Exposing Olo Part 4: The Litigations

In many instances the only real winner in class securities litigation is the plaintiff’s law firm, which can claim upwards of 30% of the class proceeds.

This is because these firms work on contingency, underwriting the costs of litigation until a judgment or settlement is reached.

Sometimes – often when the plaintiffs are unsophisticated – their attorneys stack expenses on top of their fees, effectively rendering their take rate to 40% of the class proceeds.

How about that for “alignment” with your client?

Keep this in mind as we analyze Olo’s class settlement. 

There’s also another, unfortunate wrinkle for plaintiffs: unless a plaintiff explicitly opts out of a class settlement, they waive their rights to pursue future claims against the defendant for the claims of the class.

For example, imagine a defendant defrauded investors over a period of X to Y. An attorney brings a class action and the defendant settles. Even if an investor who held shares from X to Y receives none of the settlement proceeds, they can never pursue a fraud claim against the defendant for the period of X to Y. 

Kroll, the claims administrator for Olo’s class litigation, summarizes the Olo settlement neatly:

If you purchased or otherwise acquired Class A common stock of Olo between March 17, 2021 and August 11, 2022, inclusive, you may be eligible to receive a payment from this settlement.

Plaintiff alleges that between March 17, 2021 and August 11, 2022 (the “Class Period”), Defendants Olo, Olo’s founder and chief executive officer Noah H. Glass, and Olo’s chief financial officer Peter J. Benevides made false and misleading statements and omissions regarding: (i) “active locations,” one of Olo’s “key business metrics,” (ii) Olo’s relationship with Subway restaurants, (iii) Olo’s likelihood of success in the large-chain (i.e., enterprise) restaurant market, and (iv) Olo’s financial position and prospects. 

At the end of the Class Period, the Complaint alleges that Defendants’ admission that Subway intended to terminate its relationship with Olo constituted a corrective disclosure and that the other undisclosed risks materialized that same day when Olo also announced flat active locations growth in the second quarter of 2022 and a reduction in full year 2022 earnings guidance.  The Complaint alleges that, as a result, the price of Olo’s Class A common stock declined sharply the following day, damaging investors who purchased or otherwise acquired Olo’s Class A common stock during the Class Period. This Action alleges that, based on the foregoing circumstances, Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Throughout this Action, Defendants have denied, and continue to deny, any and all allegations of fault, liability, wrongdoing, or damages whatsoever.  

The Settlement, if approved, will result in the creation of a cash settlement fund of $9,000,000. The Settlement Amount, plus accrued interest and minus the costs of this Notice and all costs associated with the administration of the Settlement, as well as any attorneys’ fees and expenses that may be approved by the Court, will be distributed to Class Members pursuant to the Plan of Allocation described in the Notice.

To summarize, investors allege that Olo did a poor job of managing the Subway news and this caused the stock to drop precipitously. This drop was worth about $4 per share, but when you look at the paltry amount left for plaintiffs in the settlement after removing legal fees, it’s tantamount to – literally – a few cents per share. 

How’s that for justice, eh?

The Subway issue is a toss-up as far as we’re concerned, but the way Olo handled the Subway news simply reinforces a consistent pattern of mismanagement that, thus far, has resulted in zero consequences for Olo’s management despite the obvious damage to Olo shareholders.

Take a look at this bad boy:

Olo has had the largest drop of the public restaurant software companies since 2020 at -83% since IPO.

And you know what’s even more ridiculous?

Olo is the only company to have kept its CEO despite its unfathomable magnitude of shareholder destruction.

Lightspeed replaced their CEO in February 2024 with the original founder.

PAR replaced their CEO in March 2019, catalyzed by relative underperformance (-55% over 36 years while the S&P returned 5,000%).

Toast replaced their CEO in September 2023 after the blowback from Toast’s $0.99 ordering fee, yet Toast was growing 42% YoY at the end of 2023. 

But Olo?

Normalizing over the same time period as Toast above so growth can be fairly compared, Olo grew 1% YoY in their Q3 2023 earnings once you back out the (we believe) intentional obfuscation of gross payments recognition. 

That math:

Olo reported a 33% CAGR in ARPU from Q3 2022 ($558) to Q3 2023 ($742), with $106 (58%) of ARPU lift generated through a reduction of locations vis-a-vis Subway’s departure. The expected $6M in quarterly revenue lift from Olo Pay gross revenue recognition ($1B GPV * 250 bps / 4 quarters = $6M at very low or even dilutive margins), however, accounts for $71 of the remaining $77 of ARPU lift the Company recognizes as “organic impact” ($6M divided by 85,000 locations). 

