S-1/A 1 d36119ds1a.htm S-1/A S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on March 31, 2021.

Registration No. 333-253744

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Compass, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7371   30-0751604

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

90 Fifth Avenue, 3rd Floor

New York, New York 10011

(212) 913-9058

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Robert Reffkin

Founder, Chairman and Chief Executive Officer

Compass, Inc.

90 Fifth Avenue, 3rd Floor

New York, New York 10011

(212) 913-9058

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Michael T. Esquivel

James D. Evans

Ran D. Ben-Tzur

Morgan A. Sawchuk

Michael M. Shaw

Fenwick & West LLP

902 Broadway, Suite 14

New York, New York 10010

(212) 921-2001

 

Brad Serwin

General Counsel and Corporate Secretary

Compass, Inc.

90 Fifth Avenue, 3rd Floor

New York, New York 10011

(212) 913-9058

 

Gregory P. Rodgers

Ian D. Schuman

Benjamin J. Cohen

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or Securities Act, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Amount

To Be

Registered(1)

 

Proposed

Maximum
Offering Price

Per Share

 

Proposed
Maximum

Aggregate
Offering Price(1)

 

Amount of

Registration Fee(2)

Class A common stock, par value $0.00001 per share

 

28,750,000

  $19.00   $546,250,000   $59,596

 

 

(1)

Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes additional shares that the underwriters have the option to purchase.

(2)

Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated March 31, 2021.

25,000,000 Shares

 

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of Compass, Inc. We are offering 25,000,000 shares of our Class A common stock.

We have three classes of authorized common stock, Class A common stock, Class B common stock and Class C common stock. The rights of the holders of Class A common stock, Class B common stock and Class C common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class C common stock is entitled to 20 votes per share. Shares of Class B common stock, which we have issued, and may in the future issue to, our licensed real estate agents registered in New York State, have, due to New York State real estate regulatory requirements, no voting rights, except as otherwise required by law. Shares of Class B common stock and Class C common stock will convert into Class A common stock, on a share-for-share basis, upon certain transfers following this offering. See the section titled “Description of Capital Stock.” Following this offering, we anticipate that our board of directors may vote to effect the automatic conversion of all outstanding shares of Class B common stock into an equivalent number of shares of Class A common stock.

On the date of this prospectus, Robert Reffkin, our founder, Chairman and Chief Executive Officer, will hold all of the shares of our Class C common stock, which, together with shares of Class A common stock held by Mr. Reffkin, represent approximately 47% of the voting power of our outstanding capital stock in the aggregate, which voting power may increase over time as Mr. Reffkin vests and settles in certain equity awards, including certain performance-based equity awards, outstanding at the time of the completion of this offering. If all such equity awards held by Mr. Reffkin had been vested and settled and exchanged for shares of Class C common stock as of the date of the completion of this offering, Mr. Reffkin would hold approximately 70% of the voting power of our outstanding capital stock, in each case without giving effect to any purchases by Mr. Reffkin pursuant to his indication of interest in participating in this offering, as described below. As a result, Mr. Reffkin will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $18.00 and $19.00.

We have been approved to list our Class A common stock on the New York Stock Exchange under the symbol “COMP.”

 

 

See the section titled “Risk Factors” beginning on page 18 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

The Reffkin family has indicated an interest in purchasing up to $18.5 million in shares of our Class A common stock in this offering at the initial public offering price per share. In addition, certain holders of more than five percent of our capital stock, including entities affiliated with SVF Excalibur (Cayman) Limited and DG Urban-C L.P., among others, have indicated an interest in purchasing an aggregate of up to $140 million in shares of our Class A common stock in this offering at the initial public offering price per share. Because these indications of interest are not binding agreements or commitments to purchase, such individuals and entities may determine to purchase more, less, or no shares in this offering. In addition, at our request, the underwriters have reserved up to 7% of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to eligible licensed real estate agents affiliated with our company and certain individuals identified by us. See the section titled “Underwriting.”

To the extent that the underwriters sell more than 25,000,000 shares of Class A common stock, the underwriters have the option to purchase up to 3,750,000 additional shares from us at the initial public offering price, less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                , 2021.

 

 

Goldman Sachs & Co. LLC   Morgan Stanley   Barclays

 

Deutsche Bank Securities   UBS Investment Bank
Oppenheimer & Co.   Needham & Company   Zelman Partners LLC   Loop Capital Markets
Academy Securities   Blaylock Van, LLC   Ramirez & Co., Inc.   Siebert Williams Shank

 

Prospectus dated                , 2021


Table of Contents

LOGO


Table of Contents

LOGO

The Compass mission is to help everyone find their place in the world.


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

LOGO

BY THE NUMBERS $300 billion+ Gross transaction value 19,000+ Agents 88%+ Agent teams using platform weekly 19%+ Average growth in number of transactions in year 2 90%+ Principal agent retention rate2 All figures as of December 31, 2020, unless otherwise specified. 1 Sum of all closing sale prices for homes transacted by Compass agents, excluding rentals, through 2020. 2 Retention rate measured annually from 2018 to 2020.


Table of Contents

LETTER FROM ROBERT REFFKIN, FOUNDER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER

I started Compass because of my mom, Ruth.

As a single mother who provided for our little family entirely on her own, she embodies the entrepreneurial spirit. She’s a resilient optimist who never lets setbacks slow her down. She’s a big dreamer who sees every interaction, every conversation, and every moment as an opportunity. Watching her do the impossible every day made me feel like anything was possible.

For the majority of my life, my mom channeled her entrepreneurial energy into a career as a real estate agent. I saw the pride she took in helping her clients navigate one of the most important transactions of their lives. I also saw that she was turning a lifetime of relationships into a strong book of business, and as an independent contractor, becoming a true business owner.

Over the years, despite her hard work, I saw my mother struggle to grow her business because she didn’t have the right tools or support. The brokerage model was originally designed to be a one-stop shop for everything an agent needed. But as software transformed every industry, brokerage firms failed to keep up and she had to rely more and more on disjointed, disconnected tools from third parties — a CRM, email newsletters, digital ads, home valuation tools, transaction management software. Each year, while technology was enabling most professionals to accomplish more, her work as a real estate agent was becoming increasingly complex, time-consuming, and difficult.

I vowed to create a company that would do better for agents like my mom.

Real estate agents are perhaps the largest and most inspiring group of entrepreneurs in the world. There are over two million agents in the U.S. alone, and I’ve been lucky enough to get to know thousands of them personally. They are business owners who’ve chosen to bet on themselves and their potential rather than rely on a steady paycheck. They are the heart of a dynamic, diverse industry with a proud history of creating exceptional economic opportunities for women, single parents, older professionals, the LGBTQ+ community, and other traditionally underrepresented groups.

What’s more, agents play the most critical and central role in the real estate transaction, advising their clients on one of the biggest economic decisions most people ever make. They lead a months-long process and coordinate a dozen or more parties: potential buyers and sellers, other agents, contractors, painters, stagers, photographers, lawyers, inspectors, appraisers, mortgage lenders, title and escrow officers, insurance brokers, movers, and more. Their advisory role often begins years before a transaction and continues for decades after.

But despite their uniquely strategic position in a $2 trillion industry, agents remain remarkably underserved. There are over 86,000 brokerage firms in the U.S. and the overwhelming majority have neither the technological expertise nor the capital to build the software and services their agents need to thrive.

The traditional brokerage firm model provided agents with support and services in the pre-internet era. In a world increasingly powered by technology, Compass is creating the agent support and services platform of the future. A cloud-native, mobile, AI-powered platform that simplifies the experience for everyone and empowers all agent workflows — prospecting, listing, pricing, marketing, searching, touring, collaborating with buyers and sellers, managing offers and the transaction closing, and more.

Our ambition is to provide agents everything they need to serve their clients, grow their business, and realize their entrepreneurial potential, all in one place. Simple, seamless, and integrated. We are replacing today’s complex, paper-driven home-buying and selling process with an all-digital, end-to-end platform that empowers real estate agents to deliver an exceptional experience to every buyer and seller.

 

1


Table of Contents

At Compass, we are agent-obsessed. We’ve built a business completely aligned with our agents: when agents succeed, Compass succeeds. Our commitment to the agent is not contingent and is not temporary; it is foundational to our vision, our strategy, and our success — and it always will be.

When you invest in Compass, you’re investing in more than a company — you’re investing in the technology-powered future of the real estate agent and the enormous potential they represent. It’s a wonderful feeling to support one of the greatest communities of entrepreneurs in the world — people like my mom, who I’m proud to say is now a Compass agent.

I invite you to join us, and the agents we serve, on this journey. Thanks to the hard work of thousands of Compass employees and agents, we have accomplished a great deal in our first eight years. But I assure you: we are just getting started.

Best,

Robert

 

2


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     11  

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

     15  

RISK FACTORS

     18  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     50  

INDUSTRY AND MARKET DATA

     52  

USE OF PROCEEDS

     53  

DIVIDEND POLICY

     54  

CAPITALIZATION

     55  

DILUTION

     58  

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     61  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     64  

BUSINESS

     104  

MANAGEMENT

     132  

EXECUTIVE COMPENSATION

     142  

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

     165  

PRINCIPAL STOCKHOLDERS

     169  

DESCRIPTION OF CAPITAL STOCK

     172  

SHARES ELIGIBLE FOR FUTURE SALE

     180  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK

     183  

UNDERWRITING

     188  

LEGAL MATTERS

     196  

EXPERTS

     196  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     196  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock.

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock and the distribution of this prospectus outside the United States.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained in more detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our Class A common stock. You should carefully read this prospectus in its entirety before investing in our Class A common stock, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Special Note Regarding Forward-Looking Statements,” and our consolidated financial statements and the accompanying notes, provided elsewhere in this prospectus.

VISION, STRATEGY & MISSION

We envision a world where the experience of selling or buying a home is simple and pleasant for everyone. Our strategy is to replace today’s complex, paper-driven, antiquated workflow with a seamless, all-digital, end-to-end platform that empowers real estate agents to deliver an exceptional experience to every seller and buyer. Our agent-centric platform is at the heart of our mission to help everyone find their place in the world.

OVERVIEW

Compass provides an end-to-end platform that empowers our residential real estate agents to deliver exceptional service to seller and buyer clients. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service and other critical functionality, all custom-built for the real estate industry and enabling our core brokerage services. Fundamentally, we believe that agents are, and will continue to be, central to residential real estate transactions. We help agents grow their businesses, serve more clients, save time, and stand out as valued, trusted and professional advisors in real estate transactions.

Through 2020, Compass agents have represented either sellers or buyers of more than 275,000 homes worth more than $300 billion. With 4% of the U.S. market, Compass is the largest independent real estate brokerage by Gross Transaction Value. Our agent-first approach and differentiated platform have delivered strong results for Compass agents and clients in 2020.

 

 

   

our agents close an average of 19% more transactions measured from their first year compared to their second year at Compass;

 

   

our agents sold homes in 21% fewer days, on average, relative to agents at firms with comparable average home sale values in our MLS Cities;

 

   

on average, 88% of our agent teams used our proprietary technology platform at least once per week, of which approximately two-thirds used it daily;

 

   

our principal agent retention rate exceeded 90%; and

 

   

our agents are strong advocates, giving Compass a Net Promoter Score of 68.1

Residential real estate is one of the largest and most complex industries in the world. According to the National Association of Realtors, or NAR, in 2020, more than 5.6 million homes were sold in the U.S., representing approximately $1.9 trillion in transaction value. Housing is the single largest consumer expenditure in the U.S., and homes are often a substantial source of household wealth.

 

1 

For further discussion on our Net Promoter Score, see “Industry and Market Data.”



 

1


Table of Contents

Selling and buying a home is one of the most significant financial events in an individual’s life and often one of the most complex, time consuming, and consequential. Given the unique nature of each property, location, buyer, seller, negotiation, title and financing, a real estate agent’s role as the driver of the majority of the workflow is indispensable. According to NAR’s 2020 Profile of Home Buyers and Sellers, 89% of home sellers and 88% of home buyers use a real estate agent or broker, levels that have remained consistent over the last 10 years with 2011 levels at 87% and 89%, respectively.

We believe the best agents are dynamic business owners, responsible for every function from attracting and retaining clients to managing finance and operations. We believe these entrepreneurs are needlessly constrained by a plethora of disconnected technology solutions, manual processes and antiquated systems. The vast majority of technology products built for agents are narrow point solutions, requiring agents to spend significant time away from their clients wrangling multiple, disjointed technology tools and manually transporting data among these tools. These inefficiencies not only frustrate agents, but also limit their ability to effectively serve their clients.

We have built an integrated software platform that helps agents operate with the sophisticated capabilities of a modern technology company and the personal attention and service of a dedicated advisor. Using proprietary data, analytics, AI and machine learning, our platform delivers a broad set of industry-specific capabilities for Compass agents and clients.

The Compass Platform

 

 

LOGO

We continuously innovate and enhance our software platform with the goal of digitizing and automating all real estate workflows that empower agents to acquire and serve clients. The caliber and pedigree of our technology leadership helps us attract and retain top-tier software engineers and AI talent globally. We have a team of over 650 highly experienced product and engineering professionals based out of our innovation hubs in New York, Seattle, Washington, D.C., and Hyderabad, India.

We complement our software with additional services that make our agents more successful, enabling them to advise on multiple aspects of the residential real estate process. Compass Concierge is a program in which we provide home sellers access to interest-free capital to front the cost of home improvement services and is designed to increase the sale value of the home and decrease its time on market. Our title and escrow services increase transparency and deliver a more integrated closing process for the consumer.



 

2


Table of Contents

We obsess over our agents’ success. We offer training and coaching, sales management, listing and transaction coordination, commission processing, and marketing design and consulting so that our agents can achieve their full potential.

Our business model is based on shared success: we succeed when our agents succeed. As the Compass platform delivers more value to agents, more agents with established real estate businesses join the platform. As those agents deliver excellent experiences to clients, they generate more repeat and referral business, in turn increasing transaction volumes. This growth enables us to invest further in the platform and propel a virtuous flywheel.

Our bold mission, agent-centric strategy, and comprehensive digital platform positions us to capture a sizable opportunity in the residential real estate market, one of the largest asset classes in the world. We estimate that agents drive approximately $95 billion of commissions in the U.S. and sit at the center of substantial additional spend directly and indirectly related to the home transaction. Our long term market opportunity is comprised of brokerage commissions (paid by clients to Compass), spend from other components of the real estate ecosystem, including closing services (title, escrow, and mortgage), paid marketing services and other real estate services. We view our serviceable addressable market, or SAM, in the United States to be over $180 billion and our total addressable market, or TAM, globally, over the long term, to be over $570 billion.1

We had 19,385 Compass agents on our platform as of December 31, 2020. A subset of our agents are considered principal agents, either agents who are leaders of their respective agent teams or individual agents operating independently on our platform. We had 9,368 principal agents on the Compass platform as of December 31, 2020. We currently cover 46 markets across the United States, defined as metropolitan statistical areas, or MSAs, according to the U.S. Census Bureau.

In 2020, Compass agents assisted home sellers and buyers to transact approximately $152 billion in residential real estate – or 4% of the U.S. market – up more than fourfold from $34 billion in 2018. We calculate our market share by dividing our Gross Transaction Value, or the total dollar value of transactions closed by agents on our platform, by two times (to account for the sell-side and buy-side of each transaction) the aggregate dollar value of U.S. existing home sales as reported by NAR. We currently generate substantially all of our revenue from commissions paid for these transactions. We believe there remains significant opportunity for us to grow our transactions by continuing to add agents to our platform, and grow their respective market shares. Additionally, we are well-positioned to capture meaningful revenue from adjacent services as we continue to expand and diversify our offerings within the real estate ecosystem.

Our business has experienced rapid growth. In 2019 and 2020, our revenue was $2.4 billion and $3.7 billion, respectively, representing a year-over-year increase of 56%. Our net losses were $388.0 million and $270.2 million in 2019 and 2020, respectively.

  

 

1 

Our SAM is based on the entire residential real estate market in the United States and not based solely on the markets that we currently serve. Our TAM is based on the entire global residential real estate market; however, none of our agents are currently located outside of the United States and our real property transactions are almost exclusively U.S.-based.



 

3


Table of Contents

THE COMPLEXITY OF THE AGENT WORKFLOW

Real estate agents are CEOs of their businesses, positioned at the center of a highly-specialized, multi-party workflow which involves complexity generally unseen by the buyer or seller. Agents serve as the liaison between the client, the counterparty and many other stakeholders related to the transaction. In addition to serving the clients directly, agents recommend, as appropriate, adjacent service providers from pre-sale to post-close.

 

 

LOGO



 

4


Table of Contents

AGENTS ARE AT THE CENTER OF ONE OF THE WORLD’S LARGEST MARKETS

According to NAR, there were 5.6 million existing homes sold in the U.S. in 2020 that generated approximately $1.9 trillion in transaction value. We estimate that an aggregate $95 billion in commissions were paid from these transactions, and NAR estimates that the median residential real estate transaction leads to roughly $85,000 of economic impact.

Despite various “agentless” models such as iBuying and for-sale-by-owner, nearly 90% of sellers and buyers in the U.S. work with real estate agents. The agent’s central role gives them a position of leverage in each transaction and in the market at large. They sit at the center of the workflow for the seller or buyer, provide recommendations for closing services (title and escrow services, mortgage, bridge loans and legal) and vendor referrals post-closing (home insurance, warranty, moving services, interior design and internet).

Agents spend significant time cultivating their sphere of influence, and a substantial portion of their business comes from repeat clients and referrals. According to NAR, in 2020, 73% of home sellers and 60% of home buyers chose to work with an agent they had used in the past or found their agent through a referral. The relationship between the agent and the client often starts with a transaction and endures many years into the future—a byproduct of this strength is clients referring their agents to friends, neighbors, and relatives. Accordingly, each new client can yield significant lifetime value for agents.

EXISTING TECHNOLOGIES DO NOT ADEQUATELY SERVE THE MARKET

Many Real Estate Agents Are Inhibited by Manual, Time-Consuming Processes

The hyper-local nature of the industry makes each transaction unique, requiring nuanced knowledge of the market, the property, and individuals’ needs. The typical agent spends a substantial portion of their time on administrative tasks that could be greatly enhanced by technology, such as managing client collaboration, coordinating tours, organizing appointments, creating marketing content, and effectively running multiple processes concurrently.

The Real Estate Industry Has Lagged in Technological Innovation, and What Innovation Has Occurred Has Not Addressed Agents’ Core Challenges

Despite the inefficiencies associated with real estate transactions, the industry has been slow to adopt technology, particularly as it relates to the agent. Some companies have developed point solutions for agents, but the lack of integration and narrow focus of that software has further complicated the agent experience. Often, these point solutions are provided by sub-scale, under-capitalized companies with limited ability to support and upgrade the product or make it available in a mobile context. Many companies have tried to build solutions to displace the agent, rather than empower them. The vast majority of spend in the industry has focused on the consumer (primarily the homebuyer), in the form of consumer-facing search portals. Consequently, the home seller and the real estate agent have largely been ignored.

THE OPPORTUNITY

We believe that real estate agents are an underserved group of business owners, and by providing them with a seamless, end-to-end platform, we can unlock enormous untapped economic potential.

As we continue to build everything agents need in a single, integrated platform, we believe more great agents will continue to come to Compass. As more great agents join us, our platform helps them provide great



 

5


Table of Contents

experiences to more buyer and seller clients. The ability to create great client experiences drives continued business for agents with repeat and referral clients. This ultimately generates more revenue for the agent, and in turn, for Compass, which enables us to invest more into enhancing the platform. These investments further empower agents to grow their businesses efficiently and effectively. Our platform and business innovations are focused on accelerating this flywheel.

 

 

LOGO

OUR PLATFORM

We are simplifying today’s complex, paper-driven, antiquated workflow to empower real estate agents to deliver an exceptional experience to every buyer and seller. Our platform is a combination of integrated software as well as value-added services, all tailored to the real estate industry.

Our Integrated Platform Empowers Agents to Win More Clients and Serve Both Sellers and Buyers

Attracting and Retaining Clients

Our platform provides a strong foundation for agents to create and foster client relationships. Our powerful Customer Relationship Management, or CRM, platform enables agents to develop automated yet customizable “drip campaigns” to stay in touch with their contacts at key moments and over time. Through our Marketing Center, agents can market their own personal brands by creating marketing collateral—digital ads, videos, listing presentations, email newsletters, print advertising and signage—as well as execute marketing campaigns, with mere minutes of effort. Our agents designed over a million different pieces of marketing content through our platform in 2020. Powered by AI, our CRM provides recommendations to agents on whom to contact as potential sellers or prospective buyers. As a result, our agents are able to focus their energy on high value clients, which can lead to more transactions and more revenue. For example, our “Likely To Sell” recommendations led to a



 

6


Table of Contents

61% higher win rate for our agents, compared to properties we did not identify as likely to sell, in the second half of 2020.

Advising Sellers

Our platform enables agents to sell more homes in less time for a better price. In 2020, our agents sold homes on behalf of Compass in 21% fewer days, on average, relative to agents at firms with comparable average home sale values in our MLS Cities. We define MLS Cities as large cities we serve and which have a multiple listing service, and currently consist of: San Francisco, Washington D.C., Boston, Los Angeles, Miami Beach, Dallas, Chicago, San Diego, Seattle, Atlanta, Austin, Denver, Houston, Philadelphia and Nashville. We consider firms with comparable average home sale values to be those with an average home sale value within 20% of ours. We believe we provide agents with the solutions and data they need to effectively list and market properties, and run the sale process more efficiently.

When it comes time to list and market a home, our agents can utilize services such as Compass Concierge which is designed to increase the sale value of the home and decrease the time on market. Sellers on our platform who use Compass Concierge are nearly twice as likely to sell their home in 60 days relative to the average MLS listing in the markets in which we operate. Our AI-powered comparative market analysis tool, or CMA, enables agents to optimize pricing strategies for clients, leveraging data on past sales and current listings to suggest representative comparable properties. Agents can also use our platform to conduct virtual tours and livestream open houses through our Open House App to ensure listings receive ample attention. In preparing for and closing the transaction, our agents can use our platform to recommend and offer adjacent services to clients such as title and escrow and referrals to service providers post-closing.

Advising Buyers

Our platform enables agents to locate desirable properties at attractive prices for buyers. Our agents provide clients with access to comprehensive inventory, including private listings, help them understand local market dynamics, tour properties, prepare and close offers, and better manage the overall home buying process.

With Compass Collections, a curated visual workspace, Compass agents and clients can easily find and organize homes of interest and then tag and discuss specific properties through an integrated chat feature. With near real-time search alerts and notifications, clients can monitor new listings and gain an edge in securing properties of interest. Using our CMA, agents can better understand the pricing dynamics of specific markets, neighborhoods and home features, ultimately providing informed advice regarding potential offers. We also provide our agents with access to services associated with closing a home purchase, such as title insurance and escrow services in selected markets.

THE COMPASS ADVANTAGE

Differentiated and Integrated Technology. Our end-to-end, mobile-first platform built for simplicity and scale, provides a truly differentiated real estate experience and creates a competitive moat.

Strategy Centered on the Agent. We have consistently focused on the agent, who has been underserved by industry innovation, because we recognize the critical role they occupy at the center of the real estate transaction.

Top-Tier Agent Talent. We believe the most talented agents want to work at Compass because we have specifically built our business to help even the most sophisticated agents achieve the best outcomes of their career.



 

7


Table of Contents

Data-Driven Insights Advantage. Our principal agent teams and their transactions have driven over 31 million sessions on our platform since 2018, helping power our machine learning algorithms and creating a data advantage for Compass.

Strong Network Effects Due to Scale. Compass is the largest independent brokerage in the United States by Gross Transaction Value (according to RealTrends), which positions us to capture spend across the real estate ecosystem.

Premier Technology Leadership and a Culture of Innovation. Our founder-led team brings significant experience in building industry-leading software.

A Brand That Recruits. Our brand stands for top-tier agents harnessing superior technology to deliver superior outcomes for clients.

GROWTH STRATEGY

Attract High-Performing Agents in Existing Markets. Even though we have leading market share in key geographies, we continue to add high-performing agents in our current markets.

Expand to New Domestic Markets. We have a demonstrated track record of successfully expanding into new markets, driven, in part, by our Compass Anywhere virtual support model.

Build Software That Makes Agents More Productive. We continue to add new functionality and improve our existing solutions with the goal of providing a seamless, integrated workflow that grows agents’ businesses while helping to save them time, money and hassle.

Develop a Broader Set of Solutions to Capture More Spend. The Compass platform is well positioned for continued expansion of adjacent solutions across the transaction lifecycle.

Execute Opportunistic M&A. We will continue to evaluate potential acquisitions in the real estate technology ecosystem that can bolster the value of our fully integrated platform and accelerate initiatives in our product roadmap.



 

8


Table of Contents

Summary of Risk Factors

Our business is subject to a number of risks and uncertainties including those described in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

   

Our success depends on general economic conditions, the health of the U.S. real estate industry, and risks generally incident to the ownership of residential real estate, and our business may be negatively impacted by economic and industry downturns, including seasonal and cyclical trends;

 

   

If we do not provide our agents with solutions that they value, we may fail to attract new agents, retain current agents or increase agents’ utilization of our platform, which may adversely affect our business, financial condition and results of operations;

 

   

We have experienced rapid growth since inception which may not be indicative of our future growth. We expect that, in the future, even if our revenue increases, our rate of growth may decline;

 

   

We have incurred net losses on an annual basis since we were founded, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability;

 

   

If we do not innovate and continuously improve and expand our platform to create value for Compass agents and clients, our business could be negatively impacted;

 

   

The outbreak of the COVID-19 coronavirus pandemic has had a material effect on our business, and could continue to do so;

 

   

We operate in highly competitive markets and we may be unable to compete successfully against competitors;

 

   

Monetary policies of the federal government and its agencies may have a material impact on our business, results of operations and financial condition;

 

   

Any decrease in our gross commission income or the percentage of commissions that we collect may harm our business, results of operations and financial condition;

 

   

Our efforts to expand our business and offer additional adjacent services may not be successful;

 

   

Our quarterly results and other operating metrics may fluctuate from quarter to quarter, which makes these difficult to predict;

 

   

The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business;

 

   

Actions by our agents or employees could adversely affect our reputation and subject us to liability;

 

   

If we pursue acquisitions that are not successfully completed or integrated into our existing operations, our business, financial condition or results of operations may be adversely affected;

 

   

We are periodically subject to claims, lawsuits, government investigations and other proceedings that may adversely affect our business, financial condition and results of operations;

 

   

Our agents are independent contractors, and if federal or state law mandates that they be classified as employees, our business, financial condition, and results of operations would be adversely impacted;

 

   

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand; and

 

   

The multi-class structure of our common stock will have the effect of concentrating voting power with Robert Reffkin, our founder, Chairman and Chief Executive Officer, which will limit your ability to influence the outcome of matters submitted to our stockholders for approval, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions.



 

9


Table of Contents

Channels for Disclosure of Information

Following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website (www.compass.com), press releases, public conference calls, public webcasts, and our Twitter feed (@Compass), our Facebook page, our LinkedIn page, our Instagram account, our YouTube channel, and Robert Reffkin’s Twitter feed (@RobReffkin) and Robert Reffkin’s Instagram account (@robreffkin).

Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

Corporate Information

We were incorporated under the laws of the state of Delaware in October 2012 under the name Urban Compass, Inc. We subsequently changed our name to Compass, Inc. in January 2021. Our principal executive offices are located at 90 Fifth Avenue, 3rd Floor, New York, New York 10011, and our telephone number is (212) 913-9058. Our website address is www.compass.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only. You should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our Class A common stock. Unless the context otherwise requires, the terms “Compass,” “the Company,” “we,” “us,” and “our” in this prospectus refer to Compass, Inc. and its consolidated subsidiaries.

“Compass,” our logo, and our other registered or common law trademarks, service marks, or tradenames appearing in this prospectus are the property of Compass, Inc. This prospectus contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trademarks and trade names referred to in this prospectus appear without the ® and symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and trade names.



