total now $110M).
You can start to see the impact here of this happening year after year. But this is misunderstood because the markets have taught us to largely overlook balance sheet strength as a method for valuations. Most often, when balance sheets are evaluated it is to point out that companies have accumulated massive amounts of cash and they can't find ways to deploy it so we start looking for dividends or acquisitions.
MSTR is in constant deployment mode. They made the determination that they will ensure their balance sheet is 100%+ deployed into a new asset they believe will allow them the benefit of compounded value over potentially hundreds of years. This approach to time horizon focus is new in the corporate world, and is why so many don't understand the strategy. They take a short term view while ignoring the evolving nature of the world and capital.
Summary
So in summary, you are witnessing a corporation shift from focusing on income to focusing on net worth. This is a strategy that builds for the long term future.
This is an approach everyone should apply to their own lives. Stop thinking short term about the next thing you want to purchase. Set your sights decades out and make the best use of the assets you accumulate early to achieve those goals.
We always hear "work smarter, not harder", well for your personal wealth this is what that means.
Spend the time working to build your assets, so your assets can get put to work building wealth for you.
I acknowledge this is a simplified overview which skips nuances of leverage, MSTR's access to capital markets, etc. But I think it is a core concept people need to really think about and understand as a foundational component for both their personal lives and for how they understand the strategy MSTR is deploying at a basic level.
Have a great rest of the weekend everyone!