In other words, Olo generated a true, organic ARPU impact of $6, representing a 1% CAGR in ARPU over Q3 2022 ($6 divided by $558).

Meanwhile real inflation was 8% over the same time period. 

(This analysis is just the tip of the iceberg, by the way.) 

And the consequences for Olo’s leadership have been… nothing!

Turns out you can live with impunity so long as your cronies are on the board and you collectively own the majority of the voting shares. 

That the existing class didn’t pursue these plaguing, underlying issues reads more that it was a quick hit job by the plaintiff’s attorneys to enrich themselves rather than recover shareholder damages. To further prove how clueless the existing class is, of the $9M settlement fund, the plaintiff’s attorneys, Scott + Scott, have negotiated $3M in fees and $900,000 in expenses. 

In other words, Scott + Scott is raking 43% of the class proceeds.

Why?

Because the class is unsophisticated and had no desire to recoup the actual damages wrought by Olo’s self-dealing. Even the derivative litigations (and there are three of them) are thin when it comes to identifying the real culprit of shareholder destruction. 

Note: we should give readers a quick primer in derivative litigation vs class litigation. This AI summary is pretty close to accurate and is sufficient for this article’s purposes:

Class action

A group of plaintiffs, such as shareholders who bought stock during a specific time period, sue a corporation together to seek compensation for damages. The goal of class actions is to make litigation more efficient and reduce redundancy in the judicial system.

Derivative suit

A shareholder sues a corporation’s executives and board of directors on behalf of all shareholders, typically alleging a breach of fiduciary duty. The purpose of a derivative suit is to allow shareholders to pursue claims against the corporation. 

In a class action, shareholders who aren’t part of the class typically pay damages to those in the class (i.e. the company directly pays the class shareholders), while in a derivative suit, management and directors pay the damages back to the company to manage (i.e. directors and management pay the company and shareholders pray the company spends the funds wisely… but really this can only happen if the management that got them into this position is terminated). 

On that note, rational public companies overseen by independent boards of directors routinely terminate CEOs for mismanagement, particularly catalyzed by failed acquisitions.

Graduate students from the University of Pennsylvania even quantified this into a nice little algorithm using data from 186 acquisitions that were material in size (i.e > $100M or 40% of the acquiring firm’s value).

While the paper is enjoyable, the takeaway is this: the likelihood of CEO termination increases dramatically with post-acquisition share price declines (duh).

This is the graphic representation of that paper: 

We went ahead and looked at Olo’s share price up to 40 trading days after the Wisely acquisition announcement, which occurred on October 21, 2021.

Over that 40-day period, Olo had fallen from $27 per share to under $22 (~18%) while SPY, a good barometer for the expected returns of the S&P, climbed 3.8%, representing a Cumulative Abnormal Return (CAR) for Olo of 21.8%. 

Put simply, Olo’s CAR is more than 3x worse than the CAR of companies who fired their CEOs after failed acquisitions.

But there are no ramifications when you’ve stuffed the board with directors who are in your pocket.

The data is overwhelmingly unconscionable: Olo’s leaders are self-dealing in order to maintain control of the company.

At the expense of everyone else.

Comparing their decisions (and consequential performance) to that of PAR shows you that it’s not a market problem: it’s a management problem.

Ironically the egos of Olo’s management have come at great personal cost, as they’ve eroded more than 80% of the value of their own holdings.

But that’s not what they’re optimizing for, clearly, or they would have considered strategic alternatives long ago. Supporting this position, the number of private equity companies that have shared their dumbfoundedness at Olo’s reluctance to hold rational conversations is nothing short of criminal.

Of course Ollo is welcome to mismanage a private company to their heart’s content. 

Unfortunately, that’s not what’s happening here.

Frankly, we believe that the evidence shows Olo is defrauding shareholders who otherwise believe that the company is being responsibly governed to maximize shareholder value.

Instead, Olo is clearly stealing from shareholders so that select directors maintain control. 

Olo should have stayed private, or at a minimum been explicit in their S-1 that their highest priority was to maintain company control at whatever costs.

At least own that you’re screwing your shareholders.

How are Olo’s shareholders going to be made whole?

It’s too late for that: there’s no way to recover the > 80% drop in share price. 

But it’s not too late to hold the existing management accountable for their actions, or lack thereof.