 

10


Table of Contents

THE OFFERING

 

Class A common stock offered

25,000,000 shares.

 

Option to purchase additional shares of Class A common stock offered

3,750,000 shares.

 

Class A common stock to be outstanding after this offering

365,008,950 shares (368,758,950 shares if the option to purchase additional shares is exercised in full).

 

Class B common stock to be outstanding after this offering

6,672,510 shares.

 

Class C common stock to be outstanding after this offering

15,244,490 shares.

 

Total Class A common stock, Class B common and Class C common stock to be outstanding after this offering

386,925,950 shares (or 390,675,950 shares if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

Use of Proceeds

We estimate that the net proceeds from the sale of shares of our Class A common stock in this offering will be approximately $426.9 million, or approximately $492.8 million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and enable access to the public equity markets for us and our stockholders. We primarily intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, which may include research and development, sales and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time. We will have broad discretion over the uses of net proceeds in this offering. See the section titled “Use of Proceeds” for additional information.

 

Voting Rights

Shares of our Class A common stock are entitled to one vote per share. Shares of our Class B common stock have no voting rights,



 

11


Table of Contents
 

except as otherwise required by law. Shares of our Class C common stock are entitled to 20 votes per share. In addition, after the completion of this offering, we anticipate that our board of directors may vote to effect the automatic conversion of all outstanding shares of Class B common stock into an equivalent number of shares of Class A common stock.

 

  Holders of our Class A common stock and Class C common stock will generally vote together as a single class, unless otherwise required by law or our restated certificate of incorporation. Effective upon the date of this prospectus, Robert Reffkin, our founder, Chairman and Chief Executive Officer, will hold approximately 47% of the voting power of our outstanding capital stock in the aggregate, which voting power may increase over time as certain equity awards held by our founder outstanding at the time of the completion of this offering vest and settle, including upon the achievement of certain public equity valuation milestones. If all such equity awards held by our founder had been vested and settled and exchanged for shares of Class C common stock as of the date of the completion of this offering, our founder would hold approximately 70% of the voting power of our outstanding capital stock.

 

  See the sections titled “Principal Stockholders” and “Description of Capital Stock” for additional information.

 

Directed Share Program

At our request, the underwriters have reserved up to seven percent of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to eligible licensed real estate agents affiliated with our company and certain individuals identified by us. The sales will be made by Morgan Stanley & Co. LLC, an underwriter in this offering, through a directed share program. We do not know if these parties will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of Class A common stock. Shares sold through the directed share program will not be subject to lockup restrictions. See the section titled “Underwriting” for additional information.

 

Risk Factors

See the section titled “Risk Factors” and other information included in this prospectus for a discussion of some of the factors you should consider before deciding to purchase shares of our Class A common stock.

 

Indications of interest from executive officers and affiliated stockholders

The Reffkin family has indicated an interest in purchasing up to $18.5 million in shares of our Class A common stock in this offering at the initial public offering price per share. In addition, certain holders of more than five percent of our capital stock, including entities



 

12


Table of Contents
 

affiliated with SVF Excalibur (Cayman) Limited and DG Urban-C L.P., among others, have indicated an interest in purchasing an aggregate of up to $140 million in shares of our Class A common stock in this offering at the initial public offering price per share. Because these indications of interest are not binding agreements or commitments to purchase, such individuals and entities may determine to purchase more, less, or no shares in this offering.

 

New York Stock Exchange symbol

“COMP”

The number of shares of our Class A common stock, Class B common stock and Class C common stock to be outstanding after this offering is based upon 340,008,950 shares of our Class A common stock outstanding, 6,672,510 shares of our Class B common stock outstanding, and 15,244,490 shares of our Class C common stock outstanding, in each case, as of December 31, 2020, and reflects:

 

   

(i) 221,127,100 shares of our Series A, Series B, Series C, Series E, Series F, and Series G convertible preferred stock that will automatically convert into 223,033,600 shares of our Class A common stock immediately prior to the completion of this offering pursuant to the terms of our amended and restated certificate of incorporation and (ii) 15,920,450 shares of our Class A common stock issued upon the conversion of our Series D convertible preferred stock into the same number of shares of Class A common stock in March 2021 pursuant to the terms of our amended and restated certificate of incorporation, which we refer to, collectively, as the Capital Stock Conversions;

 

   

101,054,900 shares of our Class A common stock outstanding, which number of shares excludes the shares being exchanged in the Class C Stock Exchange described below; and

 

   

15,244,490 shares of our Class C common stock, which reflects shares of our Class A common stock outstanding held by our founder as of December 31, 2020 that will be exchanged for an equivalent number of shares of our Class C common stock upon the effectiveness of the registration statement of which this prospectus forms a part, pursuant to the terms of an exchange agreement, or the Class C Stock Exchange.

The number of shares of our Class A common stock and Class B common stock outstanding as of December 31, 2020 excludes the following:

 

   

61,792,730 shares of our Class A common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $4.54 per share, pursuant to our 2012 Stock Incentive Plan, or the 2012 Plan;

 

   

1,034,420 shares of our Class B common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $5.16 per share, outside of the 2012 Plan;

 

   

32,556,160 shares of our Class A common stock issuable upon the vesting and settlement of restricted stock units, or RSUs, outstanding as of December 31, 2020, pursuant to our 2012 Plan, including (i) 5,809,610 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (ii) 25,072,580 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was not satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering and (iii) 1,673,970 shares issuable upon the settlement of additional RSUs;

 

   

1,888,660 shares of our Class A common stock issuable upon the exercise of options granted after December 31, 2020, with a weighted-average exercise price of $11.04 per share, pursuant to our 2012 Plan;



 

13


Table of Contents
   

18,089,442 shares of our Class A common stock issuable upon the vesting and settlement of RSUs granted after December 31, 2020, pursuant to our 2012 Plan;

 

   

stock options to purchase up to a maximum of 1,406,730 shares of our Class A common stock, and an additional $20.0 million in shares of our Class A common stock, in each case which may be issuable in connection with the achievement of certain milestones in connection with certain of our past acquisitions; and

 

   

67,762,250 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of: (1) 11,679,150 shares of our Class A common stock reserved for future issuance under our 2012 Plan, as of December 31, 2020, and an additional 19,000,000 shares of our Class A common stock reserved for future issuance under our 2012 Plan subsequent to December 31, 2020 (which reserve does not reflect the options to purchase shares of our Class A common stock and RSUs settleable for shares of our Class A common stock granted after December 31, 2020), (2) 29,666,480 shares of our Class A common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which will become effective on the date immediately prior to the date of this prospectus and (3) 7,416,620 shares of our Class A common stock reserved for issuance under our 2021 Employee Stock Purchase Plan, or the 2021 ESPP, which will become effective on the date of this prospectus.

On the date immediately prior to the date of this prospectus, any remaining shares of Class A common stock available for issuance under our 2012 Plan will be added to the shares reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2012 Plan. Our 2021 Plan and 2021 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefits and Stock Plans” for additional information.

Following the completion of this offering, and pursuant to an equity exchange right agreement to be entered into between us and our founder, our founder shall have the right (but not an obligation) to require us to exchange any shares of Class A common stock received upon the vesting and settlement of RSUs related to shares of Class A common stock for an equivalent number of shares of Class C common stock. We refer to this as the Equity Award Exchange. The Equity Award Exchange applies only to equity grants awarded to our founder prior to the effectiveness of the filing of our restated certificate of incorporation. As of the date of this prospectus, there were 25,835,430 shares of our Class A common stock subject to RSUs held by our founder that may be exchanged, upon vesting and settlement, for an equivalent number of shares of our Class C common stock following this offering.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the Capital Stock Conversions will occur prior to or upon the completion of this offering;

 

   

the amendment and restatement of our certificate of incorporation to effect a one-for-ten forward stock split effected in March 2021, with all share, option, RSU, and per share information for all periods presented in this prospectus adjusted to reflect such forward split on a retroactive basis;

 

   

no exercise of outstanding stock options or settlement of outstanding RSUs subsequent to December 31, 2020;

 

   

the Class C Stock Exchange will occur on the date of this prospectus;

 

   

the filing and effectiveness of our restated certificate of incorporation and the effectiveness of our restated bylaws, each of which will occur immediately prior to the completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 3,750,000 shares of our Class A common stock from us in this offering.



 

14


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. We derived our summary consolidated statements of operations data for 2018, 2019 and 2020 and our summary consolidated balance sheet data as of December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Our historical results are not necessarily indicative of the results to be expected in the future. You should read the following summary consolidated financial and other data in conjunction with the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this prospectus.

 

    Year Ended December 31,  
    2018     2019     2020  
    (in millions, except share and per share data)  

Consolidated Statement of Operations Data:

     

Revenue

  $ 884.7     $ 2,386.0     $ 3,720.8  

Operating expenses:

     

Commissions and other related expense(1)

    695.4       1,935.6       3,056.9  

Sales and marketing(1)

    174.3       382.8       407.9  

Operations and support(1)

    95.5       204.8       225.1  

Research and development(1)

    56.7       131.3       146.3  

General and administrative(1)

    85.7       92.4       106.7  

Depreciation and amortization

    14.8       40.9       51.2  
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,122.4       2,787.8       3,994.1  
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (237.7     (401.8     (273.3

Investment income, net

    8.4       12.9       2.0  

Interest expense

    —         —         (0.6
 

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (229.3     (388.9     (271.9

Benefit from income taxes

    5.5       0.9       1.7  
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (223.8   $ (388.0   $ (270.2
 

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (2.26   $ (3.64   $ (2.46
 

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted(2)

    98,930,220       106,529,880       109,954,760  
 

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

      $ (0.76
     

 

 

 

Pro forma weighted-average shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted(2)

        354,718,417  
     

 

 

 


 

15


Table of Contents

 

  (1)

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,  
     2018      2019      2020  
     (in millions)  

Commissions and other related expense

   $ 1.0      $ 16.1      $ 5.7  

Sales and marketing

     9.1        11.1        16.0  

Operations and support

     4.7        2.4        3.5  

Research and development

     4.0        2.8        1.4  

General and administrative

     33.7        5.0        16.6  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 52.5      $ 37.4      $ 43.2  
  

 

 

    

 

 

    

 

 

 

 

  (2)

See Notes 2 and 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical and pro forma net loss per share attributable to common stockholders, basic and diluted, and the number of shares used in the computation of the per share amounts.

 

     As of December 31, 2020  
     Actual      Pro
Forma(1)
     Pro
Forma as
Adjusted(2)
 
     (in millions)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 440.1      $ 440.1      $ 867.9  

Working capital

     317.4        317.4        746.1  

Total assets

     1,365.1        1,365.1        1,791.1  

Total liabilities

     741.3        741.3        740.4  

Convertible preferred stock

     1,486.7        —          —    

Total stockholders’ (deficit) equity

     (862.9      623.8        1,050.7  

 

  (1)

The pro forma column reflects (a) the Capital Stock Conversions and the Class C Stock Exchange, as if such conversions and exchange had occurred as of December 31, 2020, (b) the filing and effectiveness of our restated certificate of incorporation and (c) an increase to additional paid-in capital and accumulated deficit related to stock-based compensation expense of $109.1 million associated with RSUs for which the service-based vesting condition was satisfied as of December 31, 2020 and for which the liquidity event-related performance vesting condition will be satisfied in connection with this offering. Payroll tax withholding and remittance obligations have not been included in the pro forma adjustments.

  (2)

The pro forma as adjusted column reflects (a) the items described in footnote (1) above, and (b) the sale by us of shares of our Class A common stock in this offering at an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) cash, cash equivalents and short-term investments, working capital, total assets, and total stockholders’ (deficit) equity by $23.8 million, assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) cash, cash equivalents and short-term investments, working capital, total assets, and total stockholders’ (deficit) equity by approximately $17.6 million, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

Key Business Metrics and Non-GAAP Financial Measures

In addition to our financial results, we use the following business metrics to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions. To evaluate our operating



 

16


Table of Contents

performance, and for internal planning and forecasting purposes, we also use Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures. For additional information regarding these measures, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics and Non-GAAP Financial Measures.”

 

     Year Ended December 31,  
     2018     2019     2020  

Total Transactions

     27,188       87,158       144,784  

Gross Transaction Value (in billions)

   $ 33.7     $ 97.5     $ 151.7  

Average Principal Agents

     2,694       6,787       8,686  

Net Platform Retention Rate

     105     105     118

Net Loss

   $ (223.8   $ (388.0   $ (270.2

Net Loss Margin

     (25.3 )%      (16.3 )%      (7.3 )% 

Adjusted EBITDA(1) (in millions)

   $ (168.3   $ (324.6   $ (155.5

Adjusted EBITDA Margin(1)

     (19.0 )%      (13.6 )%      (4.2 )% 

 

  (1)

Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of net loss to Adjusted EBITDA, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics and Non-GAAP Financial Measures.”



 

17


Table of Contents

RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Non-GAAP Financial Measures” and our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Our business, financial condition, or results of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition and results of operations could be adversely affected. In that event, the market price of our Class A common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Operations

Our success depends on general economic conditions, the health of the U.S. real estate industry, and risks generally incident to the ownership of residential real estate, and our business may be negatively impacted by economic and industry downturns, including seasonal and cyclical trends.

Our success is impacted, directly and indirectly, by general economic conditions, the health of the U.S. real estate industry, and risks generally incident to the ownership of residential real estate, many of which are beyond our control. Our business could be harmed by a number of factors that could impact the conditions of the U.S. real estate industry, including:

 

   

a period of slow economic growth or recessionary conditions;

 

   

weak credit markets;

 

   

increasing mortgage rates and down payment requirements or constraints on the availability of mortgage financing;

 

   

a low level of consumer confidence in the economy or the residential real estate market due to macroeconomic events domestically or internationally;

 

   

high levels of unemployment resulting from the ongoing COVID-19 pandemic and the continued slow recovery of wages;

 

   

instability of financial institutions;

 

   

legislative or regulatory changes (including changes in regulatory interpretations or regulatory practices) that would adversely impact the residential real estate market as well as federal and/or state income tax changes and other tax reform affecting real estate and/or real estate transactions;

 

   

insufficient or excessive regional home inventory levels;

 

   

high levels of foreclosure activity, including but not limited to the release of homes already held for sale by financial institutions;

 

   

adverse changes in local, regional, or national economic conditions;

 

   

the inability or unwillingness of consumers to enter into sale transactions due to first-time homebuyer concerns about investing in a home and move-up buyers having limited or negative equity in their existing homes;

 

   

a decrease in the affordability of homes including the impact of rising mortgage rates, home price appreciation and wage stagnation or wage increases that do not keep pace with inflation;

 

   

decreasing home ownership rates, declining demand for real estate and changing social attitudes toward home ownership; and

 

18


Table of Contents
   

natural disasters, such as hurricanes, earthquakes and other events (including pandemics and epidemics) that disrupt local or regional real estate markets.

As our revenue is driven by sales commissions and transaction fees, any slowdown or decrease in the total number of home sale transactions and related transactions executed by our agents for any of the above reasons could adversely affect our business, financial condition and results of operations. In addition, the residential real estate market historically has been seasonal, with greater demand from home buyers in the spring and summer, and typically weaker demand in late fall and winter, resulting in fluctuations in the quantity, speed and price of transactions on our platform. We expect our financial results and working capital requirements to reflect these seasonal variations over time, although our growth and market expansion have obscured the impact of seasonality in our historical financials to date.

If we do not provide our agents with solutions that they value, we may fail to attract new agents, retain current agents or increase agents’ utilization of our platform, which may adversely affect our business, financial condition and results of operations.

If we do not provide our agents with solutions that they value, we may fail to attract new agents, retain current agents or increase agents’ utilization of our platform. Our continued growth depends on our ability to attract highly-qualified agents in each of the markets we serve and, once they are on our platform, to retain them and to help them expand their businesses and utilize our solutions. In addition, to retain our agents and expand their businesses, we offer a wide range of solutions and adjacent services, which we continue to expand through investments and acquisitions. To enhance our agent recruiting efforts in the future, we may choose to offer increased incentives, which would increase our expenses but cannot be guaranteed to lead to growth. While we believe these investments help our agents succeed, there can be no guarantee that we will retain our agents across the markets we serve, nor that our investments will lead to increased transaction volume. As a result, the success of our business is substantially dependent upon the success and growth of our agents, and their ongoing usage of our platform.

We have experienced rapid growth since inception which may not be indicative of our future growth. We expect that, in the future, even if our revenue increases, our rate of growth may decline.

We have experienced rapid growth since our founding in 2012. We expect that, in the future, even if our revenue increases, our rate of growth may decline. In any event, we may not be able to grow as fast or at all if we do not, among other things:

 

   

attract high-performing agents in markets we currently serve;

 

   

expand to new domestic markets;

 

   

improve our software and develop additional functionality;

 

   

develop a broader set of solutions;

 

   

execute opportunistic mergers and acquisitions; and

 

   

expand internationally.

To preserve our market position, we may expand organically or acquire brokerages in new markets more quickly than we would if we did not operate in such a highly competitive industry. Expanding into new markets can be challenging as some new markets have very distinctive characteristics, some of which may be unanticipated or unknown to us. These differences may result in greater recruitment and transaction costs that may result in those markets being less profitable for us than those that we currently operate in, and may slow the rate of our revenue growth.

 

19


Table of Contents

We have incurred net losses on an annual basis since we were founded, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability.

We incurred net losses of $388.0 million and $270.2 million for 2019 and 2020, respectively. We had an accumulated deficit of $825.1 million and $1.1 billion as of December 31, 2019 and 2020, respectively. We expect to continue to make future investments in developing and expanding our business, including investing in technology, recruitment and training, and pursuing strategic acquisitions. These investments may not result in increased revenue or growth in our business and may continue to result in net losses for our business. Additionally, we may incur significant losses in the future for a number of reasons, including:

 

   

declines in U.S. residential real estate transaction volumes;

 

   

our expansion into new markets, for which we typically incur more significant losses immediately following entry;

 

   

increased competition in the U.S. residential real estate industry;

 

   

increased costs to attract and retain agents;

 

   

increased research and development costs to continue to advance the capabilities of our platform;

 

   

changes in our fee structure or rates;

 

   

our failure to realize anticipated efficiencies through our technology and business model;

 

   

failure to execute our growth strategies;

 

   

increased sales and marketing costs;

 

   

hiring additional personnel to support our overall growth; and

 

   

unforeseen expenses, difficulties, complications and delays, and other unknown factors.

Accordingly, we may not be able to achieve profitability and we may continue to incur significant losses in the future. Moreover, as we continue to invest in our business, we expect expenses to continue to increase in the near term. If we fail to manage our expenses or grow our revenue sufficiently to keep pace with our investments, our business may be harmed. In addition, as a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company, which we anticipate will increase our general and administrative expenses on an absolute dollar basis.

Because we expect to incur significant costs and expenses to grow our business, and we may incur expenses prior to generating incremental revenue with respect thereto, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in an increase in revenue to offset these expenses, which would further increase our losses.

If we do not innovate and continuously improve and expand our platform to create value for Compass agents and clients, our business could be negatively impacted.

Our success depends on our ability to continuously innovate and improve our platform to provide value to our agents, including developing our customer relationship management, marketing center, listing, search, comparative market analysis, and other products for agents. As a result, we must continually invest significant resources in research and development to improve the attractiveness and comprehensiveness of our platform. Our investments in our platform allow us to provide an expanded suite of technology offerings, such as customer relationship management and differentiated search functionality, which we believe separate us from our competitors. In addition, we have expanded the adjacent services we make available to certain of our agents, such as title and escrow services, through organic growth and selective acquisitions. As a result, we believe our platform is differentiated on the basis of both its technology and the breadth of our offerings. However, if we fail to continue to innovate and expand our platform, our agents may become dissatisfied and use competitors’

 

20


Table of Contents

offerings or leave our company, which could negatively impact our business, financial condition and results of operations.

The outbreak of the COVID-19 coronavirus pandemic has had a material effect on our business, and could continue to do so.

The extent of the impact of the COVID-19 coronavirus pandemic on our business and financial results will depend largely on future developments, including the duration and extent of the spread of COVID-19 within the United States, the prevalence of local, regional and national restrictions and regulatory orders that impact our business, and the impact on capital and financial markets and on the U.S. and global economies, all of which are highly uncertain and cannot be predicted. Our success depends on a high volume of residential real estate transactions throughout the markets in which we operate. This transaction volume affects all of the ways that we generate revenue, including generation of commissions from transactions executed by our agents and the number of transactions our title and escrow business closes. In the second quarter of 2020, the COVID-19 pandemic significantly and adversely affected residential real estate transaction volume. Since that time, in addition to general macroeconomic instability, many governmental authorities put in place limitations on in-person activities related to the sale of residential real estate, such as prohibitions or restrictions on in-home showings, inspections and appraisals, and availability or hours of local real property documentation searches and new recordings. Although these measures were largely lifted later in 2020, and our results of operations showed no adverse impact in the third and fourth quarters of 2020, there can be no assurance that such measures will not be implemented in the future or that the pandemic will not again adversely affect transaction volume. In addition, many of our employees are still required to work remotely, which may adversely affect our efficiency and morale.

While our business has recovered since the beginning of the pandemic, as the ongoing COVID-19 pandemic continues to impact the overall U.S. economy, we believe that consumer spending on real estate transactions may be adversely affected by a number of macroeconomic factors related to the COVID-19 pandemic, including but not limited to:

 

   

increased unemployment rates and stagnant or declining wages;

 

   

decreased consumer confidence in the economy and recessionary conditions;

 

   

lower yields on individuals’ investment portfolios or volatility and declines in the stock market;

 

   

lower rental prices in certain markets reducing demand to purchase homes; and

 

   

more stringent mortgage financing conditions, including increased down payment requirements.

We operate in highly competitive markets and we may be unable to compete successfully against competitors.

We operate in a competitive and fragmented industry, and we expect competition to continue to increase. We believe that our ability to compete depends upon many factors both within and beyond our control, including the following:

 

   

our ability to attract and retain agents;

 

   

the timing and market acceptance of our products and services for Compass agents and clients, including new products and services offered by us or our competitors;

 

   

the attractiveness of our adjacent services for agents as well as clients;

 

   

our ability to attract top engineering talent to further develop and improve our technology to support our business model; and

 

   

our brand strength relative to our competitors.

 

21


Table of Contents

Our business model depends on our ability to continue to attract Compass agents and clients to our platform, and to enhance their engagement in a cost-effective manner. We face competition on a national level and in each of our markets from traditional real estate brokerage firms, some of which operate nationally and others that are limited to a specific region or regions. We also face competition from technology companies, including a growing number of Internet-based brokerages and others who operate with a variety of business models.

New entrants, particularly smaller companies offering point solutions, continue to join our market categories. However, our existing and potential competitors include technology companies and real estate brokerages that operate, or could develop, national and/or local businesses offering similar services, including real estate brokerage, title insurance and escrow services, to home buyers or sellers. Several of these technology companies which may enter our market categories could have significant competitive advantages, including better name recognition, greater resources, lower cost of funds and additional access to capital, and more types of offerings than we currently do. These companies may also have higher risk tolerances or different risk assessments than we do. In addition, these competitors could devote greater financial, technical and other resources than we have available to develop, grow or improve their businesses.

Monetary policies of the federal government and its agencies may have a material impact on our business, results of operations and financial condition.

Our business is significantly affected by the monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board. These policies regulate the supply of money and credit in the United States and impact the real estate market through their effect on interest rates.

Increases in mortgage rates adversely impact housing affordability and we have in the past been and could in the future be negatively impacted by a rising interest rate environment. For example, a rise in mortgage rates could result in decreased sale transaction volume if potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates. Changes in the Federal Reserve Board’s policies, the interest rate environment, and the mortgage market are beyond our control, are difficult to predict, and could have an adverse impact on our business, results of operations and financial condition.

Any decrease in our gross commission income or the percentage of commissions that we collect may harm our business, results of operations and financial condition.

Our business model depends upon our agents’ success in generating gross commission income, which we collect and from which we pay to them net commissions. Real estate commission rates vary somewhat by market, and although historical rates have been relatively consistent over time across markets, there can be no assurance that prevailing market practice will not change in a given market, or across the industry, in the future. Customary commission rates could change due to market forces locally or industry-wide, as well as due to regulatory or legal changes in such markets, including as a result of litigation or enforcement actions. In addition, a result of a nation-wide settlement by the National Association of Realtors, new Multiple Listing Service, or MLS, rules will require disclosure to consumers of buyers’ agents commission rates for each MLS listing, which could cause commission rates to decrease over time. If any such decrease in commission rates were to occur, our business, financial condition, and results of operations may be adversely impacted.

In addition, there can be no assurance that we will be able to maintain the percentage of commission income that we collect from our agents for their use of our platform. If industry conditions change such that other platforms offer similar technologies to ours at a lower price or for free, we may be forced to reduce the percentage of commissions that we collect from our agents, and our business, financial condition, and results of operations may be adversely impacted.

 

22


Table of Contents

Our efforts to expand our business and offer additional adjacent services may not be successful.

As we have grown rapidly, we have expanded to offer additional technologies, products and services on our platform to agents. For example, in 2018 we began offering escrow services, and in 2020 we began offering title services and launched Compass Lens, our machine-learning home valuation product. We have invested significant resources in these and other new product and services offerings we expect to launch in the future. However, there can be no guarantee that we can continue to launch new products and services in a timely manner, or at all. Even if we do launch new products and services, if they are not utilized by our agents at the rate we expect, or at all, our business, financial condition, and results of operations may be adversely affected.

Our quarterly results and other operating metrics may fluctuate from quarter to quarter, which makes these metrics difficult to predict.

Our results of operations have fluctuated in the past and are likely to fluctuate significantly from quarter-to-quarter and year-to-year in the future for a variety of reasons, many of which are outside of our control and difficult to predict. As a result, you should not rely upon our historical results of operations as indicators of future performance. Numerous factors can influence our results of operations, including:

 

   

our ability to attract and retain agents;

 

   

our ability to develop new solutions and offer new services on our platform;

 

   

changes in interest rates or mortgage underwriting standards;

 

   

the actions of our competitors;

 

   

costs and expenses related to the strategic acquisitions and partnerships;

 

   

increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

   

changes in the legislative or regulatory environment, including with respect to real estate commission rates and disclosures;

 

   

system failures or outages, or actual or perceived breaches of security or privacy, and the costs associated with preventing, responding to, or remediating any such outages or breaches;

 

   

adverse judgments, settlements, or other litigation-related costs and the fees associated with investigating and defending claims;

 

   

the overall tax rate for our business and the impact of any changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued and may significantly affect the effective tax rate of that period;

 

   

the application of new or changing financial accounting standards or practices; and

 

   

changes in regional or national business or macroeconomic conditions, including as a result of the COVID-19 pandemic, which may impact the other factors described above.

In addition, our results of operations are tied to certain key business metrics and non-GAAP financial measures that have fluctuated in the past and are likely to fluctuate in the future. As a result of such variability, our historical performance, including from recent quarters or years, may not be a meaningful indicator of future performance and period-to-period comparisons also may not be meaningful.

The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

Our success depends upon the continued service of our senior management team, including, in particular, Robert Reffkin, our founder, Chairman and Chief Executive Officer. Our success also depends on our ability to manage

 

23


Table of Contents

effective transitions when management team members pursue other opportunities. In addition, our business depends on our ability to continue to attract, motivate and retain a large number of skilled employees across our company, including employees with public company experience. Furthermore, much of our key technology and processes are custom-made for our business by our personnel. The loss of key engineering, product development, operations, marketing, sales and support, finance and legal personnel could also adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. In addition, we currently do not have “key person” insurance on any of our employees.

We face intense competition for qualified individuals from numerous software and other technology companies. To attract and retain key personnel, we incur significant costs, including salaries and benefits and equity incentives. Even so, these measures may not be enough to attract and retain the personnel we require to operate our business effectively.

Actions by our agents or employees could adversely affect our reputation and subject us to liability.

