JD.com Founder's $591 Million Payout

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NEW YORK (TheStreet) -- Richard Qiangdong Liu, the founder of China's largest online direct sales company, JD.com, received $591 million in stock compensation in the first quarter of 2014 as the company moved toward an initial public offering in the U.S.

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According to JD.com's prospectus, Liu was granted over 93.7 million restricted share units that immediately vested in the first quarter. That share grant was worth $591 million and caused the company to report a loss for the first quarter of 2014, in spite of an over 65% increase in revenue.

JD.com will seek to sell nearly 93.7 million American depositary shares (ADSs), or just over 187.3 million Class A Ordinary shares in its U.S. listing. On Friday, the company said in a filing with the Securities and Exchange Commission it would seek to sell its shares at a range of between $16 and $18 apiece on the Nasdaq. JD.com will list under ticker "JD."

At the high-end of JD.com's range, the company would sell about $1.7 billion worth of stock on the Nasdaq. JD.Com said it expects net proceeds of $1.1 billion from the stock offering. Founder Liu will sell 13.9 million shares in the offering while hedge fund Tiger Global Management will sell 13.4 million shares, JD.com's prospectus stated.

The 2013 Stock Plan

Founder Liu's $591 million first-quarter payout was the result of restricted share grants approved in the company's 2013 equity incentive plan. The company also granted about 12.3 million restricted share units and 1,955,000 ordinary shares to Tencent employees who have joined the company as part of a partnership signed earlier in 2014.

In total, first-quarter operating expense at the company rose over 100%, mostly as a result of $606 million in overall share-based compensation. Cost of revenue and fulfillment, in contrast, rose at about the same rate as JD.com's revenue for the first quarter.

"We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations," JD.com said in its prospectus.

The 2013 equity plan was adopted on Dec. 20, 2013, JD.com said in its prospectus, which was filed about a month later at the end of January. The  plan was then revised on Mar. 6, 2014 to increase the amount of shares awarded.

JD.com didn't disclose its 2014 equity compensation plan in its prospectus.

Liu Needed for Quorum

JD.com is seeking to list its shares with a dual class stock structure that will give Liu voting control over the company's shares, in addition to special rights that might seem unusual for a traditional U.S.-based listing.

Liu will beneficially own about 83.7% of the voting power of JD.com's shares, however, he will own only a minority of Class A Ordinary shares.

That voting control will afford Liu all of powers that usually come with a controlling voting stake in a company through a dual class stock structure. The company's bylaws also appear to afford Liu some special powers.

JD.com's board of directors will not be able to form a quorum without Liu so long as he remains a director of the company. That means the company's board of directors won't be able to assemble without him.

"[U]nder the new memorandum and articles of association that will become effective immediately prior to the completion of this offering, our board of directors will not be able to form a quorum without Mr. Liu for so long as Mr. Liu remains a director," JD.com states in its IPO prospectus.

That means JD.com board of directors won't be able to meet without Liu. Normally, a simple majority of board directors can form a quorum.