Our success depends on the performance of our agents and employees. Although our agents are independent contractors, if they were to provide lower quality services to clients in a given market or overall, our image and reputation could be adversely affected. In addition, if our agents make fraudulent claims about properties they show, if their transactions lead to allegations of errors or omissions, or if they engage in self-dealing or do not disclose conflicts of interest to clients, we could also be subject to litigation and regulatory claims which, if adversely determined, could adversely affect our business, financial condition and results of operations. For example, if an agent were to recommend that a client use an escrow service in which the agent had an ownership interest but failed to disclose that interest to the client and to us, we could see our reputation tarnished and be held liable for the agent’s failure to disclose that interest under the Real Estate Settlement Proceeding Act. Similarly, we are subject to risks of loss or reputational harm in the event that any of our employees violate applicable laws, as such laws may harm our agents’ businesses or impact clients.

If we pursue acquisitions that are not successfully completed or integrated into our existing operations, our business, financial condition or results of operations may be adversely affected.

We continue to evaluate a wide array of potential strategic opportunities, including acquisitions and “acqui-hires” of businesses in new geographies. We sometimes engage in small acquisitions of businesses or agents to provide us with greater access to a given market. At times, we may look to larger acquisitions to provide us with additional technology or adjacent services to further enhance our platform and accelerate our ability to offer new products. For example, in 2020, we acquired Modus Technologies, Inc., a title and escrow company, that provided us with a platform to offer title services to our agents. Such strategic transactions that we enter into could be material to our financial condition and results of operations, and there can be no guarantee that they will result in the intended benefits to our business, and we may not successfully evaluate or utilize the acquired agents, businesses, products, or technology, or accurately forecast the financial impact of a strategic transaction. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures, particularly in new markets.

Our failure to address risks or other problems encountered in connection with our past or future strategic transactions could cause us to fail to realize the anticipated benefits of such strategic transactions, incur unanticipated liabilities, and harm our business, financial condition and results of operations. Strategic transactions may require us to issue additional equity securities, spend a substantial portion of our available cash, or incur debt or liabilities, amortize expenses related to intangible assets, or incur write-offs of goodwill, which could adversely affect our business, financial condition and results of operations and dilute the economic and voting rights of our then-current stockholders.

 

24


Table of Contents

A change in mortgage underwriting standards could reduce the ability of homebuyers to access the credit markets on reasonable terms, or at all.

During the past several years, many lenders have significantly tightened their underwriting standards and many alternative mortgage products have become less available in the marketplace. In addition, certain lenders added new criteria or approvals necessary to underwrite mortgages in response to the COVID-19 pandemic. Underwriting standards could be changed or tightened as a result of changes in regulations, including regulations enacted to increase guarantee fees of federally-insured mortgages. More stringent mortgage underwriting standards could adversely affect the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes in order to purchase new homes, which would adversely affect our business, financial condition and results of operations.

We may not be able to maintain or establish relationships with multiple listing services and third-party listing services, which could limit the information we are able to provide to Compass agents and clients.

Our ability to attract agents to our platform and to appeal to clients depends upon providing a robust number of listings. To provide these listings, we maintain relationships with multiple listing services and other third-party listing providers and aggregators, as well as our agents themselves to include listing data in our services. Certain of our agreements with real estate listing providers are short-term agreements that may be terminated with limited notice. The loss of some of our existing relationships with listing providers, whether due to termination of agreements or otherwise, changes to our rights to use listing data, or an inability to continue to add new listing providers, may cause our listing data to omit information important to Compass agents or clients. In addition, in March 2021 we filed a complaint against the Real Estate Board of New York, or REBNY, alleging certain anticompetitive practices. REBNY is the trade association which runs New York City’s listing service. Although we do not view these alleged anticompetitive practices as having been in the past, or likely to be in the future, material to our business as a whole, we believe the reversal of such practices would be beneficial to our business in the New York market. However, litigation is inherently uncertain and can be costly, time-consuming and distracting to management. Any loss or changes to our rights to use listing data or add listings, or any similar loss of rights in the markets we serve, could negatively impact agent and client confidence in the listing data we provide and reduce our ability to attract and retain agents, which could harm our business, financial condition, and results of operations.

Cybersecurity incidents could disrupt business operations and result in the loss of critical and confidential information or litigation or claims arising from such incidents, any of which may adversely impact our reputation and business, financial condition and results of operations.

We face growing risks and costs related to cybersecurity threats to our operations, our data and agent and client data, including but not limited to:

 

   

the failure or significant disruption of our operations from various causes, including human error, computer malware, ransomware, insecure software and systems, zero-day vulnerabilities, threats to or disruption of third-party vendors who provide critical services, or other events related to our critical information technologies and systems;

 

   

the increasing level and sophistication of cybersecurity attacks, including distributed denial of service attacks, data theft, fraud or malicious acts on the part of trusted insiders, social engineering (including phishing attempts), or other unlawful tactics aimed at compromising the systems and data of Compass agents and clients (including through systems not directly controlled by us, such as those maintained by our agents and third-party service providers); and

 

   

the reputational and financial risks associated with a loss of data or material data breach (including unauthorized access to our proprietary business information or personal information of Compass agents and clients), the transmission of computer malware, or the diversion of sale transaction closing funds.

 

25


Table of Contents

Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to information technology systems via viruses, ransomware and other malicious software, to phishing, or to advanced and targeted attempts to breach systems launched by individuals, organizations or sponsored nation state actors. These attacks may be directed at our business, our employees, agents, and clients and third-party service providers. An attack, threat or breach of one system can impact one or more other systems.

In the ordinary course of our business, we and our third-party service providers, our employees, agents and clients may collect, store and transmit sensitive data, including our proprietary business information and intellectual property and that of Compass agents and clients as well as personal information, sensitive financial information and other confidential information of our employees, agents and clients. Our agents’ use of our platform to access and store data presents us with uncertainties and risks, as they may accidentally or deliberately cause private information to be transmitted through unsecure channels which may lead to breaches or other leaks of such information.

Additionally, we increasingly rely on third-party data processing, storage providers, and critical infrastructure services, including cloud solution providers. The secure processing, maintenance and transmission of this information are critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures, controls and adherence to our agreements. A breach or attack affecting one of our third-party service providers or partners could adversely impact our business even if we do not control the service that is attacked.

Moreover, the real estate industry is actively targeted by cybersecurity threat actors which attempt to conduct electronic fraudulent activity (such as phishing), security breaches and similar attacks directed at participants in real estate services transactions. In common with others in our industry, we manage and hold confidential personal information, including potentially sensitive personal information belonging to employees, agents or the clients or other individuals with whom they transact, in the operation of our online platform services. Accordingly, we have been and continue to be subject to a range of cyber-attacks, such as email-based phishing attacks on our agents. Historically, these attacks have not been material either individually or in the aggregate. We have enhanced our security measures in order to mitigate the risk of similar attacks in the future. However, there can be no assurance that our enhanced security measures, which are also partially dependent upon the security practices of our agents, will timely detect or prevent other cyber-attacks in the future. Cyber-attacks could give rise to the loss of significant amounts of agents’ data and other sensitive information. In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our agents. Such threats to our business may be wholly or partially beyond our control as our employees, agents and clients and other third-party service providers may use e-mail, computers, smartphones and other devices and systems that are outside of our security control environment. In addition, real estate transactions involve the transmission of funds by the buyers and sellers of real estate and consumers or other service providers selected by the consumer that may be the subject of direct cyber-attacks that result in the fraudulent diversion of funds, notwithstanding efforts we have taken to educate consumers with respect to these risks.

In addition, the increasing prevalence and sophistication of cyber-attacks as well as the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those of our employees, agents, clients, and third-party service providers, has led and will likely continue to lead to increased costs to us with respect to identifying, protecting, detecting, responding, recovering, mitigating, insuring against and remediating these risks, as well as any related attempted or actual fraud.

Moreover, we are required to comply with growing regulations at the local, state and federal level in the United States, and in other countries where we have operations, that regulate cybersecurity, privacy and related matters, some of which impose steep fines and penalties for noncompliance. Any further expansion domestically or internationally will necessarily subject us to additional, and possibly more stringent, regulations and penalty structures.

 

26


Table of Contents

While we, our employees, our agents, and clients have experienced and expect to continue to experience these types of threats and incidents, none of them to date has been material to our business. Although we employ measures to identify, protect, detect, address and mitigate these threats (including access controls, data encryption, penetration testing, vulnerability assessments, and maintenance of backup and protective systems), and conduct diligence on the security measures employed by key third-party service providers, cybersecurity incidents, depending on their nature and scope, could potentially result in harm to confidentiality, integrity, and availability of critical systems, data and confidential or proprietary information (our own or that of third parties, including personal information and financial information) and the disruption of business operations.

The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S. and international privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the products and services we provide to our agents and clients, and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), any of which in turn could have a material adverse effect on our competitiveness and business, financial condition and results of operations. We cannot be certain that our insurance coverage will be adequate for data security liabilities actually incurred, will cover any indemnification claims against us relating to any incident, will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, financial condition and results of operations.

We could be subject to losses if banks do not honor our escrow and trust deposits.

We act as escrow agents for certain Compass clients. As an escrow agent, we receive money from clients to hold until certain conditions are satisfied. Upon the satisfaction of those conditions (in most cases as confirmed by such clients, lenders, their respective agents or other third parties), we release the money to the appropriate party. We deposit this money with various depository banks and while these deposits are not assets of our business (and therefore excluded from our consolidated balance sheet), we remain contingently liable for the disposition of these deposits. These escrow and trust deposits totaled $24.7 million and $46.1 million as of December 31, 2019 and 2020, respectively. A significant amount of these deposits held by depository banks may be in excess of the federal deposit insurance limit. If any of our depository banks were to become unable to honor any portion of our deposits, clients could seek to hold us responsible for such amounts and, if the clients prevailed in their claims, we could be subject to significant losses.

A significant adoption by consumers of alternatives to full-service agents could have an adverse effect on our business, financial condition and results of operations.

A significant change in consumer sales that eliminates or minimizes the role of the agent in the real estate transaction process could have an adverse effect on our business, financial condition and results of operations. These options may include direct-buyer companies (also called iBuyers) that purchase directly from the seller at below-market rates in exchange for speed and convenience and then resell them shortly thereafter at market prices, and discounters who reduce the role of the agent in order to offer sellers a low commission or a flat fee while giving rebates to buyers. Consumer preferences regarding buying or selling houses and financing their home purchase will determine if these models reduce or replace the long-standing preference for full-service agents.

We plan to expand into international markets, which will expose us to significant risks.

A component of our future growth strategy involves the further expansion of our operations and establishment of an agent base internationally. We are continuing to adapt and develop strategies to address international markets,

 

27


Table of Contents

but there is no guarantee that such efforts will have the desired effect. For example, we may need to establish relationships with new partners or acquire businesses in order to expand into certain countries, and if we fail to identify, establish, and maintain such relationships or successfully identify and acquire businesses, we may be unable to execute on our expansion plans. Although we maintain engineering and related operations in India, none of our agents are located outside of the United States and we currently do not engage in any non-U.S. real property transactions, except for de-minimis transactions through partnerships with local non-U.S. brokerages. We expect that our international activities will grow in the future as we pursue opportunities in international markets, which may require significant dedication of management attention and will require significant upfront investment.

Our current and future international business and operations involve a variety of risks, including the need to adapt and localize our platform for specific countries; unexpected changes in trade relations, regulations, or laws; new, evolving, and more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal information, particularly in Europe and Canada; difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems, and regulatory systems; increased travel, real estate, infrastructure, and legal compliance costs associated with international operations; and regulations, adverse tax burdens, and foreign exchange controls that could make it difficult to repatriate earnings and cash.

If we invest substantial time and resources to establish international operations and are unable to do so successfully or in a timely manner, our business, financial condition, and results of operations may be adversely impacted.

Our management team will be required to evaluate the effectiveness of our internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy of our financial reports.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will be required to deliver an attestation report on the effectiveness of our disclosure controls and internal control over financial reporting. An adverse report may be issued in the event our independent registered public accounting firm is not satisfied with the level at which our controls are documented, designed or operating.

When evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is ineffective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, we could fail to meet our reporting obligations or be required to restate our financial statements for prior periods.

In addition, our internal control over financial reporting will not prevent or detect all errors and fraud. Because of the inherent limitations in all control systems, no evaluation can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If there are material weaknesses or failures in our ability to meet any of the requirements related to the maintenance and reporting of our internal control, investors may lose confidence in the accuracy and completeness of our financial reports and that could cause the price of our Class A common stock to decline. In addition, we could become subject to investigations by the applicable stock exchange, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.

 

28


Table of Contents

We have identified material weaknesses in our internal controls over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

Recently, in connection with the preparation of our consolidated financial statements as of December 31, 2018, 2019 and 2020 and for the years then ended, we identified material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We did not design or maintain an effective control environment as we lacked sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training commensurate with public company requirements. This material weakness resulted in our identification of the following additional material weaknesses:

 

 

We did not maintain formal accounting policies and procedures, and did not design, document and maintain controls related to substantially all of our business processes to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries; and

 

 

We did not design and maintain effective controls over information technology, or IT, general controls or information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately that are relevant to the preparation of our financial statements, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate personnel, (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored, and (iv) testing and approval of controls for program development to ensure that new software development is aligned with business and IT requirements.

These IT deficiencies, when aggregated, could impact effective segregation of duties as well as the effectiveness of IT-dependent controls that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.

None of the control deficiencies described above resulted in a material misstatement to the our annual consolidated financial statements. However, each of the material weaknesses described above could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.

To address our material weaknesses, we have added personnel and engaged an external advisor to assist with evaluating and documenting the design and operating effectiveness of our internal controls over financial reporting and assisting with the remediation of deficiencies, including implementing new controls and processes. We intend to continue to take steps to remediate the material weaknesses described above through hiring additional personnel with public company experience, and further evolving our accounting and business processes related to internal controls over financial reporting. We will not be able to fully remediate these material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time.

Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal

 

29


Table of Contents

controls over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal controls over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our annual or interim financial statements.

Neither our management nor our independent registered public accounting firm has performed an evaluation of our internal controls over financial reporting in accordance with the SEC rules because no such evaluation has been required. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until the filing of our second Annual Report on Form 10-K following this offering. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal controls over financial reporting is documented, designed, or operating. Any failure to implement and maintain effective internal controls over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal controls over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

Covenants in our debt agreements may restrict our borrowing capacity or operating activities and adversely affect our financial condition.

Our Revolving Credit and Security Agreement with Barclays Bank PLC, or the Concierge Facility, and our Revolving Credit and Guaranty Agreement with Barclays Bank PLC, or the Revolving Credit Facility, contain, and any future agreement relating to additional indebtedness which we may enter into may contain, various financial covenants. The Concierge Facility, which is secured by, and can be used to borrow against, eligible receivables and cash related to a part of our Compass Concierge program, and our Revolving Credit Facility, which is secured by substantially all the assets of us and our subsidiary guarantors, contains customary representations, warranties, affirmative covenants, such as financial statement reporting requirements, negative covenants, and financial covenants applicable to us and our restricted subsidiaries. The negative covenants include restrictions that, among other things, restrict our and our subsidiaries’ ability to incur liens and indebtedness, make certain investments, declare dividends, dispose of, transfer or sell assets, make stock repurchases and consummate certain other matters, all subject to certain exceptions. In certain cases, we may be required to repay all of the relevant debt immediately; the occurrence of such an event may have an adverse impact on our financial condition and results of operations.

Our ability to use our net operating losses, or NOLs, and other tax attributes may be limited.

As of December 31, 2020, we had approximately $882.5 million of federal and $870.7 million of state NOLs available to offset future taxable income. Certain of our federal NOLs and our state NOLs will begin to expire in 2032. The realization of these net operating losses depends on our future taxable income and there is a risk that these carryforwards could expire unused, which could materially affect our operating results. In addition, under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period is subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes such as research tax credits to offset future taxable income. We have not performed an analysis to determine whether our past issuances of stock and other changes in our stock ownership may have resulted in one or more ownership changes. If it is determined that we have in the past experienced an ownership change, or if

 

30


Table of Contents

we undergo one or more ownership changes as a result of this offering or future transactions in our stock, then our ability to utilize NOLs and other pre-change tax attributes could be limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 or 383 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we were to achieve profitability.

We rely on assumptions, estimates, and business data to calculate our key performance indicators and other business metrics, and real or perceived inaccuracies in these metrics may harm our reputation and negatively affect our business.

Certain of our performance metrics are calculated using third party applications or internal company data that have not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring such information. In addition, our measure of certain metrics may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology and as a result our results may not be comparable to our competitors.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that our market opportunity estimates will reflect actual revenue that we will generate from our platform in the future. Any expansion in our markets depends on a number of factors, including the cost, performance, and perceived value associated with our platform and the products and services of our competitors. Even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, if at all.

Changes in accounting standards, subjective assumptions and estimates used by management related to complex accounting matters could have an adverse effect on our business, financial condition and results of operations.

Generally accepted accounting principles in the United States of America, or GAAP, and related accounting pronouncements, implementation guidance and interpretations with regard to a wide range of matters, such as revenue recognition, lease accounting, stock-based compensation, asset impairments, valuation reserves, income taxes and the fair value and associated useful lives of acquired long-lived assets, intangible assets and goodwill, are highly complex and involve many subjective assumptions, estimates and judgments made by management. Changes in these rules or their interpretations or changes in underlying assumptions, estimates or judgments made by management could significantly change our reported results and adversely impact our business, financial condition and results of operations.

Our platform is highly complex and our software may contain undetected errors.

Our platform is highly complex and the software and code underlying our platform is interconnected and may contain undetected errors, bugs, or vulnerabilities, some of which may only be discovered after the code or software has been released. We release or update software code regularly and this practice may result in the more frequent introduction of errors, bugs, or vulnerabilities into the software underlying our platform, which can impact the agent and client experience on our platform. Additionally, due to the interoperative nature of the software and the systems underlying our platform, modifications to certain parts of our code, including changes to our mobile app, website, systems or third party application programming interfaces on which our platform

 

31


Table of Contents

rely, could have an unintended impact on other sections of our software or system, which may result in errors, bugs, or vulnerabilities to our platform. Any errors, bugs, or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of our agents or clients, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business, financial condition and results of operations.

Furthermore, our development and testing processes may not detect errors, bugs, or vulnerabilities in our technology offerings prior to their implementation as they may not be identified or detected at the time of implementation. Any inefficiencies, errors, bugs, system misconfiguration, technical problems or vulnerabilities arising in our technology offerings after their release could reduce the quality of our products, system performance, or interfere with our agents’ access to and use of our technology and offerings.

Our management team has limited experience in operating a public company.

Our management team has limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.

Our company culture has contributed to our success, and if we cannot maintain this culture as we grow, our business could be harmed.

We believe that our company culture, which promotes innovation and entrepreneurship, has been critical to our success. We are guided by our principles including dreaming big, moving fast, learning from reality and being solutions-driven. However, as we grow, we may face challenges that may affect our ability to sustain our culture, including:

 

   

failure to identify, attract, reward and retain people in leadership positions in our organization who share and further our culture, values and mission;

 

   

the increasing size and geographic diversity of our workforce;

 

   

shelter-in-place orders in certain jurisdictions where we operate that have required many of our employees to work remotely;

 

   

the inability to achieve adherence to our internal policies and core values;

 

   

the continued challenges of a rapidly-evolving industry;

 

   

the increasing need to develop expertise in new areas of business that affect us;

 

   

negative perception of our treatment of employees or our response to employee sentiment related to political or social causes or actions of management; and

 

   

the integration of new personnel and businesses from acquisitions.

In addition, we have at times undertaken workforce reductions to better align our operations with our strategic priorities, to manage our cost structure or in connection with acquisitions. For example, in response to the early effects of the COVID-19 pandemic on the industry, including our business, we took certain cost-cutting measures, including remote work, reductions-in-force and certain salary reductions. Although the salary reductions have been reversed and we have made our employees whole through additional equity awards, there can be no assurance that these actions will not adversely affect employee morale, our culture and our ability to attract and retain employees. If we are not able to maintain our culture, our business, financial condition and results of operations could be adversely affected.

 

32


Table of Contents

Our ability to recruit agents depends on the strength of our reputation, and adverse media coverage could harm our business.

We believe that we have developed a strong reputation for helping agents succeed on the basis of our rapid growth in recent years, the technological sophistication of our platform, and our ability to offer a wide range of high-quality services. General awareness and the perceived quality and differentiation of our platform are important aspects of our efforts to attract and retain agents. In addition, our actions and growth are frequently reported on in national and regional trade publications and other media, and media coverage of our business can be critical, and may not be fair or accurate. Our reputation may be harmed due to adverse media coverage related to our actions, the actions of our agents, or other unforeseeable events, which may cause our ability to attract and retain agents may suffer. If we are unable to maintain or enhance agent awareness of our business, or if our reputation is damaged in a given market or nationally, our business, financial condition and results of operations could be harmed.

Some of our potential losses may not be covered by insurance. We may not be able to obtain or maintain adequate insurance coverage.

We maintain insurance to cover costs and losses from certain risk exposures in the ordinary course of our operations, but our insurance does not cover all of the costs and losses from all events. We are responsible for certain retentions and deductibles that vary by policy, and we may suffer losses that exceed our insurance coverage limits by a material amount. We may also incur costs or suffer losses arising from events against which we have no insurance coverage. In addition, large-scale market trends or the occurrence of adverse events in our business may raise our cost of procuring insurance or limit the amount or type of insurance we are able to secure. We may not be able to maintain our current coverage, or obtain new coverage in the future, on commercially reasonable terms or at all. Incurring uninsured or underinsured costs or losses could harm our business.

We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and violation of these privacy obligations could result in a claim for damages, regulatory action, loss of business, or unfavorable publicity.

We receive, store and process personal information and other employee, agent and agents’ client information. There are numerous federal and state laws, as well as regulations and industry guidelines, regarding privacy and the storing, use, processing, and disclosure and protection of personal information, which are continually evolving, subject to differing interpretations, and may be inconsistent between state and federal governments and across countries or conflict with other rules. Additionally, laws, regulations, and standards covering marketing and advertising activities conducted by telephone, email, mobile devices, and the internet, may be applicable to our business, such as the Telephone Consumer Protection Act, or the TCPA (as implemented by the Telemarketing Sales Rule), the CAN-SPAM Act, and similar state consumer protection laws. We seek to comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data security protection to the extent possible. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or regulations, making enforcement, and thus compliance requirements, ambiguous, uncertain, and potentially inconsistent. Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to agents, clients or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized access to or unintended release of personally identifiable information or other agent or client data, may result in governmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others. Any of these events could cause us to incur significant costs in investigating and defending such claims and, if found liable, pay significant damages. Further, these proceedings and any subsequent adverse outcomes may cause our agents and clients to lose trust in us, which could have a materially adverse effect on our reputation and business.

 

33


Table of Contents

Any significant change to applicable laws, regulations or industry practices regarding the use or disclosure of personal information, or regarding the manner in which the express or implied consent of agents and clients for the use and disclosure of personal information is obtained, could require us to modify our products and features, possibly in a material manner and subject to increased compliance costs, which may limit our ability to develop new products and features that make use of the personal information that clients voluntarily share. For example, California recently enacted legislation, the California Consumer Privacy Act, or CCPA, that became operative on January 1, 2020 and became enforceable by the California Attorney General on July 1, 2020, along with related regulations which came into force on August 14, 2020. The CCPA gives California residents expanded rights related to their personal information, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared and increases the privacy and security obligations of businesses handling personal data. The CCPA is enforceable by the California Attorney General and there is also a private right of action relating to certain data security incidents. The CCPA provides for civil penalties for violations, which could result in statutory penalties of up to $2,500 per violation, or up to $7,500 per violation if the violation is intentional. We cannot yet fully predict the impact of the CCPA or subsequent guidance on our business or operations, but it may require us to further modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Decreased availability and increased costs of information could adversely affect our ability to meet our agents’ requirements and could have an adverse effect on our business, results of operations, and financial condition.

Additionally, a recent California ballot initiative, the California Privacy Rights Act, or CPRA, imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt-outs for certain uses of sensitive data and sharing of personal data starting in January 2023. As voted into law by California residents in November 2020, the CPRA could have an adverse effect on our business, results of operations, and financial condition. The effects of the CCPA and CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation. Any of the foregoing could materially adversely affect our business, results of operations and financial condition.

Our agents operate as independent contractors and are responsible for their own data privacy compliance. However, we provide training and our platform provides tools and security controls to assist our agents with their data privacy compliance to the extent they store relevant data on our platform. However, if an agent on our platform were to be subject to a claim for breach of data privacy laws, we could be found liable for their claims due to our relationship, which can require us to take more costly data security and compliance measures or to develop more complex systems.

Our fraud detection processes and information security systems may not successfully detect all fraudulent activity by third parties aimed at our employees or agents, which could adversely affect our reputation and business results.

Third-party cybersecurity threat actors have attempted in the past, and may attempt in the future, to conduct fraudulent activity by engaging with Compass agents or clients, including in our title insurance and escrow business. We make a large number of wire transfers in connection with loan and real estate closings and process sensitive personal data in connection with these transactions. Although we have sophisticated fraud detection processes and have taken other measures to continuously improve controls to identify fraudulent activity on our mobile app, website and internal systems, we may not be able to detect and prevent all such activity. Persistent or pervasive fraudulent activity may cause agents or clients to lose trust in us and decrease or terminate their usage of our platform, which could materially harm our operations, business, results, and financial condition.

 

34


Table of Contents

We utilize a number of third-party service providers to deliver web and mobile content and any disruption or delays in service from these third-party providers could adversely impact the delivery of our platform.

We primarily rely on Amazon Web Services in the U.S. to host our cloud computing and storage needs. We do not own, control, or operate our cloud computing physical infrastructure or their data center providers. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, system vulnerabilities, earthquakes and similar events at the sites of such providers. The occurrence of any of the foregoing events could result in damage to systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur.

A failure of these systems at one or multiple sites could result in reduced capabilities or a total failure of our systems, which could cause our mobile app or website to be inaccessible, impairing our agents ability to use our platform. Problems faced by our third-party cloud service providers with their telecommunications network providers with which they contract or with the systems by which they allocate capacity among their customers, including us, could adversely affect the experience of our agents. Our third-party cloud service providers could decide to close their facilities without adequate notice resulting in loss of service and negative effects in our systems. Any financial difficulties, such as bankruptcy reorganization, faced by our third-party web-hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web-hosting providers are unable to keep up with our growing needs for capacity, Compass’ agents, clients and business could be harmed. In addition, if distribution channels for our mobile app experience disruptions, such disruptions could adversely affect the ability of agents and potential clients to access or update our mobile app, which could harm our business.

We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, which may result from interruptions in our service as a result of system failures. Any errors, defects, disruptions or other performance problems with our services could harm our business, results of operations, and financial condition.

Third parties with whom we do business may be unable to honor their obligations to us or their actions may put us at risk.

We rely on third parties for various aspects of our business, including technology collaborations, advertising partners and development services agreements. Although we require these parties to sign our data security addendum, their actions may put our business, reputation and brand at risk. In many cases, third parties may be given access to sensitive and proprietary information or personal data in order to provide services and support to our teams or agents, and they may misappropriate and engage in unauthorized use of our information, technology or agents’ or clients’ data. In addition, the failure of these third parties to provide adequate services and technologies, or the failure of the third parties to adequately maintain or update their services and technologies, could result in a disruption to our business operations. Further, disruptions in the mobile application industry, financial markets, economic downturns, poor business decisions, or reputational harm may adversely affect our partners and may increase their propensity to engage in fraud or otherwise illegal activity which could harm our business reputation, and they may not be able to continue honoring their obligations to us, or we may cease our arrangements with them. Alternative arrangements and services may not be available to us on commercially reasonable terms or at all and we may experience business interruptions upon a transition to an alternative partner or vendor. If we lose one or more business relationships, or experience a degradation of services, our business could be harmed and our financial results could be adversely affected.

Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

There is an increasing focus from certain investors, employees and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance factors. Some investors may use these

 

35


Table of Contents

factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance. The criteria by which companies’ corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies.

Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and financial results could be materially and adversely affected.

Catastrophic events may disrupt our business.

Natural disasters or other catastrophic events may cause damage or disruption to our operations, real estate commerce, and the global economy, and thus could harm our business. For example, the COVID-19 pandemic and the reactions of governments, markets, and the general public to the COVID-19 pandemic, has resulted in and may continue to have a number of consequences for our business and results of operations, the ultimate magnitude of which is difficult to predict. Additionally, properties located in the markets in which we operate, including New York, Northern California, Southern California and South Florida, are more susceptible to certain natural hazards (such as fires, hurricanes, earthquakes, floods, or hail) than properties in other parts of the country.

In the event of a major fire, hurricane, earthquake, windstorm, tornado, flood or catastrophic event such as pandemic, flood, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure reputational harm, delays in developing our platform and solutions, breaches of data security and loss of critical data, all of which could harm our business, results of operations and financial condition. Closures of local recording offices or other governmental offices in charge of real property records, including tax or lien-related records, would adversely affect our ability to conduct operations in the affected geographies. Any of these delays will likely result in extended hold times, increased costs, and value impairment. Also, the insurance we maintain would likely not be adequate to cover our losses resulting from disasters or other business interruptions.

As we grow our business, the need for business continuity planning and disaster recovery plans will increase in significance. If we are unable to develop adequate plans to ensure that our business functions continue to operate during and after a disaster, and successfully execute on those plans in the event of a disaster or emergency, our business and reputation would be harmed.

Risks Related to Our Legal and Regulatory Environment

We are periodically subject to claims, lawsuits, government investigations and other proceedings that may adversely affect our business, financial condition and results of operations.

We may be subject to claims, lawsuits, arbitration proceedings, government investigations and other legal and regulatory proceedings in the ordinary course of business, including those involving labor and employment, anti-discrimination, commercial disputes, competition, professional liability and consumer complaints, intellectual property disputes, compliance with regulatory requirements, antitrust and anti-competition claims (including

 

36


Table of Contents

claims related to the National Association of Realtors or MLS rules regarding buyer broker commissions), securities laws and other matters, and we may become subject to additional types of claims, lawsuits, government investigations and legal or regulatory proceedings as our business grows and as we deploy new offerings, including proceedings related to our acquisitions, securities issuances or business practices.

The results of any such claims, lawsuits, arbitration proceedings, government investigations or other legal or regulatory proceedings cannot be predicted with certainty. Any claims against us or investigations involving us, whether meritorious or not, could be time-consuming, result in significant defense and compliance costs, be harmful to our reputation, require significant management attention and divert significant resources. Determining reserves for our pending litigation is a complex and fact-intensive process that requires significant subjective judgment and speculation. It is possible that a resolution of one or more such proceedings could result in substantial damages, settlement costs, fines and penalties that could adversely affect our business, financial condition and results of operations. These proceedings could also result in harm to our reputation and brand, sanctions, consent decrees, injunctions or other orders requiring a change in our business practices. Any of these consequences could adversely affect our business, financial condition and results of operations. Furthermore, under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of our business and commercial partners and current and former directors, officers and employees.

As an example of a current litigation matter, we are party to a lawsuit involving plaintiff Avi Dorfman, who seeks compensation for certain services and other contributions allegedly provided in our formation; if Mr. Dorfman prevails, we may be forced to issue equity securities to him, which could cause dilution to our current investors and to purchasers in this offering. See the section titled “Business—Legal Proceedings” for additional information.

In addition, since 2016 we have included mandatory arbitration provisions in our agreements with each of our agents, and since 2018 we have added mandatory arbitration provisions in our agreements with our employees. The provisions are intended to cover all disputes between us and our employees and agents, if permitted by law. These provisions are intended to streamline the litigation process for all parties involved, as arbitration can in some cases be faster and less costly than litigating disputes in state or federal court. However, arbitration may become more costly for us or the volume of arbitration may increase and become burdensome, and the use of arbitration provisions may subject us to certain risks to our reputation and brand, as these provisions have been the subject of increasing public scrutiny. In addition, these mandatory arbitration provisions are intended to cover claims related to our agent equity program, if permitted by law, though it is currently unclear whether these such provisions are enforceable with respect to claims arising under the U.S. federal securities laws. In order to minimize these risks to our reputation and brand, we may limit our use of arbitration provisions or be required to do so in a legal or regulatory proceeding, either of which could increase our litigation costs and exposure.

Further, with the potential for conflicting rules regarding the scope and enforceability of arbitration on a state-by-state basis, as well as between state and federal law, there is a risk that some or all of our arbitration provisions could be subject to challenge or may need to be revised to exempt certain categories of protection. If our arbitration agreements were found to be unenforceable, in whole or in part, or specific claims are required to be exempted from arbitration, we could experience an increase in our costs to litigate disputes and the time involved in resolving such disputes, and we could face increased exposure to potentially costly lawsuits, each of which could adversely affect our business, financial condition and results of operations.

Our agents are independent contractors, and if federal or state law mandates that they be classified as employees, our business, financial condition, and results of operations would be adversely impacted.

We recruit agents as independent contractors and are subject to federal regulations and applicable state laws and guidelines regarding independent contractor classifications. These regulations, laws and guidelines are subject to judicial and agency interpretation. Moreover, such regulations, laws, guidelines and interpretations continue to

 

37


Table of Contents

evolve. California changed its classification laws effective January 1, 2020 (with a specific carveout for real estate agents) and the United States Congress and certain states have introduced proposed changes to existing classification law; additionally, the Biden administration may make additional changes to applicable laws. If our business is found to have misclassified employees as independent contractors, we could face penalties and have additional exposure under laws regarding employee classification, federal and state tax, workers’ compensation, unemployment benefits, compensation, overtime, minimum wage, and meal and rest periods. Further, if legal standards for classification of our agents as independent contractors change or appear to be changing, it may be necessary to modify the compensation structure for our agents, including by paying additional compensation or reimbursing expenses. We face claims from time to time alleging misclassification of status and it could be determined that the independent contractor classification is inapplicable to any of our agents. We could also incur substantial costs, penalties and damages due to any such future challenges by current or former professionals to our classification or compensation practices, including with respect to their status as exempt or non-exempt employees. Any of these outcomes could result in substantial costs to us, could significantly impair our financial condition and our ability to conduct our business as currently contemplated, and could damage our reputation and impair our ability to attract agents.

We are subject to a variety of federal and state laws, many of which are unsettled and still developing, and certain of our businesses are highly regulated. Any failure to comply with such regulations or any changes in such regulations could adversely affect our business.

Our real estate brokerage business, our title and escrow business and the businesses of our agents must comply with RESPA and a variety of similar state regulations. RESPA and comparable state statutes prohibit providing or receiving payments, or other things of value, for the referral of business to escrow service providers in connection with the closing of real estate transactions involving federally-backed mortgages. Such laws may to some extent impose limitations on arrangements involving our real estate brokerage, escrow services, and title agency. RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers if certain requirements are met, including fee splits between title underwriters and agents, brokers and agents, and market-based fees for the provision of goods or services and marketing arrangements. In addition, RESPA allows for referrals to affiliated entities, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations for most industry participants offering escrow services, including brokerages, because of expansive interpretations of RESPA or similar state statutes by certain courts and regulators. Permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued. RESPA also has been invoked by plaintiffs in private litigation for various purposes and some state authorities have also asserted enforcement rights. In addition, title and escrow services are highly regulated. Our title agency services business also is subject to regulation by insurance and other regulatory authorities in each state in which we provide title insurance. In response to complaints made by competitive title companies in early 2020 before we acquired Modus on October 9, 2020, the State of Washington Office of Insurance Commissioner ordered our Modus Title subsidiary’s insurance producer license revoked as of April 1, 2021. We have appealed the order, staying the revocation pending that appeal. We do not expect any material impact to our business based on the outcome of that appeals process and potential remediation options available to us. Additionally, state regulations may impede or impose burdensome conditions on our ability to take actions that we may want to take to enhance our results of operations.

We are also, to a lesser extent, subject to various other rules and regulations such as “controlled business” statutes, which impose limitations on affiliations between providers of title and escrow services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand, or similar laws or regulations that would limit or restrict transactions among affiliates in a manner that would limit or restrict collaboration among our businesses.

For certain licenses, we are required to designate individual licensed brokers of record, qualified individuals and control persons. Certain licensed entities also are subject to routine examination and monitoring by state

 

38


Table of Contents

licensing authorities. We cannot assure you that we, or our licensed personnel, are and will remain at all times, in full compliance with state and federal real estate, title insurance and escrow, and consumer protection laws and regulations, and we may be subject to litigation, government investigations and enforcement actions, fines or other penalties in the event of any non-compliance. As a result of findings from examinations, we also may be required to take a number of corrective actions, including modifying business practices and making refunds of fees or money earned. In addition, adverse findings in one state may be relied on by another state to conduct investigations and impose remedies. If we apply for new licenses, we will become subject to additional licensing requirements, which we may not be in compliance with at all times. If in the future a state agency were to determine that we are required to obtain additional licenses in that state in order to operate our business, or if we lose or do not renew an existing license or are otherwise found to be in violation of a law or regulation, we may be subject to fines or legal penalties, lawsuits, enforcement actions, void contracts or our business operations in that state may be suspended or prohibited. Our business reputation with consumers and third parties also could be damaged. Compliance with, and monitoring of, these laws and regulations is complicated and costly and may inhibit our ability to innovate or grow.

Our failure to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations.

We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal or civil liability and harm our business, financial condition, and results of operations.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, U.S. domestic bribery laws, and other anti-corruption and anti-money laundering laws in the countries in which we conduct business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, and their third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. If we engage in international sales and business with partners and third-party intermediaries to market our products, we may be required to obtain additional permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. If we engage in international sales and business with the public sector, we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, agents, representatives, contractors, and partners, even if we do not explicitly authorize such activities.

While we have policies and procedures to address compliance with such laws, there is a risk that our employees and agents will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. If we further expand internationally, our risks under these laws may increase. Any such noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, and adversely affect our business, financial condition, and results of operations.

We may be subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

If we expand our brokerage business to international markets, our platform may become subject to U.S. export controls, including the U.S. Export Administration Regulations. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, our activities are subject to U.S. economic sanctions laws and regulations

 

39


Table of Contents

administered by the U.S. Treasury Department’s Office of Foreign Assets Control that prohibit the sale or supply of most products and services to embargoed jurisdictions or sanctioned parties. Violations of U.S. sanctions or export control regulations can result in significant fines or penalties and possible incarceration for responsible agents, employees and managers.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to operate our platform in those countries. Changes in our platform or future changes in export and import regulations may impede the introduction of our platform in international markets, prevent our agents with international clients from using our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether, and may adversely affect our business, financial condition, and results of operations.

Internet law is evolving, and unfavorable changes to, or failure by us to comply with, these laws and regulations could adversely affect our business, financial condition and results of operations.

We are subject to regulations and laws specifically governing the Internet. The scope and interpretation of the laws that are or may be applicable to our business are often uncertain, subject to change and may be conflicting. If we incur costs or liability as a result of unfavorable changes to these regulations or laws or our failure to comply therewith, the business, financial condition and results of operations of our business could be adversely affected. Any costs incurred to prevent or mitigate this potential liability could also harm our business, financial condition and results of operations.

Adverse decisions in litigation against companies unrelated to us could impact our business practices and those of our agents in a manner that adversely impacts our financial condition and results of operations.

Litigation, claims and regulatory proceedings against other participants in the residential real estate or technology industry may impact us when the rulings in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, and sales agent classification. Similarly, we may be impacted by litigation and other claims against companies in other industries. To the extent plaintiffs are successful in these types of litigation matters, and we or our agents cannot distinguish our or their practices (or our industry’s practices), we and our agents could face significant liability and could be required to modify certain business practices or relationships, either of which could materially and adversely impact our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.

Our trade secrets, trademarks, copyrights and other intellectual property rights are important assets, and litigation to defend intellectual property can be expensive and lengthy. Various factors outside of our control also pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which our products and services are available. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. Despite our efforts to protect our proprietary rights, there can be no assurance our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business or that unauthorized parties may attempt to copy aspects of our technology and use information that we consider proprietary.

In addition to registered intellectual property rights such as trademark registrations, we rely on non-registered proprietary information and technology, such as trade secrets, confidential information, know-how and technical

 

40


Table of Contents

information. In order to protect our proprietary information and technology, we rely in part on agreements with our employees, investors, independent contractors and other third parties that place restrictions on the use and disclosure of this intellectual property. These agreements may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become known to our competitors, which could cause us to lose any competitive advantage resulting from this intellectual property. To the extent that our employees, independent contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. The loss of trade secret protection could make it easier for third parties to compete with our products and services by copying functionality. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, financial condition, results of operations and competitive position.

We may pursue registration of trademarks and domain names in the United States and in certain jurisdictions outside of the United States. Effective protection of trademarks and domain names is expensive and difficult to maintain, both in terms of application and registration costs as well as the costs of defending and enforcing those rights. We may be required to protect our rights in an increasing number of countries, a process that is expensive and may not be successful or which we may not pursue in every country in which our products and services are distributed or made available. Foreign countries have different laws and regulations regarding protection of intellectual property, and the protection available in other jurisdictions may not be as effective as that provided in the United States.

We may be unable to obtain trademark protection for our technologies and brands, and our existing trademark registrations and applications, and any trademarks that may be used in the future, may not provide us with competitive advantages or distinguish our products and services from those of our competitors. In addition, our trademarks may be contested, circumvented, or found to be unenforceable, weak or invalid, and we may not be able to prevent third parties from infringing or otherwise violating them. To counter infringement or unauthorized use of our trademarks, we may deem it necessary to file infringement claims, which can be expensive and time consuming. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. An adverse outcome in such litigation or proceedings may expose us to a loss of our competitive position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all.

Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Efforts to enforce or protect proprietary rights may be ineffective and could result in substantial costs and diversion of resources, which could harm our business and results of operations.

Our products and services may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from providing our products and services.

We cannot guarantee that our internally developed or acquired systems, technologies and content do not and will not infringe the intellectual property rights of others. In addition, we use content, software and other intellectual property rights from third parties and may be subject to claims of infringement or misappropriation if we have failed to obtain appropriate intellectual property licenses from such parties, or such parties do not possess the necessary intellectual property rights to the products or services they license to our business. We have in the past and may in the future be subject to claims that we have infringed the copyrights, trademarks, or other intellectual property rights of a third party. Any intellectual property-related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and divert management resources and attention.

 

41


Table of Contents

Should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages, limit or curtail our offerings and technologies or take other action, which could harm our business and results of operations. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and could expose our business to significant liabilities.

We rely on licenses to use the intellectual property rights of third parties which are incorporated into our products and services. Failure to renew or expand existing licenses may require us to modify, limit or discontinue certain offerings, which could materially affect our business, financial condition and results of operations.

We rely on products, technologies and intellectual property that we license from third parties for use in our services. We cannot assure that these third-party licenses, or support for such licensed products and technologies, will continue to be available to us on commercially reasonable terms, if at all. In the event that we cannot renew and/or expand existing licenses, we may be required to discontinue or limit our use of the products and technologies that include or incorporate the licensed intellectual property.

We cannot be certain that our licensors are not infringing the intellectual property rights of others or that our suppliers and licensors have sufficient rights to the technology in all jurisdictions in which we may operate. Some of our license agreements may be terminated by our licensors for convenience. If we are unable to obtain or maintain rights to any of this technology because of intellectual property infringement claims brought by third parties against our suppliers and licensors or against us, or if we are unable to continue to obtain the technology or enter into new agreements on commercially reasonable terms, our ability to develop our services containing that technology could be severely limited and our business could be disrupted or otherwise harmed. Additionally, if we are unable to obtain necessary technology from third parties, we may be forced to acquire or develop alternate technology, which may require significant time and effort and may be of lower quality or performance standards. This would limit and delay our ability to provide new or competitive offerings and increase our costs. If alternate technology cannot be obtained or developed, we may not be able to offer certain functionality as part of our offerings, which could adversely affect our business, financial condition and results of operations.

Some of our products and services contain open source software, which may pose particular risks to our proprietary software, products, and services in a manner that could have a negative effect on our business.

We use open source software in our products and services and anticipate using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost, and we may be subject to such terms. The terms of certain open source licenses to which our business is subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we could face claims from third parties alleging ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated products or services unless and until it can re-engineer such source code in a manner that avoids infringement. This re-engineering process could require us to expend significant additional research and development resources, and we may not be able to complete the re-engineering process successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and results of operations.

 

42


Table of Contents

Risks Related to this Offering, the Securities Markets and Ownership of Our Class A common stock

The multi-class structure of our common stock will have the effect of concentrating voting power with Robert Reffkin, our founder, Chairman and Chief Executive Officer, which will limit your ability to influence the outcome of matters submitted to our stockholders for approval, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions.

Our Class A common stock, which is the stock we are offering by means of this prospectus, has one vote per share, our Class B common stock has no voting rights, except as otherwise required by law, and our Class C common stock has 20 votes per share. As of the date of this prospectus, Robert Reffkin, our founder, Chairman and Chief Executive Officer, will hold all of the issued and outstanding shares of Class C common stock. Accordingly, upon the closing of this offering, and without giving effect to any purchases by Mr. Reffkin pursuant to his indication of interest in participating in this offering, our founder will hold approximately 47% of the voting power of our outstanding capital stock in the aggregate, which voting power may increase over time as our founder vests in equity awards, including certain performance-based equity awards, outstanding at the time of completion of this offering, pursuant to his right to require us to exchange any shares of Class A common stock for shares of Class C common stock.

If all such equity awards held by our founder had been vested and settled as of the date of the completion of this offering, and without giving effect to any purchases by Mr. Reffkin pursuant to his indication of interest in participating in this offering, our founder would hold approximately 70% of the voting power of our outstanding capital stock. As a result, our founder will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction. Our founder may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing, or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company, and might ultimately affect the market price of our Class A common stock.

Future transfers by the holders of Class C common stock will generally result in those shares automatically converting into shares of Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning or other transfers by our founder. In addition, each share of Class C common stock will convert automatically into one share of Class A common stock upon the earlier of (i) the date fixed by our board of directors that is no less than 61 days and no more than 180 days following the first date following the completion of this offering on which the number of shares of our Class C common stock held by our founder, his permitted entities and permitted transferees is less than 50% of the number of shares of Class C common stock held by our founder, permitted transferees and permitted entities as of the date of this prospectus; (ii) the date fixed by our board of directors that is no less than 61 days and no more than 180 days following the first date following the completion of this offering that both (A) our founder is no longer providing services to us as an officer, employee or consultant and (B) our founder is no longer a member of our board of directors as a result of a voluntary resignation by our founder or as a result of a written request or agreement by our founder not to be renominated as a member of our board of directors at a meeting of our stockholders; (iii) the date fixed by our board of directors that is no less than 61 days and no more than 180 days following the date on which our founder is terminated for cause (as defined in our restated certificate of incorporation); (iv) the date that is 12 months after the death or disability (as defined in our restated certificate of incorporation) of our founder; (v) two days prior to the date specified in writing upon which our shares of capital stock will be included on the S&P 500 index following written notice and confirmation from Standard & Poor’s of such specified date and; (vi) the date specified by the affirmative vote of the holders of our Class C common stock not representing less than two-thirds (2/3) of the voting power of the outstanding shares of our Class C common stock, voting

 

43


Table of Contents

separately as a single class; or (vii) seven years from the date of this prospectus. For information about our multi-class structure, see the section titled “Description of Capital Stock.”

In addition, because our Class A common stock has one vote per share and our Class B common stock carries no voting rights (except as otherwise required by law), if we issue Class C common stock in the future upon the vesting and settlement of equity awards held by our founder, the holders of Class C common stock may be able to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders for a longer period of time than would be the case if we issued Class A common stock or Class B common stock rather than Class C common stock in such transactions. Finally, after the completion of this offering, we anticipate that our board of directors may vote to effect the automatic conversion of all outstanding shares of Class B common stock into an equivalent number of shares of Class A common stock. Any such action may further reduce the voting power held by purchasers in this offering, as such shares of previously non-voting stock receive voting rights. See the section titled “Description of Capital Stock—Anti-takeover Provisions” for additional information.

We cannot predict the effect our multi-class structure may have on the market price of our Class A common stock.

We cannot predict whether our multi-class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multi-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices and in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. However, pursuant to our restated certificate of incorporation, each share of our Class C common stock will convert into one share of our Class A common stock two days prior to the date specified in writing upon which our shares of capital stock will be included on the S&P 500 index following written notice and confirmation from Standard & Poor’s of such specified date and inclusion. Under such announced policies, the multi-class structure of our common stock would make us ineligible for inclusion in certain indices and may discourage such indices from selecting us for inclusion, notwithstanding this automatic termination provision. As a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to track those indices would not invest in our Class A common stock. It is unclear what effect, if any, these policies will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

There has been no prior public trading market for our Class A common stock, and an active trading market for our Class A common stock might not develop.

Before this offering, there has been no public market for shares of our Class A common stock. We cannot assure you that an active trading market for our shares will develop or, that any market will be sustained. We cannot predict the prices at which our Class A common stock will trade. The initial public offering price of our Class A common stock will be determined by negotiations between us and the underwriters, and may not bear any relationship to the price at which our Class A common stock will trade after the completion of this offering or to any other established criteria of the value of our business.

 

44


Table of Contents

In addition, the market price of our Class A common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your shares of our Class A common stock.

The trading price of the shares of our Class A common stock is likely to be volatile, and purchasers of our Class A common stock could incur substantial losses.

Technology and real estate stocks historically have experienced high levels of volatility. The trading price of our Class A common stock following this offering may fluctuate substantially. Following the completion of this offering, the market price of our Class A common stock may be higher or lower than the price you pay in the offering, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to incur substantial losses, including all of your investment in our Class A common stock. Factors that could cause fluctuations in the trading price of our Class A common stock include the following:

 

   

significant volatility in the market price and trading volume of technology companies in general and of companies in the real estate technology industry in particular;

 

   

changes in mortgage interest rates;

 

   

variations in the housing market, including seasonal trends and fluctuations;

 

   

announcements of new solutions, commercial relationships, acquisitions, or other events by us or our competitors;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

changes in how agents perceive the benefits of our platform and future offerings;

 

   

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

fluctuations in the trading volume of our shares or the size of our public float;

 

   

sales of large blocks of our common stock;

 

   

actual or anticipated changes or fluctuations in our results of operations or financial projections;

 

   

changes in actual or future expectations of investors or securities analysts;

 

   

litigation involving us, our industry, or both;

 

   

governmental or regulatory actions or audits;

 

   

regulatory developments applicable to our business, including those related to privacy in the United States or globally;

 

   

general economic conditions and trends;

 

   

major catastrophic events in our markets; and

 

   

departures of key employees.

In addition, if the market for technology or real estate stocks, or the stock market, in general, experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition or results of operations. The trading price of our Class A common stock might also decline in reaction to events that affect other companies in the real estate or technology industries even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company.

 

45


Table of Contents

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares, change their opinion of our business prospects or publish inaccurate or unfavorable research about our business, our share price may decline. If one or more of these analysts who cover us ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We may need to raise additional capital to continue to grow our business and we may not be able to raise additional capital on terms acceptable to us, or at all.

Growing and operating our business, including through the development of new and enhanced products and adjacent services and expansion into new markets, may require significant cash outlays, liquidity reserves and capital expenditures. If cash on hand, cash generated from operations and cash equivalents and investment balances are not sufficient to meet our cash and liquidity needs, we may need to seek additional capital and we may not be able to raise the necessary cash on terms acceptable to us, or at all. Financing arrangements we pursue or assume may require us to grant certain rights, take certain actions, or agree to certain restrictions, that could negatively impact our business. If additional capital is not available to us on terms acceptable to us or at all, we may need to modify our business plans, which would harm our ability to grow our operations.

If you purchase shares of our Class A common stock in this offering, your investment will experience immediate dilution.

We expect the initial public offering price of our Class A common stock to be substantially higher than the pro forma net tangible book value per share of our Class A common stock following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our Class A common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. Based on the assumed initial public offering price of $18.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, you will experience immediate dilution of $16.21 per share, representing the difference between our pro forma as adjusted net tangible book value per share as of December 31, 2020, after giving effect to the issuance of 25,000,000 shares of our Class A common stock in this offering. To the extent current or future outstanding equity awards are settled in shares of our capital stock, you will incur further dilution. Furthermore, if outstanding options are exercised, you could experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section titled “Dilution.”

Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could cause the market price of our Class A common stock to decline.

Sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act (including any shares that may be purchased by any of our affiliates in this offering). The remaining shares of our common stock are subject to the lock-up agreement or market stand-off agreements described below.

 

46


Table of Contents

Our lock-up period has two potential release dates, the first following our first earnings release or periodic report (either our quarterly report on Form 10-Q or annual report on Form 10-K), subject to certain conditions described below, and the second following 180 days after the date of this prospectus.

The terms of the lock-up agreements will expire as to 10% of the outstanding shares and vested equity awards held by each current and former holder of any series of our preferred stock and as to 5% of the outstanding shares and vested equity awards held by all other holders of our capital stock subject to the lock-up agreement if certain conditions are met, and we refer to the date on which this early release occurs as the Early Lock-Up Expiration Date. If such conditions are met, these shares will become available for sale after the close of trading on the second full trading day following the date on which all of the below conditions are satisfied:

 

(1)

such date occurs after we have publicly furnished at least one earnings release on Form 8-K or filed at least one periodic report with the SEC; and

 

(2)

on such date, and for 5 out of any 10 consecutive trading days ending on such date, the last reported closing price of our Class A common stock is at least 25% greater than the initial public offering price set forth on the cover page of this prospectus.

All remaining shares of common stock subject to the lock-up agreement and not released on the Early Lock-Up Expiration Date will be released upon the date that is 180 days from the date of this prospectus. When the lock-up period expires, we and our securityholders subject to a lock-up agreement or market stand-off agreement will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See the sections titled “Shares Eligible for Future Sale” and “Underwriting” for more information. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

In addition, as of December 31, 2020, we had options and RSUs outstanding that, if fully exercised, would result in the issuance of 94,348,890 shares of Class A common stock and 1,034,420 shares of Class B common stock. We also granted options to purchase 1,888,660 shares of our Class A common stock and RSUs settleable for 18,089,442 shares of our Class A common stock subsequent to December 31, 2020. All of the shares of Class A common stock issuable upon the exercise or settlement of stock options, RSUs, and the shares reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to existing lock-up or market standoff agreements and applicable vesting requirements.

Provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may limit attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a merger, acquisition or other change in control of our company that the stockholders may consider favorable. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, our restated certificate of incorporation and amended and restated bylaws include provisions that:

 

   

provide that our board of directors is classified into three classes of directors with staggered three-year terms;

 

   

permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

 

47


Table of Contents
   

require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

provide that only our chief executive officer, chairperson of our board of directors or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders;

 

   

prohibit cumulative voting;

 

   

provide that directors may only be removed “for cause” and only with the approval of the holders of at least two-thirds of the voting power of the then outstanding capital stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

Moreover, Section 203 of the Delaware General Corporation Law, or DGCL, may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.

Our restated certificate of incorporation and amended and restated bylaws contain exclusive forum provisions for certain claims, which may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware, to the fullest extent permitted by law, will be the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the DGCL, our restated certificate of incorporation, or our restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine.

Moreover, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Our restated certificate of incorporation provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or Federal Forum Provision. Our decision to adopt a Federal Forum Provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal or state courts will follow the holding of the Delaware Supreme Court or determine that the Federal Forum Provision should be enforced in a particular case, application of the Federal Forum Provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and the Federal Forum Provision will apply, to the fullest extent permitted by law, to suits brought to enforce any duty or liability created by the Exchange Act. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal court, to the fullest extent permitted by law.

Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.

 

48


Table of Contents

Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions, including the Federal Forum Provision. These provisions may limit a stockholders’ ability to bring a claim in a judicial forum of their choosing for disputes with us or our directors, officers, or employees, which may discourage lawsuits against us and our directors, officers, and employees. Alternatively, if a court were to find the choice of forum provision contained in our restated certificate of incorporation or restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and results of operations.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

We intend to use the net proceeds that we receive in this offering for working capital and other general corporate purposes, which may include technology and product development, sales and marketing, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. Consequently, our management will have broad discretion over the specific use of these net proceeds and may do so in a way with which our investors disagree. The failure by our management to apply and invest these funds effectively may not yield a favorable return to our investors and may adversely affect our business, financial condition and results of operations. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition and results of operations could be adversely affected.

Because we do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

We have never declared or paid any dividends on our common stock. We currently intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, the terms of our future debt agreements, if any, may prevent us from paying dividends. As a result, you may only receive a return on your investment in our Class A common stock if the market price of our Class A common stock increases.

We will incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

We will incur increased costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives. If we complete this offering and become a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules adopted, and to be adopted, by the SEC and the New York Stock Exchange. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives and may not effectively or efficiently manage our transition into a public company. Moreover, we expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be forced to accept reduced policy limits or incur substantially higher costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

49


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our expectations regarding our revenue, rate of growth, operating expenses including changes in sales and marketing, research and development, and general and administrative expenses (including any components of the foregoing) and our ability to achieve and sustain future profitability;

 

   

any changes in macroeconomic conditions and in U.S. residential real estate market conditions, including changes in prevailing interest rates or monetary policies;

 

   

the effects of the ongoing COVID-19 coronavirus pandemic in the markets in which we operate;

 

   

our business plan and our ability to effectively manage our expenses or grow our revenue;

 

   

anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

 

   

our ability to drive ongoing usage of our platform by agents;

 

   

our market opportunity;

 

   

our ability to expand into new domestic and international markets;

 

   

our ability to successfully develop and market our adjacent services;

 

   

our ability to attract and retain agents and expand their businesses;

 

   

beliefs and objectives for future operations;

 

   

the timing and market acceptance of our products and services for Compass agents and clients, including new products and services offered by us or our competitors;

 

   

the effects of seasonal and cyclical trends on our results of operations;

 

   

our expectations concerning relationships with third parties;

 

   

our ability to maintain, protect, and enhance our intellectual property;

 

   

the effects of increased competition in our markets and our ability to compete effectively;

 

   

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and, if and as applicable, internationally; and

 

   

economic and industry trends, growth forecasts, or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment.

 

50


Table of Contents

New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

 

51


Table of Contents

INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity, and market size, is based on information from various sources, as well as assumptions that we have made that are based on those data and other similar sources, and on our knowledge of the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity, and market size information included in this prospectus is generally reliable, information of this sort is inherently imprecise. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

This prospectus contains statistical data, estimates, and forecasts that are based on industry publications or reports generated by third-party providers, or other publicly available information, as well as other information based on our internal sources.

The sources of certain statistical data, estimates, and forecasts contained in this prospectus include:

 

   

Allied Market Research, Residential Real Estate Market: Global Opportunity Analysis and Industry Forecast 2020-2027—October 2020;

 

   

Borrell Associates, 2019 Real Estate Advertising Outlook—January 2019;

 

   

IBISWorld, US Industry (NAICS) Report 48421: Moving Services Annual Revenue in the US—September 2020;

 

   

IBISWorld, US Industry (NAICS) Report 53131: Property Management in the US—October 2020;

 

   

IBISWorld, US Industry (Specialized) Report OD4766: Homeowners’ Insurance—March 2020;

 

   

IBISWorld, US Industry (Specialized) Report OD4785: Home Warranty—October 2020;

 

   

National Association of REALTORS, 2020 Profile of Home Buyers and Sellers—November 2020;

 

   

National Association of REALTORS, Existing Home Sales Overview—January 2021; and

 

   

Technavio, Global Real Estate Software Market 2020-2024—February 2020.

This prospectus includes references to our Net Promoter Score, or NPS. NPS is a proxy for measuring agents’ brand loyalty and satisfaction, ranging from -100 to +100 based on the question: “On a scale of 0 to 10, with 10 being extremely likely, how likely are you to recommend Compass to another agent?” Our NPS is based on agents who respond to the survey question, which is automatically generated via email on a bi-monthly cadence, and evenly distributed across our markets. Our NPS is calculated by using the standard methodology of subtracting the percentage of agents who respond that they are not likely to recommend Compass (6 or lower) from the percentage of agents that respond that they are extremely likely to recommend Compass (9 or 10). The NPS gives no weight to agents who decline to answer the survey question. This method is substantially consistent with how businesses across our industry and other industries typically calculate their NPS. We use NPS to evaluate how satisfied agents are with our platform and how effective our platform is at enabling our agents to best serve clients.

 

52


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from the sale of 25,000,000 shares of our Class A common stock in this offering at an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $426.9 million, or $492.8 million if the underwriters’ option to purchase additional shares is exercised in full.

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share would increase (decrease) the net proceeds that we receive from this offering by approximately $23.8 million, assuming the number of shares of our Class A common stock offered by us remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our Class A common stock offered by us would increase (decrease) the net proceeds that we receive from this offering by approximately $17.6 million, assuming that the assumed initial public offering price of $18.50 remains the same, and after deducting the estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and enable access to the public equity markets for us and our stockholders. We primarily intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, which may include research and development, sales, and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time.

We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

 

53


Table of Contents

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. In addition, our Concierge Facility and Revolving Credit Facility contain restrictions on our ability to pay cash dividends on our capital stock. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information.

 

54


Table of Contents

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of December 31, 2020 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (1) the Capital Stock Conversions and the Class C Stock Exchange, as if such conversions and exchange had occurred as of December 31, 2020, (2) the filing and effectiveness of our restated certificate of incorporation and (3) an increase to additional paid-in capital and accumulated deficit related to stock-based compensation expense of $109.1 million associated with RSUs for which the service-based vesting condition was satisfied as of December 31, 2020 and for which the liquidity event-related performance vesting condition will be satisfied in connection with this offering. Payroll tax withholding and remittance obligations have not been included in the pro forma adjustments, as further described in Note 2 to our consolidated financial statements included elsewhere in this prospectus; and

 

   

a pro forma as adjusted basis to give effect to (1) the adjustments described above and (2) the sale and issuance of 25,000,000 shares of our Class A common stock offered in this offering at an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

55


Table of Contents

The pro forma as adjusted information below is illustrative only, and our cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

     As of December 31, 2020  
     Actual      Pro Forma      Pro Forma
as
Adjusted(1)
 
            (unaudited)  
     (in millions, except share and per share data)  

Cash and cash equivalents

   $ 440.1      $ 440.1      $ 867.9  
  

 

 

    

 

 

    

 

 

 

Convertible preferred stock, $0.00001 par value per share: 246,430,170 shares authorized, 237,047,550 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted

     1,486.7        —          —    

Stockholders’ equity:

        

Preferred stock, par value $0.00001 per share: no shares authorized, issued, and outstanding, actual; 25,000,000 shares authorized, no shares issued, and outstanding, pro forma and pro forma as adjusted

     —          —          —    

Class A common stock, $0.00001 par value per share: 530,136,050 shares authorized, 118,549,390 shares issued, and 116,299,390 shares outstanding, actual; 12,500,000,000 shares authorized, 365,008,950 shares issued and outstanding, pro forma; 12,500,000,000 shares authorized, 364,008,950 shares issued and outstanding, pro forma as adjusted

     —          —          —    

Class B common stock, $0.00001 par value per share: 170,618,860 shares authorized, 6,672,510 shares issued and outstanding, actual; 1,250,000,000 shares authorized, 6,672,510 shares issued and outstanding, pro forma; 1,250,000,000 shares authorized, 6,672,510 shares issued and outstanding, pro forma as adjusted

     —          —          —    

Class C common stock, $0.00001 par value per share: no shares authorized, issued and outstanding, actual; 100,000,000 shares authorized, 15,244,490 issued and outstanding, pro forma; 100,000,000 shares authorized, and 15,244,490 shares issued and outstanding, pro forma as adjusted

     —          —          —    

Additional paid-in capital

     238.0        1,833.8        2,260.7  

Accumulated other comprehensive income

     —          —          —    

Accumulated deficit

     (1,100.9      (1,210.0      (1,210.0
  

 

 

    

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (862.9      623.8        1,050.7  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 623.8      $ 623.8      $ 1,050.7  
  

 

 

    

 

 

    

 

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term

 

56


Table of Contents
  investments, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by approximately $23.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by approximately $17.6 million, assuming that the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares is exercised in full, the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization would increase by approximately $492.8 million, after deducting the estimated underwriting discounts and commissions, and we would have 368,758,950 shares of our Class A common stock, 6,672,510 shares of our Class B common stock and 15,244,490 shares of our Class C common stock issued and outstanding, pro forma as adjusted.

The number of shares of our Class A common stock, Class B common stock and Class C common stock outstanding as of December 31, 2020 excludes the following:

 

   

61,792,730 shares of our Class A common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $4.54 per share, pursuant to our 2012 Plan;

 

   

1,034,420 shares of our Class B common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $5.16 per share, outside of the 2012 Plan;

 

   

32,556,160 shares of our Class A common stock issuable upon the vesting and settlement of RSUs outstanding as of December 31, 2020, pursuant to our 2012 Plan, including (i) 5,809,610 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (ii) 25,072,580 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was not satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering and (iii) 1,673,970 shares issuable upon the settlement of additional RSUs;

 

   

1,888,660 shares of our Class A common stock issuable upon the exercise of options granted after December 31, 2020, with a weighted-average exercise price of $11.04 per share, pursuant to our 2012 Plan;

 

   

18,089,442 shares of our Class A common stock issuable upon the vesting and settlement of RSUs granted after December 31, 2020, pursuant to our 2012 Plan;

 

   

stock options to purchase up to a maximum of 1,406,730 shares of our Class A common stock, and an additional $20.0 million in shares of our Class A common stock, in each case which may be issuable in connection with the achievement of certain milestones in connection with certain of our past acquisitions; and

 

   

67,762,250 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of: (1) 11,679,150 shares of our Class A common stock reserved for future issuance under our 2012 Plan, as of December 31, 2020 (which reserve does not reflect the options to purchase shares of our Class A common stock and RSUs settleable for shares of our Class A common stock granted after December 31, 2020), and an additional 19,000,000 shares of our Class A common stock reserved for future issuance under our 2012 Plan subsequent to December 31, 2020, (2) 29,666,480 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (3) 7,416,620 shares of our Class A common stock reserved for issuance under our 2021 ESPP, which will become effective on the date of this prospectus.

 

57


Table of Contents

DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of Class A common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of Class A common stock immediately after this offering.

As of December 31, 2020, our pro forma net tangible book value was approximately $456.6 million, or $1.26 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2020, after giving effect to (1) the Capital Stock Conversions and the Class C Stock Exchange, as if such conversions and exchange had occurred on December 31, 2020, and (2) the filing and effectiveness of our restated certificate of incorporation.

After giving effect to our sale in this offering of 25,000,000 shares of our Class A common stock, at an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been approximately $885.3 million, or $2.29 per share. This represents an immediate increase in pro forma net tangible book value of $1.03 per share to our existing stockholders and an immediate dilution of $16.21 per share to investors purchasing Class A common stock in this offering at the assumed initial public offering price.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $ 18.50  

Pro forma net tangible book value per share as of December 31, 2020, before giving effect to this offering

   $ 1.26     

Increase in pro forma net tangible book value per share attributable to new investors in this offering

   $ 1.03     
  

 

 

    

Pro forma as adjusted net tangible book value per share

      $ 2.29  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $ 16.21  
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.06 per share and would increase (decrease) the dilution per share to new investors in this offering by $0.94 per share, assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $0.04 per share and would increase (decrease) the dilution to new investors by $(0.04) per share, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering would be $2.43 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $16.07 per share.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2020, after giving effect to the pro forma adjustments described above, the difference between existing stockholders and new investors

 

58


Table of Contents

purchasing shares of Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders or to be paid by investors purchasing shares in this offering at an assumed offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses:

 

     Shares Purchased     Total Consideration     Average
Price
 
     Number      Percent     Amount      Percent     Per
Share
 

Existing stockholders

     361,925,950        93.5   $ 1,833,800,000        79.9   $ 5.07  

New investors

     25,000,000        6.5     462,500,000        20.1   $ 18.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     386,925,950        100   $ 2,296,300,000        100   $ 5.93  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $23.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our Class A common stock. If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own 93% and our new investors would own 7% of the total number of shares of our common stock outstanding after this offering.

In addition, to the extent we issue any additional stock options or RSUs or any outstanding stock options are exercised or RSUs are settled, or we issue any other securities or convertible debt in the future, investors will experience further dilution.

The number of shares of our Class A common stock, Class B common stock and Class C common stock outstanding as of December 31, 2020 excludes the following:

 

   

61,792,730 shares of our Class A common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $4.54 per share, pursuant to our 2012 Plan;

 

   

1,034,420 shares of our Class B common stock issuable upon the exercise of options outstanding as of December 31, 2020, with a weighted-average exercise price of $5.16 per share, outside of the 2012 Plan;

 

   

32,556,160 shares of our Class A common stock issuable upon the vesting and settlement of restricted stock units, or RSUs, outstanding as of December 31, 2020, pursuant to our 2012 Plan, including (i) 5,809,610 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (ii) 25,072,580 shares issuable upon the vesting and settlement of RSUs for which the service-based vesting condition was not satisfied as of December 31, 2020 and for which the liquidity-based vesting condition will be satisfied in connection with this offering and (iii) 1,673,970 shares issuable upon the settlement of additional RSUs;

 

   

1,888,660 shares of our Class A common stock issuable upon the exercise of options granted after December 31, 2020, with a weighted-average exercise price of $11.04 per share, pursuant to our 2012 Plan;

 

   

18,089,442 shares of our Class A common stock issuable upon the vesting and settlement of RSUs granted after December 31, 2020, pursuant to our 2012 Plan;

   

stock options to purchase up to a maximum of 1,406,730 shares of our Class A common stock, and an additional $20.0 million in shares of our Class A common stock, in each case which may be issuable in connection with the achievement of certain milestones in connection with certain of our past acquisitions; and

 

59


Table of Contents
   

67,762,250 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of: (1) 11,679,150 shares of our Class A common stock reserved for future issuance under our 2012 Plan, as of December 31, 2020, and an additional 19,000,000 shares of our Class A common stock reserved for future issuance under our 2012 Plan subsequent to December 31, 2020 (which reserve does not reflect the options to purchase shares of our Class A common stock and RSUs settleable for shares of our Class A common stock granted after December 31, 2020), (2) 29,666,480 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (3) 7,416,620 shares of our Class A common stock reserved for issuance under our 2021 ESPP, which will become effective on the date of this prospectus.

 

60


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present selected historical financial and other data for our business. We derived our selected consolidated statements of operations data for 2018, 2019 and 2020 and our selected consolidated balance sheet data as of December 31, 2019 and December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. We derived our selected consolidated balance sheet data as of December 31, 2018 from our audited consolidated financial statements not included in this prospectus. We derived our selected consolidated statements of operations data for 2016 and 2017 and consolidated balance sheet data as of December 31, 2016 and 2017 from our accounting records that have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future. You should read the following selected consolidated financial and other data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this prospectus.

 

    Year Ended December 31,  
    2016(1)(2)     2017(1)(2)     2018(2)     2019     2020  
    (in millions, except share and per share data)        

Consolidated Statement of Operations Data:

         

Revenue

  $ 186.8     $ 370.3     $ 884.7     $ 2,386.0     $ 3,720.8  

Operating Expenses:

         

Commissions and other related expense(3)

    144.9       290.8       695.4       1,935.6       3,056.9  

Sales and marketing(3)

    47.5       63.5       174.3       382.8       407.9  

Operations and support(3)

    20.3       26.9       95.5       204.8       225.1  

Research and development(3)

    12.4       19.5       56.7       131.3       146.3  

General and administrative(3)

    21.0       29.8       85.7       92.4       106.7  

Depreciation and amortization

    3.6       5.4       14.8       40.9       51.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    249.7       435.9       1,222.4       2,787.8       3,994.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (62.9     (65.6     (237.7     (401.8     (273.3

Investment income, net

    0.4       0.8       8.4       12.9       2.0  

Interest expense

    —         —         —         —         (0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (62.5     (64.8     (229.3     (388.9     (271.9

Benefit from income taxes

    —         —         5.5       0.9       1.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (62.5   $ (64.8   $ (223.8   $ (388.0   $ (270.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(4)

  $ (0.74   $ (0.74   $ (2.26   $ (3.64   $ (2.46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted(4)

    84,279,360       87,103,410       98,930,220       106,529,880       109,954,760  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(4)

          $ (0.76
         

 

 

 

Pro forma weighted-average shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted(4)

            354,718,417  
         

 

 

 

 

61


Table of Contents

 

(1)

We adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective transition method. Comparative information for 2016 and 2017, as presented above, continues to be reported under ASC 605, Revenue Recognition.

(2)

We adopted ASC 842, Leases, effective January 1, 2019, using the modified retrospective transition method. Comparative information for 2016, 2017, and 2018, as presented above, continues to be reported under ASC 840, Leases.

(3)

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,  
     2016      2017      2018      2019      2020  
     (in millions)  

Commissions and other related expense

   $ —        $ —        $ 1.0      $ 16.1      $ 5.7  

Sales and marketing

     3.3        5.1        9.1        11.1        16.0  

Operations and support

     —          0.6        4.7        2.4        3.5  

Research and development

     0.5        1.2        4.0        2.8        1.4  

General and administrative

     3.7        8.8        33.7        5.0        16.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 7.5      $ 15.7      $ 52.5      $ 37.4      $ 43.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(4)

See Notes 2 and 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical and pro forma net loss per share attributable to common stockholders, basic and diluted, and the number of shares used in the computation of the per share amounts.

 

     As of December 31,  
     2016(1)(2)      2017(1)(2)      2018(2)      2019      2020  
     (in millions)  

Consolidated Balance Sheet Data:

              

Cash, cash equivalents and short-term investments

   $ 79.7      $ 137.5      $ 683.6      $ 547.2      $ 440.1  

Working capital(3)

     74.1        131.0        669.5        568.3        317.4  

Total assets

     133.8        193.8        968.2        1,471.6        1,365.1  

Total liabilities

     29.1        41.6        124.9        627.5        741.3  

Convertible preferred stock

     233.9        328.7        1,182.4        1,525.7        1,486.7  

Total stockholders’ deficit

     (129.2      (176.5      (339.1      (681.6      (862.9

 

  (1)

We adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective transition method. Comparative information for 2016 and 2017, as presented above, continues to be reported under ASC 605, Revenue Recognition.

  (2)

We adopted ASC 842, Leases, effective January 1, 2019, using the modified retrospective transition method. Comparative information for 2016, 2017, and 2018, as presented above, continues to be reported under ASC 840, Leases.

  (3)

We define working capital as current assets less current liabilities.

 

62


Table of Contents

Key Business Metrics and Non-GAAP Financial Measures

In addition to our financial results, we use the following business metrics to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions. To evaluate our operating performance, and for internal planning and forecasting purposes, we also use Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures. For additional information regarding these measures, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics and Non-GAAP Financial Measures.”

 

     Year Ended December 31,  
     2018     2019     2020  

Total Transactions

     27,188       87,158       144,784  

Gross Transaction Value (in billions)

   $ 33.7     $ 97.5     $ 151.7  

Average Principal Agents

     2,694       6,787       8,686  

Net Platform Retention Rate

     105     105     118

Net Loss

   $ (223.8   $ (388.0   $ (270.2

Net Loss Margin

     (25.3 )%      (16.3 )%      (7.3 )% 

Adjusted EBITDA(1) (in millions)

   $ (168.3   $ (324.6   $ (155.5

Adjusted EBITDA Margin(1)

     (19.0 )%      (13.6 )%      (4.2 )% 

 

  (1)

Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of net loss to Adjusted EBITDA, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics and Non-GAAP Financial Measures.”

 

63


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” or in other parts of this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Except as otherwise noted, all references to 2020 refer to the year ended December 31, 2020, references to 2019 refer to the year ended December 31, 2019, and references to 2018 refer to the year ended December 31, 2018.

OVERVIEW

Compass provides an end-to-end platform that empowers our residential real estate agents to deliver exceptional service to seller and buyer clients. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service and other critical functionality, all custom-built for the real estate industry and enabling our core brokerage services. Fundamentally, we believe that agents are, and will continue to be, central to residential real estate transactions. We help agents grow their businesses, serve more clients, save time, and stand out as valued, trusted and professional advisors in real estate transactions.

Through 2020, Compass agents have represented either sellers or buyers of more than 275,000 homes worth more than $300 billion. With 4% of the U.S. market, Compass is the largest independent real estate brokerage by Gross Transaction Value. Our agent-first approach and differentiated platform have delivered strong results for Compass agents and clients in 2020.

 

   

our agents close an average of 19% more transactions measured from their first year compared to their second year at Compass;

 

   

our agents sold homes in 21% fewer days, on average, relative to agents at firms with comparable average home sale values in our MLS Cities;

 

   

on average, 88% of our agent teams used our proprietary technology platform at least once per week, of which approximately two-thirds used it daily;

 

   

our principal agent retention rate exceeded 90%; and

 

   

our agents are strong advocates, giving Compass a Net Promoter Score of 68.1

Residential real estate is one of the largest and most complex industries in the world. According to the National Association of Realtors, or NAR, in 2020, more than 5.6 million homes were sold in the U.S., representing approximately $1.9 trillion in transaction value. Housing is the single largest consumer expenditure in the U.S., and homes are often a substantial source of household wealth.

Selling and buying a home is one of the most significant financial events in an individual’s life and often one of the most complex, time consuming, and consequential. Given the unique nature of each property, location, buyer, seller, negotiation, title and financing, a real estate agent’s role as the driver of the majority of the workflow is indispensable. According to NAR’s 2020 Profile of Home Buyers and Sellers, 89% of home sellers and 88% of home buyers use a real estate agent or broker, levels that have remained consistent over the last 10 years with 2011 levels at 87% and 89%, respectively.

 

1 

For further discussion on our Net Promoter Score, see “Industry and Market Data.”

 

64


Table of Contents

We believe the best agents are dynamic business owners, responsible for every function from attracting and

retaining clients to managing finance and operations. We believe these entrepreneurs are needlessly constrained by a plethora of disconnected technology solutions, manual processes and antiquated systems. The vast majority of technology products built for agents are narrow point solutions, requiring agents to spend significant time away from clients wrangling multiple, disjointed technology tools and manually transporting data among these tools. These inefficiencies not only frustrate agents, but also limit their ability to effectively serve clients.

We have built an integrated software platform that helps agents operate with the sophisticated capabilities of a modern technology company and the personal attention and service of a dedicated advisor. Using proprietary data, analytics, AI and machine learning, our platform delivers a broad set of industry-specific capabilities for Compass agents and clients.

We obsess over our agents’ success. We offer training and coaching, sales management, listing and transaction coordination, commission processing, and marketing design and consulting so that our agents can achieve their full potential.

We were founded in 2012 by Ori Allon and Robert Reffkin, first launching in New York City in 2013. We recognized an opportunity to use technology to elevate one of the largest industries in the world, residential real estate – the level of investment in technology in residential real estate still lags significantly behind the size of the industry and the influence on people’s daily lives.

We have expanded significantly since our founding, having successfully grown our footprint to 46 markets across the United States, as of February 2021. In 2020, our Gross Transaction Value was approximately $152 billion, which represented only 4% of residential real estate transacted in the United States. We calculate our market share by dividing our Gross Transaction Value, or the total dollar value of transactions closed by agents on our platform, by two times (to account for the sell-side and buy-side of each transaction) the aggregate dollar value of U.S. existing home sales as reported by NAR. Accordingly, we believe we are still in the early phases of broad market adoption.

 

65


Table of Contents

Since our founding, we have made significant progress in extending our platform offerings, expanding our market footprint and growing our agent base:

 

Key Milestones, Gross Transaction Value ($ in billions)

 

 

LOGO

 

66


Table of Contents

Our Business Model

Our business model is directly aligned with the success of our agents. Our platform provides an integrated suite of software for customer relationship management, marketing, client service, operations and other critical functionality, as well as brokerage services and adjacent services, all custom-built for the residential real estate industry. We attract agents to our brokerage and partner with them as independent contractors who affiliate their real estate licenses with us, operating their businesses on the Compass platform and under the Compass brand. Compass generates revenue from clients through Compass agents by assisting home sellers and buyers in listing, marketing, selling and finding homes as well as the provision of services adjacent to the transaction, like title and escrow services, which comprise a smaller portion of our revenue to date. We currently generate substantially all of our revenue from commissions paid to us by clients at the time that a home is transacted on our platform. In addition, we generate a smaller portion of our revenue from adjacent services that we provide through our platform in connection with a real estate transaction. We grow our revenues by attracting new agents, growing our existing agents’ revenue, and expanding revenue that comes from adjacent services.

Our revenue is comprised of the following components:

 

 

Commission revenue. We earn revenue from commissions we receive from clients when they are represented by our agents in a home transaction. The total commissions generated is the product of the Gross Transaction Value—the total dollar value of transactions closed by agents on our platform—and the commission rate paid by clients upon the closing of a real estate transaction. Commission rates for buy-side and sell-side transactions typically range between 2.5% and 3.0% of a home’s sale price. The commission paid is based on the terms of an exclusive listing agreement that is signed between Compass and the client. In addition, we generate a small portion of commissions revenue from rentals, new development projects, and commercial real estate transactions.

 

 

Adjacent services revenue. We also generate revenue from adjacent services related to a real estate transaction such as title and escrow, which we offer in certain markets. We plan to continue to expand these offerings across our markets, and to develop additional offerings to enhance the experience for Compass agents and clients. Adjacent services revenue also includes non-commission related revenue streams, including fees related to transaction coordination services and professional services related to our new development business. Adjacent services have not contributed a significant portion of our revenue to date, although we expect for these revenue streams to grow in the future.

The sum of the components above equates to our revenue, which is depicted below:

 

LOGO

We succeed when our agents succeed. When our agents help clients successfully buy or sell a home, they build trusted relationships that lead to repeat and referral business as well as the opportunity to recommend pre-sale, adjacent, and post-closing services and partners. As our platform delivers more value to agents and clients, more agents with established real estate businesses join the platform. As those agents grow their transaction volumes, generating more revenue for Compass, it enables us to invest further in the platform which creates a virtuous flywheel. Our flywheel is further strengthened by our principal agent retention rate which has exceeded 90% in each of the last three years. We define principal agents as any agents who are leaders of their respective agent teams or individual agents operating independently on our platform.

 

67


Table of Contents

To date, the vast majority of our revenue has come from commissions paid by clients related to the sale and purchase of homes on our platform. We expect that this revenue will continue to grow as we attract more agents to our platform and as their respective businesses grow. In addition, we plan to expand our adjacent services across our markets, and introduce new services. Growth in adjacent services will drive an increase in revenue.

To date, we have made substantial investments with a focus on rapidly growing our business and positioning ourselves to take advantage of the large market opportunity ahead of us. Since 2018, we have increased our investment in research and development, and have seen a corresponding improvement in operating leverage, reducing the cost required to support our agents on our platform by 49% from 2018 to 2020. We expect to continue to invest in research and development in order to:

 

 

Continue to enhance our integrated platform to help agents win more clients and generate more transactions, contact clients more frequently and efficiently, and better serve clients;

 

 

Accelerate expansion in new markets through faster data integration and ingestion, more efficient agent onboarding, and adaption of our solutions to the hyper-local requirements of specific markets, enabling us to launch multiple markets in a given month; and

 

 

Continue to provide high service levels for our agents while managing expense growth.

 

68


Table of Contents

KEY BUSINESS METRICS AND NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our consolidated financial statements, we use the following key business metrics and non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

 

     Year Ended December 31,  
     2018     2019     2020  

Total Transactions

     27,188       87,158       144,784  

Gross Transaction Value (in billions)

   $ 33.7     $ 97.5     $ 151.7  

Average Number of Principal Agents

     2,694       6,787       8,686  

Net Platform Retention Rate

     105     105     118

Net Loss

   $ (223.8   $ (388.0   $ (270.2

Net Loss Margin

     (25.3 )%      (16.3 )%      (7.3 )% 

Adjusted EBITDA(1) (in millions)

   $ (168.3   $ (324.6   $ (155.5

Adjusted EBITDA Margin(1)

     (19.0 )%      (13.6 )%      (4.2 )% 

 

  (1)

Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of net loss to Adjusted EBITDA, see the section titled “—Non-GAAP Financial Measures” below.

Key Business Metrics

Total Transactions

We define Total Transactions as the sum of all transactions closed on the Compass platform in which our agent represented the buyer or seller in the purchase or sale of a home. We include a single transaction twice when one or more Compass agents represent both the buyer and seller in any given transaction. We exclude transactions related to rentals in this metric.

Total Transactions

 

LOGO

Total Transactions is a key measure of the scale of our platform, which drives our financial performance. Total Transactions have increased over time as we recruited new agents in existing markets, expanded into new markets, retained top-performing agents, and as existing agents increased their productivity on our platform.

We experience seasonality in Total Transactions. In the real estate industry, a higher number of transactions close in the second and third quarters of the year than in the first and fourth quarters of the year. We believe that this seasonality has affected and will continue to affect our quarterly results. However, our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business. Our Total Transactions are also influenced by market conditions that affect home sales, such as local inventory levels and mortgage interest rates.

 

69


Table of Contents

Our Total Transactions were 27,188 in 2018 and 87,158 in 2019, a 221% increase. In 2020, our Total Transactions increased to 144,784, a 66% increase from 2019, notwithstanding the effect of the COVID-19 pandemic. This increase accelerated in the second half of 2020, as our business achieved four consecutive months of record revenue between June and September 2020. Robust housing demand was driven by a number of factors including: (i) historically low mortgage rates, (ii) pandemic-related home relocations and accelerations in purchases of second homes, and (iii) positive demographics as millennials are entering the housing market in larger numbers. We expect these factors to drive continued strong demand in 2021. Our Total Transactions were driven in part by our acquisition of Pacific Union International, Inc., or Pacific Union, which contributed approximately 13% and 9% of our Total Transactions in 2019 and 2020, respectively.

Gross Transaction Value

Gross Transaction Value is the sum of all closing sale prices for homes transacted by agents on the Compass platform. We include the value of a single transaction twice when our agents serve both the home buyer and home seller in the transaction. This metric excludes rental transactions.

Gross Transaction Value is a key measure of the scale of our platform and success of our agents, which ultimately impacts revenue. Gross Transaction Value is primarily driven by home values in the markets we serve and by changes in the number of our agents in those markets, as well as seasonality and macroeconomic factors. We experience seasonality in our Gross Transaction Value that is consistent with the seasonality of Total Transactions.

Gross Transaction Value (in billions)

 

LOGO

In recent years, we have seen our Gross Transaction Value grow from $33.7 billion in 2018 to $97.5 billion in 2019 and to $151.7 billion in 2020, representing growth of 189% from 2018 to 2019, and growth of 56% from 2019 to 2020. Our acquisition of Pacific Union contributed approximately 19% and 15% of our Gross Transaction Value in 2019 and 2020, respectively. We have experienced consistent and significant growth in the number of agents on our platform and the markets we serve, resulting in strong year-over-year growth rates in both Total Transactions and associated Gross Transaction Value. We believe that we have a significant opportunity to continue growing Gross Transaction Value as a result of our significant total addressable market opportunity as well as our platform advantages that we expect will continue to attract agents to our platform. We expect that Gross Transaction Value will continue to grow in line with Total Transactions, though the overall rate of growth will depend on changes in home sale prices and geographic mix.

 

70


Table of Contents

Average Number of Principal Agents

The Average Number of Principal Agents represents the number of agents who are leaders of their respective agent teams or individual agents operating independently on our platform during a given period. This figure is calculated by taking the average of the number of principal agents at the end of each month included in the period. We use the Average Number of Principal Agents, in combination with our other key metrics such as Total Transactions and Gross Transaction Value, as a measure of agent productivity. We view this figure to be an indicator of the potential future growth of our business, as well as the size and strength of our platform.

In 2018, 2019 and 2020, our Average Number of Principal Agents was 2,694, 6,787 and 8,686, respectively. Our 2020 Average Number of Principal Agents included 1,238 principal agents acquired through Pacific Union. In 2020, our Average Number of Principal Agents was 50% of our average number of total agents. Many of our agents are influential high performers in their respective markets, who joined us because they wanted to maximize their potential and deliver superior results for clients. Further, our business model is based on shared success with our agents: we succeed when our agents succeed. As our platform delivers more value to agents, more agents with established real estate businesses join the platform. As those agents grow their transaction volumes, it enables us to invest further in the platform. This has allowed us to maintain a retention rate that exceeded 90% among our principal agents for 2018, 2019 and 2020. Our principal agents generate revenue across a diverse set of real estate markets in the United States.

Average Number of Principal Agents

 

LOGO

We believe that we have the opportunity to continue growing our principal agent count both within and beyond the markets we currently serve. In 2020, our Gross Transaction Value was approximately $152 billion, which represented 4% of the U.S. market. We calculate our market share by dividing our Gross Transaction Value by two times (to account for the sell-side and buy-side of each transaction) the aggregate dollar value of U.S. existing home sales as reported by NAR. Our enterprise sales team has a demonstrated track record of success in attracting agents to our platform while our expansion team continues to launch new markets more efficiently, generating faster market share gains. Each year, a significant portion of our principal agents are recruited as part of our Compass Anywhere program, our mobile agent offering tailored to the needs of agents looking for more flexibility in operating their businesses. Principal agents who have opted for Compass Anywhere represented approximately 30% of the Average Number of Principal Agents in 2020. As we continue to refine the efficiency of our recruiting and expansion activities, we expect the percentage of Compass Anywhere agents on our platform to grow.

 

71


Table of Contents

Net Platform Retention Rate

We use Net Platform Retention Rate, and believe it is useful to investors, because it measures the health of our business and our ability to monetize home sale and purchase transactions over time. Specifically, the Net Platform Retention Rate measures the year-over-year (i) increase or decrease in commissions associated with homes sold or purchased by our clients through a Compass agent, (ii) increase or decrease in revenue that we generate from our clients through adjacent services, including title and escrow, and (iii) impact of the economic relationship with our agents.

The Net Platform Retention Rate for a given year demonstrates how revenue less commissions and other related expense trends year-over-year for specific cohorts of agents on our platform. The Net Platform Retention Rate in any given year is measured as follows: revenue less commissions and other related expense for that year (the “current measurement period”) divided by the same metric in the prior year (the “prior measurement period”) for the specific subset of agents who were on the platform in advance of the prior measurement period. For example, in 2020, to be included within the metric, an agent would need to have joined Compass in 2018 or prior. This metric reflects the impact of agents (and the associated spend from clients) who left Compass during the measurement period. For example, if an agent left the platform at the end of the prior measurement period, there would be no revenue attributable to this agent in the current measurement period, which would result in a lower Net Platform Retention Rate, reflecting this churn. The calculation of Net Platform Retention Rate excludes revenue and commissions associated with agents that joined Compass in connection with our acquisition of certain brokerages where information is not available on a cohort basis. In order to provide for better comparability between periods, the calculation also excludes the impact of the agent equity program by reflecting commissions and other related expense as though all commissions had been paid as cash commissions in all periods. See the section titled “Executive Compensation—Employee Benefits and Stock Plans” for additional information regarding our agent equity program.

Our Net Platform Retention Rate was 105% in both 2018 and 2019 and 118% in 2020. These results demonstrate our ability to grow revenue from transactions and adjacent services, as well as improve economics with our agents, for the same cohort of agents year-over-year. In each of 2018, 2019 and 2020, this growth more than offset the impact of agents (and the associated spend from clients) who left Compass. The Net Platform Retention Rate increased significantly to 118% in 2020 primarily due to the large cohort of agents who came onto our platform in 2018 and the uplift in transactions associated with those agents in 2020. This was driven, in part, by the market momentum in the second half of 2020, which impacted performance across all agents in the measurement cohort.

Net Platform Retention Rate is an operating measure and not a financial measure. It is not intended to provide a measure of the gross profit associated with the purchase and sale of a home and, therefore, excludes certain costs and expenses, including various operations, support, sales and marketing expenses. These expenses are managed across our business and we do not separately allocate these expenses to our revenue, either on an individual transaction basis or in the aggregate, when assessing the performance of our business. Because Net Platform Retention Rate excludes certain costs and expenses, investors should not use it as a substitute for financial measures calculated in accordance with GAAP.

 

72


Table of Contents

Net Platform Retention Rate

 

LOGO

Cohort Trends

We consider our agents’ success to be one of the most powerful drivers of our business model. The strength of our business model lies in the consistent revenue growth driven by our agents: the increase in transactions and revenue that we generate through an agent cohort has historically offset the decline in transactions and revenue generated through agents that have left Compass. The consistency of this trend over time supports our strategy of investing in building an integrated platform to more effectively recruit, retain, and grow our agents’ businesses.

 

73


Table of Contents

The chart below illustrates the expansion in transactions and revenue, net of churn, we have generated through our agent cohorts since 2018. The chart excludes revenue generated from certain acquisitions where such information is not available. In addition, the first year of a cohort reflects four quarters of revenue through agents that joined us in the first quarter, three quarters of revenue through agents that joined us in the second quarter, two quarters of revenue through agents that joined us in the third quarter, and one quarter of revenue through agents that joined us in the fourth quarter. In 2020, revenue from our 2018 cohort grew 16%, and our 2019 cohort experienced their first full year on our platform.

Revenue by Cohort

 

LOGO

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP financial measure that represents our net loss adjusted for depreciation and amortization, investment income, net, interest expense, stock-based compensation expense, benefit from income taxes and other items. During the periods presented, other items included (i) restructuring charges associated with lease termination and severance costs and (ii) acquisition-related expense (income) related to adjustments to the fair value of contingent consideration and acquisition consideration treated as compensation expense over underlying retention periods. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue.

We use Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We believe Adjusted EBITDA and Adjusted EBITDA Margin are also helpful to investors, analysts and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, however, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Because of these limitations, you should consider Adjusted EBITDA and Adjusted EBITDA Margin alongside other financial performance measures, including net loss and our other GAAP results. In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA and Adjusted EBITDA Margin should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted

 

74


Table of Contents

EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are not presented in accordance with GAAP and the use of these terms varies from others in our industry.

                             Adjusted EBITDA (in millions)

 

LOGO

Our net losses for 2018 and 2019 were $(223.8) million and $(388.0) million, representing (25.3)% and (16.3)% of revenue, respectively. In 2018 and 2019, Adjusted EBITDA was $(168.3) million and $(324.6) million, representing (19.0)% and (13.6)% of revenue, respectively. The increase in net loss and the decrease in Adjusted EBITDA in 2019 were due to significant investments in our technology infrastructure and growth initiatives that more than doubled the Average Principal Agents on our platform, and nearly tripled our Gross Transaction Value.

Our net losses for 2019 and 2020 were $(388.0) million and $(270.2) million, representing (16.3)% and (7.3)% of revenue, respectively. In 2019 and 2020, Adjusted EBITDA was $(324.6) million and $(155.5) million, representing (13.6)% and (4.2)% of revenue, respectively. The decrease in net loss and the increase in Adjusted EBITDA in 2020 were due to increases in revenue with the growth in Average Principal Agents, net of commission expenses, combined with a reduction in operating expenses relative to revenue with cost containment activities we took in 2020 as a result of the COVID-19 pandemic and other operating efficiencies. We expect net loss, net loss margin, Adjusted EBITDA and Adjusted EBITDA Margin to fluctuate in the near term as we continue to invest to drive growth in our business, and improve over the long term as we achieve greater scale in our business and efficiencies in our operating expenses.

 

75


Table of Contents

The following table provides a reconciliation of net loss to Adjusted EBITDA:

 

     Year Ended December 31,  
     2018     2019     2020  
     (in millions, except percentages)  

Net loss

   $ (223.8   $ (388.0   $ (270.2

Adjusted to exclude the following:

      

Depreciation and amortization

     14.8       40.9       51.2  

Investment income, net

     (8.4     (12.9     (2.0

Interest expense

     —         —         0.6  

Stock-based compensation

     52.5       37.4       43.2  

Benefit from income taxes

     (5.5     (0.9     (1.7

Restructuring charges (1)

     —         1.7       10.3  

Acquisition-related expenses (income) (2)

     2.1       (2.8     13.1  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (168.3   $ (324.6   $ (155.5
  

 

 

   

 

 

   

 

 

 

Net Loss Margin

     (25.3 )%      (16.3 )%      (7.3 )% 

Adjusted EBITDA Margin

     (19.0 )%      (13.6 )%      (4.2 )% 

 

  (1)

Includes lease termination and severance costs. See Note 15 to our consolidated financial statements included elsewhere in this prospectus for more information.

  (2)

Includes adjustments related to the change in fair value of contingent consideration and adjustments related to acquisition consideration treated as compensation expense over the underlying retention periods. See Note 3 to our consolidated financial statements included elsewhere in this prospectus for more information.

KEY FACTORS AFFECTING OUR PERFORMANCE

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow our business.

Ability to Attract and Retain Agents with Our Technology

We are focused on continuing to attract the most talented agents to our platform, which is critical to our long-term success. We grow our revenue by increasing the productivity of our agents and by selectively attracting high-performing agents looking to grow their business.

We have significantly invested in our platform to create an integrated suite of offerings. Our agents close an average of 19% more transactions on behalf of Compass measured from their first year to their second year on our platform, which we believe is due to the collective benefits of our platform. Our ability to provide our agents with the most powerful and relevant solutions to grow their businesses and enhance the offering to clients is paramount to our and our agents’ success. In 2020, on average, 88% of our agent teams used our proprietary technology platform at least once per week, of which approximately two-thirds used it daily. In addition, from 2019 to 2020, agent teams in the top 25% of platform usage (by session count) grew their commissions at double the rate of those in the bottom 25% of platform usage.

Investment in Technology

We make investments in technology that we believe will enhance the agent and client experience. Key investment areas for our platform include continuing to build an integrated platform to help agents win more clients, generate more transactions and accelerate our data integration and analytics. We also invest heavily in building solutions to the hyper-local requirements of specific markets allowing us to launch markets more efficiently and to enhance the scalability of our platform. Since 2018, we have increased our investment in research and development, and have seen a corresponding improvement in operating leverage, reducing the cost

 

76


Table of Contents

required to support our agents on our platform by 49% from 2018 to 2020. Our ability to grow our agents, retain our agents and increase agent success on our platform, depends in part, on our ability to continue innovating in the industry and our ability to successfully launch new products for agents and clients. As such, we plan to continue making significant investments in research and development.

Expansion into New Markets

Since launching in New York City in 2013, we have successfully grown our footprint to 46 markets across the United States. We define a market as a metropolitan statistical area, or MSA, according to the U.S. Census Bureau.

We believe there remains a meaningful opportunity to grow our business by continuing to expand our geographic coverage. We launched 12 markets in 2018 and 13 markets in 2019. Our rate of expansion moderated to seven markets in 2020, primarily due to reduced discretionary spend in response to COVID-19. We expect to launch additional markets in 2021 and beyond. Faster data integration and ingestion, more efficient agent onboarding, and the ability to customize our solutions to local market requirements have allowed us to enter new markets more quickly and effectively over time. We have a dedicated expansion team responsible for launching new markets that partners closely with our enterprise sales team to rapidly identify talented agents in each new market. We view the first year of a market launch as an investment period during which we ramp up our agent recruitment, increase platform utilization and agent productivity, and refine our go-to-market strategy. The priority with which we enter new markets is based on the addressable size of each market, agent feedback and local market dynamics.

Further Penetration in Existing Markets

The longer we operate in a given market, the more our brand resonates with top local agents and the stronger our local market positioning becomes, driving increased market share. Since we operate in a highly fragmented industry and we believe we offer a differentiated value proposition to our agents, we believe there is significant opportunity to further expand market share in our existing markets. Historically, we have been able to consistently gain market share upon entry. In our top three MLS Cities by sales volume, our market share was approximately 26% as of December 31, 2020. For the ten MLS Cities launched in 2018, our average market share has grown to approximately 10% as of December 31, 2020. In 2020, our agents sold homes in 21% fewer days, on average, relative to agents at firms with comparable average home sale values in our MLS Cities. We define MLS Cities as large cities we serve and which have a multiple listing service, and currently consist of: San Francisco, Washington D.C., Boston, Los Angeles, Miami Beach, Dallas, Chicago, San Diego, Seattle, Atlanta, Austin, Denver, Houston, Philadelphia and Nashville. We consider firms with comparable average home sale values to be those with an average home sale value within 20% of ours.

Our focus remains on attracting top-tier agents to Compass through our highly-effective agent recruiting process. Additionally, Compass Anywhere, our mobile agent offering, allows us to both attract and serve talented agents more cost-efficiently with flexibility across offices and a virtual support model.

Ability to Increase Penetration of Adjacent Services

Agents sit at the center of the real estate transaction. We believe that Compass clients value the convenience of conducting an entire end-to-end transaction with a single trusted advisor — the home buying and selling transaction itself, managing title and escrow documentation, completing the mortgage process, and handling the related services and logistical requirements associated with a home purchase or sale.

We empower agents with the opportunity to recommend and offer adjacent services, capturing more economic value over time. Services such as Compass Concierge, a program centered around pre-sale renovations, and title and escrow, provide opportunities for our agents to win more clients and increase revenue generated from each transaction. Our ability to recommend and offer adjacent services delivers a superior client experience, leading to higher agent productivity, and in turn, creating further monetization opportunities for us.

 

77


Table of Contents

Seasonality and Cyclicality

The residential real estate market is seasonal, which directly impacts our agents’ businesses. While individual markets may vary, transaction volume is typically highest in spring and summer, and then declines gradually in late fall and winter. We experience the most significant financial effect from this seasonality in the first and fourth quarters of each year, when our revenue is typically lower relative to the second and third quarters. We believe that this seasonality has affected and will continue to affect our quarterly results; however, to date its effect may have been masked by our rapid growth.

The residential real estate industry is also highly cyclical, and individual markets can have their own cyclical dynamics that diverge from broad market conditions. Generally, when economic conditions are favorable, the real estate industry tends to perform well. When the economy is weak, if interest rates dramatically increase, if mortgage lending standards tighten, or if there are economic or political disturbances, the residential real estate industry tends to perform poorly. Our revenue growth rate tends to increase as the real estate industry performs well, and to decrease when the real estate industry performs poorly.

COVID-19 Impact to Our Operations

In March 2020, the World Health Organization declared the outbreak of the COVID-19 coronavirus pandemic, which continues to spread throughout the United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including quarantines, shelter-in-place orders, and business limitations and shutdowns.

The COVID-19 pandemic significantly affected the U.S. residential real estate market during the spring months. As a result of health concerns, stay-at-home orders and economic uncertainty, many metro areas saw a significant decline in home sales. In April and May, nationwide home sales dropped to their lowest levels since the housing and financial crisis that began in 2007, with a significant increase in the number of delisted homes. During that time, new listings and home buying activity were down significantly year over year, however, the combination of low supply and historically low interest rates allowed prices to remain steady.

Despite the large drops in home sales due to the pandemic, real estate activity began to improve in late spring, approaching pre-pandemic levels by the summer. Potential buyers started to increase their housing search and purchase activity by the end of May. Home showings per listing rose from their lows in March and April, and were well above pre-pandemic levels by May, aided by the increase in online and socially distant viewings. Housing supply did not recover at the same pace, with housing inventory down over significantly year-over-year in the second half of 2020.

Impact on Gross Transaction Value

As a result of uncertainty related to the COVID-19 pandemic, we saw a material slowdown in Gross Transaction Value in April and May of 2020 relative to the prior year period, which in turn contributed to a decline in our revenue during that time. Beginning in June 2020, Gross Transaction Value for our agents recovered at a remarkable pace, with record-breaking monthly revenue each month from June through September in 2020, demonstrating the resilience of our business and the effectiveness of our differentiated platform.

We attribute the strong growth in the residential real estate industry and increased home prices across the United States in the second half of 2020 to the low interest rate environment, and continued record low inventory and mobility resulting from COVID-19. Stay-at-home orders and social distancing measures have driven a renewed interest in suburban and rural areas and driven many households to reevaluate the requirements of their homes, as their homes have become substitutes for offices, schools, restaurants and recreation facilities. Families are substituting home amenities (for example, swimming pools or swing sets) for community amenities (for example, parks or stadiums). This shift also places a greater value on the specific characteristics of a house and less on its location. Since the pandemic, there have been more first-time homebuyers and more people buying second homes as people who are able to work from home place less value on a shorter commute and are able to move

 

78


Table of Contents

farther from an office. Looking ahead, we believe the COVID-19 environment has accelerated technology adoption trends within our industry, and enhanced the value of a technology-based platform among real estate agents.

Our Actions in Response to COVID-19

The COVID-19 lockdowns fundamentally impacted the typical agent workflow. At the onset of the pandemic, we took several decisive actions to allow our agents to continue to operate their businesses and responsibly manage our business in the face of a potential downturn:

 

   

Platform Enhancements: We rapidly mobilized our product teams, who accelerated elements of our product roadmap relevant to address the unique requirements of our agents during COVID-19, deploying Virtual Agent Services (such as virtual open houses and virtual tours) through our cloud-based technology platform;

 

   

Operational Effectiveness: We quickly revamped our operations, processes and systems to recruit, onboard, and support agents and staff through a fully virtual model. We enabled agents to prospect, win and show listings, support home buyers and sellers, and close transactions, all virtually. This included remote payments, electronic signature, and eNotary capabilities. Additionally, we publicly launched Compass Academy, our digital learning and development platform, to support all agents across the industry, not just our agents, to help them adapt to the new realities of physical distancing and shelter-in-place;

 

   

Safety & Regulatory: We monitored and communicated to agents local regulations as they evolved, and worked with regulators to establish safety guidelines and protocols across our markets. We also provided our perspective to Congress to encourage them to address the particular needs of agents in their relief plan and classify agents as essential workers; and

 

   

Cost Management: Amidst uncertainty in the real estate market, we undertook an internal review of our cost structure, ultimately making changes to improve the strength of our business in the long term. We rapidly made changes to manage our expenses in a period of material business interruption, which included the following: we reduced full-time personnel headcount by 15%; reduced employee salaries for a subset of our employee base, including all executive management, for a period of three months; significantly reduced all discretionary spend; managed lease portfolio and temporarily slowed expansion activities; and implemented various cash management initiatives. As our business rebounded in the second half of 2020, we were later able to restore salaries and make our employees whole by delivering a one-time equity grant in the form of Restricted Stock Units, or RSUs, for the total reduction amount, and re-hired certain employees once conditions stabilized.

Second Half 2020 Impact and Our Outlook

Following year-over-year revenue declines in April and May 2020, we saw a dramatic increase in year-over-year revenue growth starting in June 2020. This momentum continued through the second half of 2020 across almost all of our markets, with the exception of New York City where the recovery has significantly lagged those trends observed in other markets.

More broadly, we believe that COVID-19 has accelerated the adoption of our technology platform, allowing our agents to not only continue to operate their businesses during the slowdown, but also to take advantage of the current market momentum. In addition, we have seen strong interest in our Compass Anywhere mobile agent offering, which provides location flexibility and a fully virtual support model well-suited to the COVID-19 working environment. Approximately 44% of our newly recruited principal agents in 2020 opted to be Compass Anywhere agents. As of 2020, approximately 30% of our Average Number of Principal Agents consist of Compass Anywhere agents, and we expect this percentage to increase in the future.

While our performance in the face of COVID-19 does not necessarily reflect our future performance in every industry downturn, our adaptable team, backed by our strong digital platform, proved its ability to respond quickly in times of significant market dislocation.

 

79


Table of Contents

However, the full impact of the COVID-19 pandemic on the global economy and the extent to which the COVID-19 pandemic will continue to adversely impact our financial condition, results of operations, and cash flows remains uncertain. The extent and duration of the impact of the COVID-19 pandemic over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19, the extent and effectiveness of containment actions taken, including shelter-in-place orders, the timing, availability, and effectiveness of vaccines, and the impact of these and other factors on residential real estate values, real estate transaction behavior in general, and on our business in particular.

Components of Our Results of Operations

Revenue

We generate substantially all our revenue by assisting home sellers and buyers in listing, marketing, selling and finding homes. We hold the real estate brokerage license that is necessary under relevant state laws and regulations to provide brokerage services and therefore we control those services that are necessary to legally transfer real estate between home sellers and buyers. We are the principal in the transaction and recognize as revenue the gross amount of the commission we expect to receive in exchange for those services. Revenue is recognized upon the transfer of control of promised services to the home sellers or home buyers. Accordingly, real estate commissions are recorded as revenue at the point in time real estate transactions are closed (i.e., sale or purchase of a home).

Commissions paid to agents are recognized concurrently with associated revenue and are presented within the Commissions and other related expense line on our consolidated statement of operations.

We also recognize revenue from other adjacent services related to the home transaction such as title and escrow services. While revenue from these services was immaterial through 2020, we expect revenue from these services to grow over time as we expand existing and add new adjacent services to our platform.

Operating Expenses

Commissions and other related expense

Commissions and other related expense primarily consists of commissions paid to our agents, who are independent contractors, upon the closing of a real estate transaction as well as stock-based compensation expense related to our agent equity program and fees paid to external brokerages for client referrals, which are recognized and paid upon the closing of a real estate transaction.

We also charge our agents technology and resource fees. These fees are either transaction based, where amounts are collected at the closing of a real estate transaction, or in the form of periodic fixed fees. These fees are recognized as a reduction to commissions and other related expense.

We expect our commissions and other related expense to increase in absolute dollars over the long term as our revenue continues to grow. Our commissions and other related expense as a percentage of revenue is expected to fluctuate from period-to-period based on the mix of the commission arrangements we have with our agents, the technology and resource fees we collect and the increase in adjacent services revenue. We anticipate additional commissions and other related expense during the year in which we complete this offering as a result of the stock-based compensation expense associated with our RSUs granted in connection with the agent equity program as described in the section titled “—Critical Accounting Policies and Estimates—Stock-Based Compensation.”

Sales and marketing

Sales and marketing expense consists primarily of marketing and advertising expenses, compensation and other personnel-related costs for employees supporting sales, marketing, expansion and related functions, occupancy-

 

80


Table of Contents

related costs for our regional offices, agent acquisition incentives and costs related to administering the Compass Concierge Program, including associated bad debt expenses. Advertising expense primarily includes the cost of marketing activities such as print advertising, online advertising and promotional items, which are expensed as incurred. Compensation and other personnel-related costs include salaries, benefits, bonuses and stock-based compensation expense.

We plan to continue to invest in sales and marketing to attract and retain agents and increase brand awareness with home sellers and buyers. We expect that sales and marketing expense will increase on an absolute dollar basis to the extent that we continue to experience increased adoption of our platform. We expect sales and marketing expense to vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue over the long term. We anticipate additional sales and marketing expense during the year in which we complete this offering as a result of the stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Policies and Estimates—Stock-Based Compensation.”

Operations and support

Operations and support expense consists primarily of compensation and other personnel-related costs for employees supporting agents, third-party consulting and professional services costs, fair value adjustments to contingent consideration for our acquisitions and other related expenses.

We plan to continue to invest in operations and support to ensure success for our agents. We expect that operations and support expense will increase on an absolute dollar basis to the extent we continue to see growth on our platform. We expect operations and support expense to vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue over the long term as a result of continued investments to improve the operational efficiency of our operations and support organization. We anticipate additional operations and support expense during the year in which we complete this offering as a result of the stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Policies and Estimates—Stock-Based Compensation.”

Research and development

Research and development expense consists primarily of compensation and other personnel-related costs for employees in the product, engineering and technology functions, website hosting expenses, software licenses and equipment, third-party consulting costs, data licenses and other related expenses.

We plan to continue to invest in research and development to maintain our platform and to support our technology infrastructure. We expect that our research and development expense will increase on an absolute dollar basis and vary from period-to-period as a percentage of revenue for the foreseeable future as we continue to invest in the research and development activities relating to ongoing improvements to and maintenance of our platform for agents, including the hiring of engineering, product development and design employees to support these efforts. We anticipate additional research and development expense during the year in which we complete this offering as a result of the stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Policies and Estimates—Stock-Based Compensation.”

General and administrative

General and administrative expense consists primarily of compensation and other personnel-related costs for our executive management and administrative employees, including finance and accounting, legal, human resources and communications, the occupancy costs for our New York headquarters and other offices supporting our administrative functions, professional services fees for legal and finance, insurance expenses and talent acquisition expenses.

We expect that general and administrative expense will increase on an absolute dollar basis and vary from period-to-period as a percentage of revenue for the foreseeable future as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business. We expect to incur

 

81


Table of Contents

additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for directors’ and officers’ insurance, investor relations and professional services. We expect that general and administrative expense as a percentage of revenue will decrease over the long term. We anticipate additional general and administrative expense during the year in which we complete this offering as a result of the stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Policies and Estimates—Stock-Based Compensation.”

Depreciation and amortization

Depreciation and amortization expense consists primarily of depreciation and amortization of our property and equipment, capitalized software and acquired intangible assets.

We expect depreciation and amortization expense will increase on an absolute dollar basis and vary from period-to-period as a percentage of revenue for the foreseeable future as we continue to invest in our platform to develop new functionalities, purchase technology through acquisitions and develop our technology infrastructure. We will also continue to invest in property and equipment, including leases, to support our overall growth.

Investment Income, net

Investment income, net consists primarily of interest, dividends and realized gains and losses earned on our cash, cash equivalents and short-term investments.

Interest Expense

Interest expense consists primarily of expense related to the interest and amortization of debt issuance costs associated with our Concierge Facility (as defined below).

Benefit from Income Taxes

Benefit from income taxes consists of a partial reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions. We maintain a full valuation allowance against our deferred tax assets for U.S. income tax purposes because we have concluded that it is more likely than not that the deferred tax assets will not be realized.

 

82


Table of Contents

Results of Operations

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in the prospectus. The following tables set forth our results of operations for the periods presented in dollars and as a percentage of revenue:

 

     Year Ended December 31,  
     2018     2019     2020  
     (in millions, except percentages)  

Revenue

   $ 884.7       100.0   $ 2,386.0       100.0   $ 3,720.8       100

Operating expenses:

            

Commissions and other related expense(1)

     695.4       78.6       1,935.6       81.1       3,056.9       82.2  

Sales and marketing(1)

     174.3       19.7       382.8       16.0       407.9       11.0  

Operations and support(1)

     95.5       10.8       204.8       8.6       225.1       6.0  

Research and development(1)

     56.7       6.4       131.3       5.5       146.3       3.9  

General and administrative(1)

     85.7       9.7       92.4       3.9       106.7       2.9  

Depreciation and amortization

     14.8       1.7       40.9       1.7       51.2       1.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,122.4       126.9       2,787.8       116.8       3,994.1       107.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (237.7     (26.9     (401.8     (16.8     (273.3     (7.3

Investment income, net

     8.4       0.9       12.9       0.5       2.0       0.1  

Interest expense

     —         —         —         —         (0.6     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (229.3     (25.9     (388.9     (16.3     (271.9     (7.3

Benefit from income taxes

     5.5       0.6       0.9       0.0       1.7       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (223.8     (25.3 )%    $ (388.0     (16.3 )%    $ (270.2     (7.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
     2018      2019      2020  
     (in millions)  

Commissions and other related expense

   $ 1.0      $ 16.1      $ 5.7  

Sales and marketing

     9.1        11.1        16.0  

Operations and support

     4.7        2.4        3.5  

Research and development

     4.0        2.8        1.4  

General and administrative

     33.7        5.0        16.6  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 52.5      $ 37.4      $ 43.2  
  

 

 

    

 

 

    

 

 

 

Comparison of 2019 and 2020

Revenue

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2019      2020  
     (in millions, except percentages)  

Revenue

   $ 2,386.0      $ 3,720.8      $ 1,334.8        55.9

Revenue increased by $1,334.8 million, or 55.9%, for 2020 compared to 2019. The increase was primarily driven by higher volume of transactions as a result of an increase in the number of agents that joined during 2019 and 2020, including continued geographic expansion into seven new markets during 2020. The Average Principal Agents for 2020 was 8,686 compared to 6,787 for 2019. The COVID-19 pandemic adversely affected real estate transaction volume in the second quarter of 2020; however, growth resumed in the third and fourth quarters of 2020 as the real estate market recovered.

 

83


Table of Contents

Operating Expenses

Commissions and other related expense

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

Commissions and other related expense

   $ 1,935.6     $ 3,056.9     $ 1,121.3        57.9

Percentage of revenue

     81.1     82.2     

Commissions and other related expense increased by $1,121.3 million, or 57.9%, for 2020 compared to 2019. Commissions and other related expense was 81.1% of revenue for 2019 as compared to 82.2% for 2020. The increase in absolute dollar was primarily driven by higher volume of transactions as a result of an increase in the number of agents that joined us and our expansion into new markets. The increase in commissions and other related expense as a percentage of revenue in 2020 compared to 2019 was primarily due to the mix of the commission arrangements we have with our agents, driven in part by our rapid expansion into new markets with different local market practices with respect to commission structures.

Sales and marketing

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

Sales and marketing

   $ 382.8     $ 407.9     $ 25.1        6.6

Percentage of revenue

     16.0     11.0     

Sales and marketing expense increased by $25.1 million, or 6.6%, for 2020 compared to 2019. The increase was primarily driven by an increase of $26.6 million in agent recruitment and other agent-related costs and $4.4 million in bad debt expense associated with our Compass Concierge Program. Additionally, sales and marketing expense for 2020 includes $1.5 million of severance expenses and $4.3 million of lease termination costs. These increases were partially offset by a decrease in employee compensation, as we reduced marketing headcount as a cost-reduction measure in response to COVID-19. The decrease in sales and marketing expense as a percentage of revenue in 2020 compared to 2019 was primarily due to economies of scale as we were able to grow revenue more quickly than the costs of our sales and marketing efforts and cost-saving measures taken in response to the COVID-19 pandemic.

Operations and support

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

Operations and support

   $ 204.8     $ 225.1     $ 20.3        9.9

Percentage of revenue

     8.6     6.0     

Operations and support expense increased by $20.3 million, or 9.9%, for 2020 compared to 2019. The increase was primarily driven by a $15.3 million change in expenses incurred in connection with the Company’s contingent consideration arrangements and acquisition-related compensation expense. In addition, operations and support expense increased as a result of a $7.4 million increase in bad debt expense due to higher accounts receivable balances, a $5.9 million increase in employee compensation due to increased headcount and $2.9 million in severance expenses related to cost reduction measures taken in response to COVID-19. Although we reduced headcount in response to COVID-19 in the first quarter of 2020, we ended the year with additional headcount after the recovery of the real estate market in the second half of 2020. This increase was partially

 

84


Table of Contents

offset by decreases in office-related expenses of $8.9 million and $4.2 million in travel and entertainment, as much of our workforce was required to work remotely during the year. The decrease in operations and support as a percentage of revenue in 2020 as compared to 2019 was primarily due to economies of scale as we were able to grow revenue more quickly than the costs to support our agents.

Research and development

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

Research and development

   $ 131.3     $ 146.3     $ 15.0        11.4

Percentage of revenue

     5.5     3.9     

Research and development expense increased by $15.0 million, or 11.4%, for 2020 compared 2019. The increase was primarily driven by an increase of $22.4 million in compensation and other personnel-related costs due to higher headcount. Although we reduced headcount in response to COVID-19 in the first quarter of 2020, we ended the year with additional headcount after the recovery of the real estate market in the second half of 2020. This increase was partially offset by reductions in consulting costs of $5.2 million. Although we continue to invest in our development efforts, the research and development expense as a percentage of revenue decreased in 2020 as compared to 2019 primarily due to compensation and other personnel-related costs growing at a slower rate relative to our revenue growth.

General and administrative

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

General and administrative

   $ 92.4     $ 106.7     $ 14.3        15.5

Percentage of revenue

     3.9     2.9     

General and administrative expense increased by $14.3 million, or 15.5%, for 2020 compared to 2019. Included in general and administrative expense in 2020 was $8.0 million in compensation expenses recognized in connection with the sale of shares to investors by certain of our employees. Excluding the effect of this item, general and administrative expenses increased by $6.3 million as compared to 2019. The increase was primarily driven by increases of $7.4 million in professional services and other administrative fees and $3.0 million of insurance expense. The increase was partially offset by decreases of $3.3 million in office-related expenses and $1.8 million in travel and entertainment expenses as much of our workforce was required to work remotely during the year. Our general and administrative expense as a percentage of revenue decreased in 2020 as compared to 2019 as certain of our administrative costs are fixed and did not increase with the increase in revenue and economies of scale as we were able to grow revenue more quickly than our general and administrative costs.

Depreciation and amortization

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2019     2020  
     (in millions, except percentages)  

Depreciation and amortization

   $ 40.9     $ 51.2     $ 10.3        25.2

Percentage of revenue

     1.7     1.4     

Depreciation and amortization expense increased by $10.3 million, or 25.2%, for 2020 compared to 2019. The increase was primarily driven by an increase of $9.2 million in depreciation due to the increased capital

 

85


Table of Contents

expenditures. Depreciation and amortization expense as a percentage of revenue decreased between 2019 and 2020 primarily due to capital expenditures growing at a slower rate relative to our revenue growth.

Investment income, net

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2019      2020  
     (in millions, except percentages)  

Investment income, net

   $ 12.9      $ 2.0      $ (10.9      (84.5 )% 

Investment income, net decreased by $10.9 million, or 84.5%, for 2020 compared to 2019. The decrease was primarily driven by the decrease in short term interest rates that we earn on our cash and investments and a decrease in overall balances of cash and short-term investments in 2020 as compared to 2019.

Interest expense

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2019      2020  
     (in millions, except percentages)  

Interest expense

   $ —        $ (0.6    $ (0.6      100

Interest expense increased by $0.6 million, or 100%, for 2020 compared to 2019. The increase was driven by drawdowns on the Concierge Facility, a revolving credit facility entered into during 2020 and used to finance a portion of the Compass Concierge Program.

Benefit from income taxes

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2019      2020  
     (in millions, except percentages)  

Benefit from income taxes

   $ 0.9      $ 1.7      $ 0.8        88.9

Benefit from income taxes increased by $0.8 million, or 88.9%, for 2020 compared to 2019. The increase in 2020 was primarily due to refunds from net operating loss carrybacks as a result of provisions within the CARES Act and current taxes from our operations in India that are fully offset with future alternative minimum tax credits.

Comparison of 2018 and 2019

Revenue

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2018      2019  
     (in millions, except percentages)  

Revenue

   $ 884.7      $ 2,386.0      $ 1,501.3        169.7

Revenue increased by $1,501.3 million, or 169.7%, for 2019 compared to 2018. The increase was primarily driven by an increase in the volume of transactions as a result of an increase in the number of agents that joined our company during 2018 and 2019, including an acceleration in our geographic expansion as we entered 13 new markets. The Average Principal Agents for 2019 was 6,787 compared to 2,694 for 2018, including agents we

 

86


Table of Contents

acquired through our 2018 acquisitions of Pacific Union International, Inc. and Paragon Real Estate Holdings, Inc. Revenue attributable to our acquisition of Pacific Union contributed $362.6 million or 15% of our revenue in 2019.

Operating Expenses

Commissions and other related expense

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

Commissions and other related expense

   $ 695.4     $ 1,935.6     $ 1,240.2        178.3

Percentage of revenue

     78.6     81.1     

Commissions and other related expense increased by $1,240.2 million, or 178.3%, for 2019 compared to 2018. Commissions and other related expense was 78.6% of revenue for 2018 as compared to 81.1% for 2019. The increase in absolute dollar was primarily driven by an increase in the volume of transactions as a result of an increase in the number of agents that joined us and our expansion into new markets. The increase in commissions and other related expense as a percentage of revenue in 2019 compared to 2018 was primarily due to the mix of the commission arrangements we have with our agents driven, in part, by our rapid expansion into new markets with different local market practices with respect to commission structures. The increase was partially offset by an increase in technology and resource fees charged to our agents due to the increased number of agents.

Sales and marketing

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

Sales and marketing

   $ 174.3     $ 382.8     $ 208.5        119.6

Percentage of revenue

     19.7     16.0     

Sales and marketing expense increased by $208.5 million, or 119.6%, for 2019 compared to 2018. The increase was primarily driven by an increase of $66.2 million in occupancy-related expenses due to an expansion of regional field offices, $54.2 million in agent marketing and advertising, $42.8 million in compensation and other personnel-related costs due to increased headcount, and $40.3 million in agent recruitment and other agent-related costs. The decrease in sales and marketing expense as a percentage of revenue in 2019 compared to 2018 was primarily due to economies of scale as we were able to grow revenue more quickly than the costs of our sales and marketing efforts.

Operations and support

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

Operations and support

   $ 95.5     $ 204.8     $ 109.3        114.5

Percentage of revenue

     10.8     8.6     

Operations and support expense increased by $109.3 million, or 114.5%, for 2019 compared to 2018. The increase was primarily driven by an increase of $96.4 million in compensation and other personnel-related costs due to increased headcount. The decrease in operations and support as a percentage of revenue in 2019 as compared to 2018 was primarily due to economies of scale as we were able to grow revenue more quickly than the costs to support our agents.

 

87


Table of Contents

Research and development

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

Research and development

   $ 56.7     $ 131.3     $ 74.6        131.6

Percentage of revenue

     6.4     5.5     

Research and development expense increased by $74.6 million, or 131.6%, for 2019 compared 2018. The increase was primarily driven by an increase of $47.0 million in compensation and other personnel-related costs due to increased headcount and $24.5 million in hosting, software and licensing fees as part of our investment in our platform and related technology initiatives. Although we continue to invest in our development efforts, the research and development expense as a percentage of revenue decreased in 2019 as compared to 2018 primarily due to compensation and other personnel-related costs growing at a slower rate relative to our revenue growth.

General and administrative

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

General and administrative

   $ 85.7     $ 92.4     $ 6.7        7.8

Percentage of revenue

     9.7     3.9     

General and administrative expense increased by $6.7 million, or 7.8%, for 2019 compared to 2018. Included in general and administrative expense in 2018 was $30.7 million in compensation expenses recognized in connection with the sale of shares to investors by certain of our employees. Excluding the effect of this item, general and administrative expenses increased by $37.4 million. The increase was primarily driven by increases of $18.3 million in compensation and other personnel-related costs due to increased headcount, $8.0 million in legal, professional services and other administrative fees and $5.9 million of occupancy costs, primarily related to new administrative office spaces to support our growth. Our general and administrative expense as a percentage of revenue decreased in 2019 as compared to 2018 as certain of our administrative costs are fixed and did not increase with the increase in revenue.

Depreciation and amortization

 

     Year Ended
December 31,
    $
Change
     %
Change
 
     2018     2019  
     (in millions, except percentages)  

Depreciation and amortization

   $ 14.8     $ 40.9     $ 26.1        176.4

Percentage of revenue

     1.7     1.7     

Depreciation and amortization expense increased by $26.1 million, or 176.4%, for 2019 compared to 2018. The increase was primarily driven by an increase of $12.0 million in the amortization of intangible assets related to the full year impact of acquisitions completed in 2018 and $11.9 million in depreciation due to the increased capital expenditures. Depreciation and amortization expense as a percentage of revenue was consistent between 2018 and 2019 primarily due to higher amortization expense recognized related to the intangible assets acquired in our 2018 acquisitions.

 

88


Table of Contents

Investment income, net

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2018      2019  
     (in millions, except percentages)  

Investment income, net

   $ 8.4      $ 12.9      $ 4.5        53.6

Investment income, net increased by $4.5 million, or 53.6%, for 2019 compared 2018. The increase was primarily driven by higher average cash, cash equivalents and short-term investments balances in 2019 as compared to 2018.

Benefit from income taxes

 

     Year Ended
December 31,
     $
Change
     %
Change
 
     2018      2019  
     (in millions, except percentages)  

Benefit from income taxes

   $ 5.5      $ 0.9      $ (4.6      (83.6 )% 

Benefit from income taxes decreased by $4.6 million, or 83.6%, for 2019 compared to 2018. The decrease resulted from a smaller adjustment to the reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions when compared to the prior year.

Quarterly Results of Operations and Other Data

The following tables set forth selected unaudited consolidated quarterly statements of operations data for each of the eight fiscal quarters ended December 31, 2020, as well as the percentage of revenue that each line item represents for each quarter. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.

 

89


Table of Contents

Quarterly Consolidated Statements of Operations

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
    (in millions)  

Revenue

  $ 341.9     $ 716.2     $ 662.1     $ 665.8     $ 619.9     $ 682.1     $ 1,188.5     $ 1,230.3  

Operating expenses:

               

Commissions and other related expense(1)

    271.1       574.3       539.4       550.8       508.8       559.0       979.4       1,009.7  

Sales and marketing(1)

    80.4       96.7       98.2       107.5       106.5       90.8       99.7       110.9  

Operations and support(1)

    39.5       51.1       53.3       60.9       61.1       44.5       53.3       66.2  

Research and development(1)

    25.3       32.3       34.8       38.9       38.8       34.2       33.7       39.6  

General and administrative(1)

    20.8       20.9       21.5       29.2       26.5       26.5       22.7       31.0  

Depreciation and amortization

    8.9       9.1       11.1       11.8       12.4       12.7       13.0       13.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    446.0       784.4       758.3       799.1       754.1       767.7       1,201.8       1,270.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (104.1     (68.2     (96.2     (133.3     (134.2     (85.6     (13.3     (40.2

Investment income, net

    3.7       2.9       3.6       2.7       1.5       0.5       —         —    

Interest expense

    —         —         —         —         —         —         (0.2     (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (100.4     (65.3     (92.6     (130.6     (132.7     (85.1     (13.5     (40.6

Benefit from income taxes

    0.9       —         —         —         —         0.9       —         0.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (99.5   $ (65.3   $ (92.6   $ (130.6   $ (132.7   $ (84.2   $ (13.5   $ (39.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation as follows:

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
    (in millions)  

Commissions and other related expense

  $ 1.1     $ 1.7     $ 5.0     $ 8.3     $ 4.1     $ 0.5     $ 0.5     $ 0.6  

Sales and marketing

    2.7       2.9       2.7       2.8       2.9       2.5       2.6       8.0  

Operations and support

    0.8       0.9       0.3       0.4       0.8       0.7       0.7       1.3  

Research and development

    1.0       0.9       0.4       0.5       0.5       0.3       0.3       0.3  

General and administrative

    1.2       1.2       1.3       1.3       2.8       9.0       2.0       2.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 6.8     $ 7.6     $ 9.7     $ 13.3     $ 11.1     $ 13.0     $ 6.1     $ 13.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

90


Table of Contents

Quarterly Consolidated Statements of Operations, as a Percentage of Revenue

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 

Revenue

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Operating expenses:

               

Commissions and other related expense

    79.3       80.2       81.5       82.7       82.1       82.0       82.4       82.1  

Sales and marketing

    23.5       13.5       14.8       16.1       17.2       13.3       8.4       9.0  

Operations and support

    11.6       7.1       8.1       9.1       9.9       6.5       4.5       5.4  

Research and development

    7.4       4.5       5.3       5.8       6.3       5.0       2.8       3.2  

General and administrative

    6.1       2.9       3.2       4.4       4.3       3.9       1.9       2.5  

Depreciation and amortization

    2.6       1.3       1.7       1.8       2.0       1.9       1.1       1.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    130.4       109.5       114.5       120.0       121.6       112.5       101.1       103.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (30.4     (9.5     (14.5     (20.0     (21.6     (12.5     (1.1     (3.3

Investment income, net

    1.1       0.4       0.5       0.4       0.2       0.1       0.0       0.0  

Interest expense

    0.0       0.0       0.0       0.0       0.0       0.0       0.0       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (29.4     (9.1     (14.0     (19.6     (21.4     (12.5     (1.1     (3.3

Benefit from income taxes

    0.3       0.0       0.0       0.0       0.0       0.1       0.0       0.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (29.1 )%      (9.1 )%      (14.0 )%      (19.6 )%      (21.4 )%      (12.3 )%      (1.1 )%      (3.2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

During 2019, quarterly revenue peaked in the second quarter, driven by the seasonality of the residential real estate market which historically has seen the strongest demand from home buyers in the spring and summer and weakest demand in the late fall and winter. Revenue in the third and fourth quarter of 2019 increased compared to the first quarter driven by the increase in affiliated agent headcount and corresponding transaction volume, as well as these seasonal trends. During the first quarter of 2020, revenue declined compared to the prior quarter as we experienced seasonal trends and the early effects of the COVID-19 related restrictions. Revenue increased modestly due to seasonal trends in the second quarter, however, the increase was impacted by the effect of shelter-in-place measures taken due to the COVID-19 pandemic on residential real estate transaction volume. The third and fourth quarters increases in 2020 in revenue were due to restrictions being lifted and the recovery of the residential real estate market and increases in affiliated agent headcount led to increases in transaction volume.

Quarterly Operating Expense Trends

Our operating expenses have generally increased with growth in our revenue, which drive a corresponding increase in commissions and other related expense. The general increases in operating expenses period over period are also driven by higher personnel and the associated overhead costs to support our expanding operations. We incurred approximately $6.6 million for restructuring activities in the first quarter of 2020, primarily due to

 

91


Table of Contents

severance related to a reduction in workforce as a result of cost-saving measures taken due to the COVID-19 pandemic. These restructuring initiatives resulted in a decrease in many of our operating expenses during the second quarter of 2020 which was offset by growth in expenses during the third quarter of 2020 and more significantly, the fourth quarter of 2020, as transaction volume returned with the recovery of the residential real estate market.

Liquidity and Capital Resources

Since inception, we have generated negative cash flows from operations and have primarily financed our operations from net proceeds from the sale of convertible preferred stock and common stock. As of December 31, 2020, we had cash and cash equivalents of $440.1 million and an accumulated deficit of $1.1 billion.

We expect that operating losses and negative cash flows from operations will continue in the foreseeable future as we continue to invest in the expansion of our business, research and development and sales and marketing activities. We believe our existing cash and cash equivalents, the Concierge Facility (which, as defined below, may be used to support our Compass Concierge Program), the Revolving Credit Facility (as defined below) and available access to equity and debt financing will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.

Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of our agents and the associated costs to attract, support and retain them, our expansion into new geographic markets, future acquisitions, and the timing of investments in technology and personnel to support the overall growth in our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected.

In addition to the foregoing, based on our current assessment, we do not currently anticipate any material impact on our long-term liquidity due to the COVID-19 pandemic. However, we will continue to assess the effect of the pandemic on our operations. The extent and duration of the impact of the COVID-19 pandemic over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19, the extent and effectiveness of containment actions taken, including shelter-in-place orders, the timing, availability, and effectiveness of vaccines, and the impact of these and other factors on residential real estate values, real estate transaction behavior in general, and on our business in particular. While the potential economic impact brought by COVID-19 may be difficult to assess or predict, the ultimate impact of the pandemic could result in significant disruption of global financial markets, reducing our ability to access capital in the future. In addition, a recession or long-term market correction resulting from the spread of COVID-19 could materially affect our business, financial condition and results of operations.

Concierge Facility

In July 2020, our subsidiary, Compass Concierge SPV I, LLC, or Concierge SPV, entered into a Revolving Credit and Security Agreement, or the Concierge Facility, with Barclays Bank PLC, as administrative agent, and the several lenders party thereto. The Concierge Facility provides for a $75.0 million revolving credit facility and is solely used to finance, in part, our Compass Concierge Program. The Concierge Facility is secured by the assets of the Concierge SPV, which primarily consists of the purchased receivables and cash of the Compass Concierge Program. The Concierge Facility is also guaranteed by us. Borrowings under the Concierge Facility

 

92


Table of Contents

accrue interest at rates equal to (i) the adjusted London interbank offered rate (LIBOR) plus the applicable margin of 3.00%, which may be adjusted, or an alternate rate of interest upon the occurrence of certain changes in LIBOR, or (ii) a rate based on the weighted average cost in respect of all commercial paper notes issued by a conduit administered by the Administrative Agent and used to finance loans extended by such conduit, plus the applicable margin of 3.00%. We are required to pay an annual commitment fee of 0.50% on a quarterly basis based on the unused portion of the Concierge Facility. The principal amount, if any, is payable in full in January 2022, unless earlier terminated or extended. As of December 31, 2020, there were $8.4 million in borrowings outstanding under the Concierge Facility. The interest rate on the Concierge Facility was 3.26% as of December 31, 2020.

We have the option to repay our borrowings under the Concierge Facility without premium or penalty prior to maturity. The Concierge Facility contains customary affirmative covenants, such as financial statement reporting requirements, as well as customary covenants related to the Concierge SPV, including affirmative covenants that restrict its ability to, among other things, incur additional indebtedness, sell certain receivables, declare dividends or make certain distributions and undergo a merger or consolidation or certain other transactions. Additionally, in the event that we and our consolidated subsidiaries fail to comply with certain financial covenants that require us to meet certain liquidity-based measures, the commitments under the Concierge Facility will automatically be reduced to zero and we will be required to repay any outstanding loans under the Concierge Facility. As of December 31, 2020, we were in compliance with the covenants under the Concierge Facility.

Revolving Credit Facility

In March 2021, we entered into a Revolving Credit and Guaranty Agreement, or the Revolving Credit Facility, among us, certain of our subsidiaries from time to time party thereto as guarantors, the several lenders and issuing banks from time to time party thereto, and Barclays Bank PLC, as administrative agent and as collateral agent. The Revolving Credit Facility provides for a $350 million revolving credit facility, which may be increased by the greater of $250 million and 18.5% of our consolidated total assets, plus such additional amount so long as our total net leverage ratio does not exceed 4.50:1.00 on a pro forma basis as of the most recent test period, subject to the terms of the Revolving Credit Facility. The Revolving Credit Facility also includes a letter of credit sublimit which is the lesser of (i) $125 million and (ii) the aggregate unused amount of the revolving commitments then in effect under the Revolving Credit Facility. Our obligations under the Revolving Credit Facility are guaranteed by certain of our subsidiaries and are secured by a first priority security interest in substantially all of our assets and our subsidiary guarantors.

Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of 0.50% or (ii) a floating rate per annum equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of 1.50%. In the Revolving Credit Facility, the base rate is defined as the highest of (a) the prime rate as quoted by The Wall Street Journal, (b) the federal funds effective rate plus 0.50%, (c) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00%, and (d) 1.00%. During an event of default under the Revolving Credit Facility the applicable interest rates are increased by 2.0% per annum.

We are also obligated to pay other customary fees for a credit facility of this size and type, including a commitment fee on a quarterly basis based on amounts committed but unused under the Revolving Credit Facility of 0.175% per annum and fees associated with letters of credit. The principal amount, if any, is payable in full in March 2026, unless earlier terminated or extended.

We have the option to repay our borrowings, and to permanently reduce the loan commitments in whole or in part, under the Revolving Credit Facility without premium or penalty prior to maturity. As of March 15, 2021, our company had no outstanding borrowings under the Revolving Credit Facility.

The Revolving Credit Facility contains customary representations, warranties, affirmative covenants, such as financial statement reporting requirements, negative covenants, and financial covenants, applicable to us and our

 

93


Table of Contents

restricted subsidiaries. The negative covenants include restrictions that, among other things, restrict our and our subsidiaries’ ability to incur liens and indebtedness, make certain investments, declare dividends, dispose of, transfer or sell assets, make stock repurchases and consummate certain other matters, all subject to certain exceptions. The financial covenants require that (a) we maintain liquidity of at least $150 million as of the last day of each fiscal quarter and each date of a credit extension and (b) our consolidated total revenue as of the last day of each fiscal quarter be equal to or greater than the specified amount corresponding to such period. In the Revolving Credit Facility, liquidity is defined as the aggregate of (i) revolving commitments under the Revolving Credit Facility minus the aggregate principal amount of all outstanding loans, any drawn and unreimbursed amounts under letters of credit and the maximum amount that may be drawn under letters of credit, plus (ii) unrestricted cash that is generally available for use by us and our subsidiaries.

The Revolving Credit Facility includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain material ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Revolving Credit Facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2018      2019      2020  
     (in millions)  

Net cash used in operating activities

   $ (189.4    $ (377.0    $ (58.1

Net cash (used in) provided by investing activities

     (627.1      389.9        (13.4

Net cash provided by financing activities

     857.2        350.2        19.9  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 40.7      $ 363.1      $ (51.6
  

 

 

    

 

 

    

 

 

 

Operating Activities

For 2020, net cash used in operating activities was $58.1 million. The outflow was primarily due to a $270.2 million loss from operations adjusted for $119.6 million of non-cash charges and cash inflow due to changes in assets and liabilities of $92.5 million. The non-cash charges are primarily related to $51.2 million of depreciation and amortization expense, $43.2 million of stock-based compensation expense and $16.0 million of bad debt expense. The changes in assets and liabilities resulted in a cash inflow primarily due to a net increase of $34.6 million operating lease liabilities as compared to operating lease assets, a $29.1 million increase in commissions payable as a result of increased revenue and the timing of commissions payments, a $20.5 million increase in accrued expenses and other liabilities and a $16.6 million decrease in Compass Concierge Receivables. The cash inflow provided by operations was partially offset by an increase of $16.3 million in accounts receivable due to growth in revenue and timing of receipts.

For 2019, net cash used in operating activities was $377.0 million. The outflow was primarily due to a $388.0 million loss from operations adjusted for $75.2 million of non-cash charges and cash outflow due to changes in assets and liabilities of $64.2 million. The non-cash charges are primarily related to $40.9 million of depreciation and amortization expense, $37.4 million of stock-based compensation expense, $9.9 million due to changes related to contingent consideration and $6.8 million of bad debt expense. The changes in assets and liabilities increased cash outflow primarily due to a $84.8 million increase in Compass Concierge Receivables due to the growth of the program which was launched in October 2018, an increase of $45.0 million in other current assets primarily related to increases in prepaid incentives for agents and an increase of $18.2 million in accounts receivable due to growth in revenue and timing of receipts. These increases in cash used in operations

 

94


Table of Contents

were partially offset by a $24.9 million increase in accrued expenses and other liabilities, primarily attributable to an increase of $21.5 million in accrued expense due to the timing of invoices and payments and accrued personnel and compensation costs due to increased employee headcount, a $21.8 million net increase due to increases in operating lease liabilities as compared to operating lease right-of-use assets and a $21.6 million increase in commissions payable as a result of increased revenue and the timing of commissions payments.

For 2018, net cash used in operating activities was $189.4 million. The outflow was primarily due to a $223.8 million loss from operations adjusted for $69.6 million of non-cash charges and a cash outflow due to changes in assets and liabilities of $35.2 million. The non-cash charges are primarily related to $14.8 million of depreciation and amortization and $52.5 million of stock-based compensation expense. The changes in assets and liabilities increased cash outflow primarily due to a $36.2 million increase in other current assets primarily related to increases in prepaid incentives for agents, a $20.7 million increase in accounts receivable primarily due to the growth in revenue and timing of receipts and a $16.1 million increase in other non-current assets primarily due to the increase in prepaid incentives for agents. These increases in cash used in operations were partially offset by a $17.5 million increase in accounts payable due to timing of payments and increased spending to support our overall growth, a $16.3 million increase in accrued expenses and other liabilities primarily driven by an increase in accrued compensation of $10.9 million due to employee headcount growth and timing of payments and a $8.3 million increase in deferred rent due to new leases.

Investing Activities

During 2020, net cash used by investing activities was $13.4 million consisting of $43.3 million in capital expenditures and $25.6 million in payments for acquisitions net of cash acquired, partially offset by $55.5 million in proceeds from sales and maturities of marketable securities.

During 2019, net cash provided by investing activities was $389.9 million consisting of $572.9 million in proceeds from sales and maturities of marketable securities, partially offset by $70.7 million for purchases of marketable securities, $74.1 million in capital expenditures and $38.2 million in payments for acquisitions, net of cash acquired.

During 2018, net cash used in investing activities was $627.1 million, consisting of $726.9 million for purchases of marketable securities, $35.3 million in capital expenditures, $88.7 million in payments for acquisitions, net of cash acquired, partially offset by $223.8 million in proceeds from sales and maturities of marketable securities.

Financing Activities

During 2020, net cash provided by financing activities was $19.9 million, primarily consisting of $15.9 million in proceeds from the exercise and early exercise of stock options and $10.1 million in net proceeds from drawdowns on the Concierge Facility, partially offset by $3.2 million in payments of contingent consideration related to acquisitions and $3.0 million in repayments of drawdowns on the Concierge Facility.

During 2019, net cash provided by financing activities was $350.2 million, primarily consisting of $343.3 million in net proceeds from the issuance of Series G convertible preferred stock and $7.6 million in proceeds from the exercise of stock options.

During 2018, net cash provided by financing activities was $857.2 million primarily consisting of $853.5 million in net proceeds from the issuance of Series E and Series F convertible preferred stock and $3.7 million in proceeds from the exercise of stock options.

 

95


Table of Contents

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2020:

 

     Payments Due by Period  
     Total      Less
than 1 Year
     1-3
Years
     3-5
Years
     More than
5 years
 
     (in millions)  

Operating lease obligations(1)

   $ 602.5      $ 90.6      $ 173.7      $ 142.0      $ 196.2  

Estimated undiscounted contingent consideration payments(2)

     27.7        12.2        15.0        0.5        —    

Purchase obligations(3)

     59.1        21.5        22.1        15.5        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 689.3      $ 124.3      $ 210.8      $ 158.0      $ 196.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Consists of future non-cancelable minimum rental payments under operating lease obligations, excluding short-term leases.

(2)

Represents future cash contingent consideration under our acquisition agreements.

(3)

Purchase obligations in the preceding table include agreements that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table are limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.

Our Concierge Facility, which matures in January 2022, unless earlier terminated or extended and can be repaid at any time. As of December 31, 2020, there were $8.4 million in borrowings outstanding under the Concierge Facility. We are required to pay an annual commitment fee of 0.50% on a quarterly basis based on the unused portion of the Concierge Facility. In addition, interest on the used portion of the Concierge Facility is 3.0% plus an interest rate based on LIBOR multiplied by the Statutory Reserve Rate. The effective interest rate was 3.26% as of December 31, 2020. For additional information, see the section titled “—Liquidity and Capital Resources—Concierge Facility.”

We have irrevocable letters of credit with various financial institutions, primarily related to security deposits for leased facilities. As of December 31, 2020, we were contingently liable for $50.7 million, under these letters of credit. These letters of credit are collateralized by cash and cash equivalents.

Off-Balance Sheet Arrangements

We administer escrow and trust deposits which represent undistributed amounts for the settlement of real estate transactions. We are contingently liable for these escrow and trust deposits totaled $24.7 million and $46.1 million as of 2019 and 2020, respectively. We did not have any other off-balance sheet arrangements as of or during the periods presented.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in interest rates or inflation.

Interest Rate Risk

Our cash and cash equivalents as of December 31, 2020 consisted of $440.1 million in cash and money market funds. Certain of our cash and cash equivalents are interest-earning instruments that carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

 

96


Table of Contents

We are also subjected to interest rate exposure on LIBOR-based interest rates on our Concierge Facility. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Our Concierge Facility bears interest equal to the adjusted LIBOR rate plus a margin of 3.00% or an alternate rate of interest upon the occurrence of certain changes in LIBOR. As of December 31, 2020, we had total outstanding balance of $8.4 million. Based on the amounts outstanding, a 100-basis point increase or decrease in market interest rates over a twelve-month period would not result in a material change to our interest expense.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with increased revenue. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition results of operations are based upon our consolidated financial statements included elsewhere in this prospectus. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.

Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below are the most difficult management decisions as they involve the use of significant estimates and assumptions as described above.

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for more information.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09 (Topic 606) Revenue from Contracts with Customers. We adopted the new revenue standard on January 1, 2018 using the modified retrospective transition method. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

We generate revenue by assisting home sellers and buyers in listing, marketing, selling and finding homes. We hold the real estate brokerage license that is necessary under relevant state laws and regulations to provide brokerage services and therefore we control those services that are necessary to legally transfer real estate between home sellers and buyers. Although our agents are independent contractors, they cannot execute a real estate transaction without a brokerage license, which we possess. We have the only contractual relationship for the sale or exchange of real estate with the clients. Accordingly, we are the principal in our transactions with home buyers and sellers. As principal, we recognize revenue in the gross amount of consideration to which we expect to receive in exchange for our services.

Stock-Based Compensation

We have granted stock-based awards consisting of stock options and RSUs to employees, agents, members of our board of directors, and non-employee advisors. The substantial majority of our stock-based awards have been made to employees and agents.

 

97


Table of Contents

The majority of our outstanding RSUs contain both a service-based vesting condition and a liquidity-event based vesting condition. The service-based vesting condition for the majority of these awards is satisfied over four years. The liquidity event-based vesting condition is satisfied upon the occurrence of a qualifying event, which is generally defined as a change in control transaction or an initial public offering. Through December 31, 2020, no qualifying event has occurred, so we have not recognized any stock-based compensation expense for the RSUs with both a service-based vesting condition and a liquidity event-based vesting condition. In connection with this offering, we will begin recording stock-based compensation expense based on the grant-date fair value of the RSUs using the accelerated attribution method. If this offering had been completed on December 31, 2020, we would have recorded a cumulative stock-based compensation expense of $109.1 million for those RSUs for which the service-based vesting condition had been satisfied, and would have $102.4 million of unrecognized compensation expense that represents the RSUs that had not met the service-based vesting condition as of December 31, 2020. We expect to recognize the unrecognized compensation expense over a weighted-average period of 1.6 years. Beginning in December 2020, we stopped granting RSUs with liquidity event-based vesting conditions. Accordingly, stock-based compensation expenses related to RSUs granted in December 2020 and thereafter will be expensed over the applicable service period.

We account for stock-based compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which requires compensation expense for the grant-date fair value of stock-based awards to be recognized over the requisite service period. We account for forfeitures when they occur.

We have elected to use the Black-Scholes option pricing model to determine the fair value of stock options on the grant date. The Black-Scholes option pricing model requires certain subjective inputs and assumptions, including the fair value of our common stock, the expected term, risk-free interest rate, expected stock price volatility, and expected dividend yield of our common stock.

These assumptions used in the Black-Scholes option-pricing model, other than the fair value of our common stock (see the section titled “—Common Stock Valuations” below), are estimated as follows:

 

   

Expected term. We estimate the expected term based on the simplified method;

 

   

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury constant maturity notes with terms approximately equal to the share-based awards’ expected term;

 

   

Expected volatility. We estimate the volatility of our common stock on the date of grant based on the average historical stock price volatility of comparable publicly-traded companies in our industry group for a period equal to the expected life of the option as there has been no public market for our shares to date. We selected companies with comparable characteristics to it, including enterprise value, risk profiles, and position within the industry and with historical share price information sufficient to meet the expected term of the stock options; and

 

   

Expected dividend yield. Expected dividend yield is zero percent, as we have not paid and do not anticipate paying dividends on our common stock in the foreseeable future.

 

98


Table of Contents

The following table summarizes the assumptions used in estimating the fair value of stock options granted to employees and non-employees during each of the periods presented:

 

     Year Ended December 31,  
     2018     2019     2020  

Expected term (in years)

     6.5       5.9       7.0  

Risk-free interest rate

     2.7     2.3     0.8

Expected volatility

     45.0     45.0     45.1

Dividend rate

            

Fair value of common stock (range for the period)

     $2.66 - $5.16       $5.16 - $6.44       $6.65 - $23.44  

Weighted average grant date fair value of options granted

     $1.40       $2.62       $5.67  

We continue to use judgment in evaluating the expected volatility and expected term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility and expected term, which could materially impact our future stock-based compensation expense.

Common Stock Valuations

Prior to this offering, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors, and from June 2020 onward, the compensation committee of our board of directors, exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock, including:

 

   

independent third-party valuations of our common stock;

 

   

the prices of the recent convertible preferred stock sales by us to investors in arm’s-length transactions;

 

   

the price of sales of our common stock and preferred stock in recent secondary sales by existing stockholders to investors;

 

   

our capital resources and financial condition;

 

   

the preferences held by our convertible preferred stock classes relative to those of our common stock;

 

   

the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;

 

   

our historical operating and financial performance as well as our estimates of future financial performance;

 

   

valuations of comparable companies;

 

   

the hiring of key personnel;

 

   

the status of our agent recruitment, development, and sales efforts;

 

   

the relative lack of marketability of our common stock;

 

   

industry information such as market growth and volume and macro-economic events; and

 

   

additional objective and subjective factors relating to our business.

Prior to this offering, in valuing our common stock, our board of directors, and from June 2020 onward, the compensation committee of our board of directors, determined the fair value of our common stock using an options-based allocation method that values the claim each security class has on the overall value of the enterprise, taking

 

99


Table of Contents

into account certain preferences and rights, in addition to giving consideration to recent secondary sales of our common stock. The aggregate equity value was determined based on the recent convertible preferred stock sales by us to investors. Additionally, beginning in September 2020, we determined the fair value of our common stock in relation to stock-based compensation awards by a linear interpolation between an August 2020 valuation and the midpoint of the preliminary pricing range of our initial public offering estimated by our board of directors in February 2021.

Following this offering, it will not be necessary to determine the fair value of our Class A common stock, as our shares will be traded in the public market.

Based upon the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our stock options outstanding as of December 31, 2020 was $876.4 million, with $524.3 million related to vested stock options, and $352.1 million related to unvested stock options.

Goodwill and Long-Lived Assets

When we acquire businesses, we allocate the purchase price to the fair value of the assets acquired and liabilities assumed, including identifiable intangible assets. Any residual purchase price is recorded as goodwill.

The fair value of identifiable intangible assets is based on significant judgments made by management. We typically engage third-party valuation appraisal firms to assist us in determining the fair values and useful lives of the assets acquired. Such valuations and useful life determinations require us to make significant estimates and assumptions. These estimates and assumptions are based on historical experience and information obtained from management of the acquired companies, and also include, but are not limited to, the timing and amount of expected future cash flows used in the valuation requires estimates, among other items, of revenue and agent retention rates, operating expenses and expected operating cash flow margins. The development of these cash flows, and the discount rate applied to the cash flows, is subject to inherent uncertainties.

An impairment of goodwill is recognized when the carrying amount of assets exceeds their implied fair value. The process of evaluating the potential impairment is highly subjective and requires the application of significant judgment.

We evaluate goodwill for impairment annually in the fourth quarter or whenever an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill. Such evaluation could result in a non-cash impairment charge that could have a material impact on our financial results. For purposes of the annual impairment test, we assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the quantitative impairment test which considers the fair value of the reporting unit compared with the carrying value on the date of the test.

We evaluate long-lived assets, including finite-lived intangible assets and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our property and equipment or our finite-lived intangibles and other assets, that revision could result in a non-cash impairment charge that could have a material impact on our financial results.

As a result of the potential impact of COVID-19 pandemic in early March 2020, we prepared an analysis to determine whether there was a triggering event for a goodwill impairment test. Based on the results of our analysis, we determined that it was more-likely-than-not that our fair value was greater than net book value and

 

100


Table of Contents

that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill. Although our assessment of the qualitative considerations clearly indicated that we had been significantly impacted by the economic disruption caused by COVID-19 in 2020, based on a review of macroeconomic and industry considerations, we expected the business to recover in the second half of 2020 and to further recover in 2021. In addition, we believe we have sufficient liquidity to withstand the downturn and be in a positive position when businesses are expected to recover. Based on the above, we also determined that there was no triggering event for an impairment assessment of our long-lived assets.

There is significant uncertainty regarding the economic disruption caused by the COVID-19 health crisis and its impacts on the global growth forecast, and our ability to recover in line with those considerations. In addition, there is significant uncertainty regarding the timing of economies reopening and the impacts from government and central bank actions. Notwithstanding these uncertainties, the above represents our best assessment of our current position. We will continue to monitor developments including updates to our forecasted revenues, expenses and cash flow and an update of our assessment and related estimates may be required in the future as the situation evolves. If the extent and duration of the economic disruption caused by the pandemic is longer or more severe there could be a material impact to our revenue and expected cash flows and in turn the recoverability of our goodwill balance.

Compass Concierge

In 2018, we launched the Compass Concierge Program, or Compass Concierge, for home sellers who have engaged us as their exclusive listing agent. The initial program is based on a services model, or Concierge Classic. The Concierge Classic program provides for the payment of the up-front costs of specified home improvement services provided by unrelated vendors. In 2019, the Compass Concierge Program was expanded to include Concierge Capital, a loan program offered by an independent third-party lender via a commercial arrangement with Compass Concierge.

Payment under Compass Concierge is due at the earlier of a successful home sale, the termination of the listing agreement, or one year from the date in which costs were originally funded. We exercise significant judgment in estimating the timing, frequency and severity of losses on the outstanding receivables. The allowance for credit losses is adjusted based on our consideration of whether the underlying property will be sold, the age and nature of the accounts outstanding, as well as risk of specific non-payment. Compass Concierge receivables associated with properties that are eventually sold have a lower credit risk than those that are associated with properties that are not sold.

Leases

We determine if a long-term contractual obligation is a lease at inception. Our operating leases primarily relate to agent and corporate offices. We record our lease liabilities at the present value of the lease payments not yet paid, discounted at our incremental borrowing rate. Management uses their judgement in determining our incremental borrowing rates by making estimates and assumptions about our credit rating and interest rate spread in similar economic environment where the leased asset is located.

Contingent Consideration

Contingent consideration consists of earn-out obligations in connection with our acquired businesses and assets, in which we are required to pay additional purchase consideration based on different financial metrics of the acquired businesses each year through the terms of the underlying purchase agreements. Contingent consideration is recorded at fair value, which is measured at the present value of the consideration expected to be transferred. The fair value of contingent consideration is re-measured at the end of each reporting period. The primary method we used to estimate the fair value of the contingent consideration was a Monte Carlo simulation, which is based on significant inputs such as forecasted future results of the acquired businesses which are not observable in the market, discount rates and earnings volatility measures.

 

101


Table of Contents

Income taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to settle. The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized as income or expense in the period that includes the enactment date. Deferred tax assets and liabilities are classified as noncurrent in accordance with ASU No. 2015-17. Valuation allowances are established against deferred tax assets if it is more likely than not that they will not be realized.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We continuously review issues raised in connection with ongoing examinations and open tax years to evaluate the adequacy of its tax liabilities. Our policy is to adjust these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on its financial condition and operating results. The provision for income taxes includes the effects of any reserves that we identify.

Recent Accounting Pronouncements

See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

Internal Controls Over Financial Reporting

As a high-growth company, we are still in the process of developing our internal processes and procedures to accommodate our rapid growth in recent years. In the course of preparing the consolidated financial statements that are included in this prospectus, our management determined that we have material weaknesses in our internal controls over financial reporting. These material weaknesses primarily relate to our failure to design, maintain, and document sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training in internal control over financial reporting commensurate with public company requirements; formal accounting policies, procedures, and controls related to substantially all of our business processes to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries; IT general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. These material weaknesses could result in material misstatements of our financial statement account balances or disclosures of our annual or interim financial statements that would not be prevented or detected. We have concluded that these material weaknesses in our internal controls over financial reporting occurred because, prior to this offering, we were a private company and did not have the internal controls necessary to satisfy the accounting and financial reporting requirements of a public company.

In order to remediate these material weaknesses, we have taken and plan to take the following actions:

 

   

continuing to hire personnel with public company experience as our company continues to grow;

 

   

providing additional training for our personnel on internal controls over financial reporting;

 

   

implementing additional controls and processes, including those that operate at a sufficient level of precision or that evidence performance;

 

   

implementing processes and controls to better identify and manage segregation of duties; and

 

102


Table of Contents
   

engaging an external advisor to assist with evaluating and documenting the design and operating effectiveness of internal controls and assisting with the remediation of deficiencies, as necessary.

We and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal controls over financial reporting as of December 31, 2020 or any prior period in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act after the completion of this offering.

 

103


Table of Contents

BUSINESS

VISION, STRATEGY & MISSION

We envision a world where the experience of selling or buying a home is simple and pleasant for everyone. Our strategy is to replace today’s complex, paper-driven, antiquated workflow with a seamless, all-digital, end-to-end platform that empowers real estate agents to deliver an exceptional experience to every seller and buyer. Our agent-centric platform is at the heart of our mission to help everyone find their place in the world.

OVERVIEW

Compass provides an end-to-end platform that empowers our residential real estate agents to deliver exceptional service to seller and buyer clients. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service and other critical functionality, all custom-built for the real estate industry. Fundamentally, we believe that agents are, and will continue to be, central to residential real estate transactions and enabling our core brokerage services. We help agents grow their businesses, serve more clients, save time, and stand out as valued, trusted and professional advisors in real estate transactions.

Through 2020, Compass agents have represented either sellers or buyers of more than 275,000 homes worth more than $300 billion. With 4% of the U.S. market, Compass is the largest independent real estate brokerage by Gross Transaction Value. Our agent-first approach and differentiated platform have delivered strong results for Compass agents and clients in 2020:

 

   

our agents close an average of 19% more transactions measured from their first year compared to their second year at Compass;

 

   

our agents sold homes in 21% fewer days, on average, relative to agents at firms with comparable average home sale values in our MLS Cities;

 

   

on average, 88% of our agent teams used our proprietary technology platform at least once per week, of which approximately two-thirds used it daily;

 

   

our principal agent retention rate exceeded 90%; and

 

   

our agents are strong advocates, giving Compass a Net Promoter Score of 68.1

Residential real estate is one of the largest and most complex industries in the world. According to the National Association of Realtors, or NAR, in 2020, more than 5.6 million homes were sold in the U.S., representing approximately $1.9 trillion in transaction value. Housing is the single largest consumer expenditure in the U.S., and homes are often a substantial source of household wealth.

Selling and buying a home is one of the most significant financial events in an individual’s life and often one of the most complex, time consuming, and consequential. Given the unique nature of each property, location, buyer, seller, negotiation, title and financing, a real estate agent’s role as the driver of the majority of the workflow is indispensable. According to NAR’s 2020 Profile of Home Buyers and Sellers, 89% of home sellers and 88% of home buyers use a real estate agent or broker, levels that have remained consistent over the last 10 years with 2011 levels at 87% and 89%, respectively.

When advising the seller, agents typically help price the property, prepare it for sale with renovations, staging and photography, provide the seller with a full-service marketing program, list the property on a variety of portals, advertise it digitally and in print, show the property to prospective buyers, advise on sale negotiations, and prepare for and coordinate the closing of the transaction.

When advising the buyer, agents typically locate specific properties that meet the buyer’s personal and financial parameters, tour properties with the buyer, help evaluate the pros and cons of each property, assist in preparing

 

1 

For further discussion on our Net Promoter Score, see “Industry and Market Data.”

 

104


Table of Contents

the bid and negotiating, refer adjacent service providers such as title and escrow agencies, mortgage brokers, real estate lawyers, home inspectors, movers, contractors and painters, and prepare for closing the transaction.

We believe the best agents are dynamic business owners, responsible for every function from attracting and retaining clients to managing finance and operations. We believe these entrepreneurs are needlessly constrained by a plethora of disconnected technology solutions, manual processes and antiquated systems. The vast majority of technology products built for agents are narrow point solutions, requiring agents to spend significant time away from their clients wrangling multiple, disjointed technology tools and manually transporting data among these tools. These inefficiencies not only frustrate agents, but also limit their ability to effectively serve clients.

We have built an integrated software platform that helps agents operate with the sophisticated capabilities of a modern technology company and the personal attention and service of a dedicated advisor. Using proprietary data, analytics, AI and machine learning, our platform delivers a broad set of industry-specific capabilities for Compass agents and clients.

The Compass Platform

 

 

LOGO

We continuously innovate and enhance our software platform with the goal of digitizing and automating all real estate workflows that empower agents to acquire and serve clients. The caliber and pedigree of our technology leadership helps us attract and retain top-tier software engineers and AI talent globally. We have a team of over 650 highly experienced product and engineering professionals based out of our innovation hubs in New York, Seattle, Washington, D.C., and Hyderabad, India.

We complement our software with additional services that make our agents more successful, enabling them to advise on multiple aspects of the residential real estate process. Compass Concierge is a program in which we provide home sellers access to interest-free capital to front the cost of home improvement services and is designed to increase the sale value of the home and decrease its time on market. Our title and escrow services increase transparency and deliver a more integrated closing process for the consumer.

We obsess over our agents’ success. We offer training and coaching, sales management, listing and transaction coordination, commission processing, and marketing design and consulting so that our agents can achieve their full potential.

Our business model is based on shared success: we succeed when our agents succeed. As the Compass platform delivers more value to agents, more agents with established real estate businesses join the platform. As those agents deliver excellent experiences to clients, they generate more repeat and referral business, in turn increasing transaction volumes. This growth enables us to invest further in the platform and propel a virtuous flywheel.

 

105


Table of Contents

Our bold mission, agent-centric strategy, and comprehensive digital platform positions us to capture a sizable opportunity in the residential real estate market, one of the largest asset classes in the world. We estimate that agents drive approximately $95 billion of commissions in the U.S. and sit at the center of substantial additional spend directly and indirectly related to the home transaction. Our long term market opportunity is comprised of brokerage commissions (paid by clients to Compass), spend from other components of the real estate ecosystem, including closing services (title, escrow, and mortgage), paid marketing services and other real estate services. We view our serviceable addressable market, or SAM, in the United States to be over $180 billion and our total addressable market, or TAM, globally, over the long term, to be over $570 billion.1

We had 19,385 Compass agents on our platform as of December 31, 2020. A subset of our agents are considered principal agents, either agents who are leaders of their respective agent teams or individual agents operating independently on our platform. We had 9,368 principal agents on the Compass platform as of December 31, 2020. We currently cover 46 markets across the United States, defined as metropolitan statistical areas, or MSAs, according to the U.S. Census Bureau.

In 2020, Compass agents assisted home sellers and buyers to transact approximately $152 billion in residential real estate – or 4% of the U.S. market – up more than fourfold from $34 billion in 2018. We calculate our market share by dividing our Gross Transaction Value, or the total dollar value of transactions closed by agents on our platform, by two times (to account for the sell-side and buy-side of each transaction) the aggregate dollar value of U.S. existing home sales as reported by NAR. We currently generate substantially all of our revenue from commissions paid for these transactions. We believe there remains significant opportunity for us to grow our transactions by continuing to add agents to our platform, and grow their respective market shares. Additionally, we are well-positioned to capture meaningful revenue from adjacent services as we continue to expand and diversify our offerings within the real estate ecosystem.

Our business has experienced rapid growth. In 2019 and 2020, our revenue was $2.4 billion and $3.7 billion, respectively, representing a year-over-year increase of 56%. Our net losses were $388.0 million and $270.2 million in 2019 and 2020, respectively.

 

1 

Our SAM is based on the entire residential real estate market in the United States and not based solely on the markets that we currently serve. Our TAM is based on the entire global residential real estate market; however, none of our agents are currently located outside of the United States and our real property transactions are almost exclusively U.S.-based.

 

106


Table of Contents

THE COMPLEXITY OF THE AGENT WORKFLOW

Real estate agents are CEOs of their businesses, positioned at the center of a highly-specialized, multi-party workflow which involves complexity generally unseen by the buyer or seller. Agents serve as the liaison between the client, the counterparty and many other stakeholders related to the transaction. In addition to serving their clients directly, agents recommend, as appropriate, adjacent service providers from pre-sale to post-close.

 

LOGO

 

107


Table of Contents

AGENTS ARE AT THE CENTER OF ONE OF THE WORLD’S LARGEST MARKETS

According to NAR, there were 5.6 million existing homes sold in the U.S. in 2020 that generated approximately $1.9 trillion in transaction value. We estimate that an aggregate $95 billion in commissions were paid from these transactions. Residential real