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When ServiceTitan filed documents last week for its IPO, it was hoping to get it Debuting before the end of 2024, The technology world wondered if the stuck IPO market was finally opening.
Unfortunately, probably not.
But ServiceTitan could actually be a harbinger of something else entirely: a string of late-stage companies being forced to IPO or reveal other ugly terms they agreed to after the venture capital fundraising market collapses in 2022 and valuations decline.
“Yes, we’ll see more of this as ZIRP companies start going public. “You can’t hide these details in an S-1, even if they’re hard to understand in the legal writing on the S-1,” VC Alex Clayton tells TechCrunch, in A reference to companies that raised a lot of money during the zero interest rate policy period that ended in 2021. Clayton is a general partner at the recent firm Meritech Capital, which he and his colleagues at Meritech noted. Anthony DiCamillo and Austin Wang, to a wild term revealed in ServiceTitan’s S-1 documents, in an analysis The post that went viral over the weekend.
To recap, as TechCrunch previously noted, with ServiceTitan’s Series H raise in November 2022, the company agreed to give these investors a “complex IPO structure.”
The IPO structure means that if a company goes public at a share price lower than what the venture capitalist paid, the company will cover the loss by giving the investor more shares, as if the venture capital had been purchased at the lower price. If the IPO price is higher than what the investor paid, there is no problem.
In the case of ServiceTitan, as the Meritech crew pointed out, it agreed to a “double-up” IPO escalation structure. For every quarter ServiceTitan’s IPO is delayed past the May 22, 2024 deadline, the company will owe Series H investors more equity: 11% annually, doubling quarterly.
The stock price for the November 2022 round was $84.57 per share. Currently, Meritech calculates that ServiceTitan would have to debut at a price above $90 per share to trigger a payout of more shares to Series H investors. The S-1 did not disclose which investor(s) this term holds.
Furthermore, the Meritech crew – experts in stock pricing – believes ServiceTitan’s financials currently justify it approaching around $72 per share. this Given its revenues (at a pace of $772 per year, based on the last quarter, the company says) and a growth rate (implied 24%, based on the last quarter). That’s if the IPO prices are around the mid-range compared to other software companies.
Further delay, regardless of what happens in the market, means that ServiceTitan will have to raise its price to avoid getting into trouble with Series H investors. This would also further dilute the holdings of other major investors.
VC Bill Gurley, who was a popular partner at Benchmark and an IPO hawk for years, Comment on the situation on X. The “combined ratchet” sounds painful (it is!). The company appears to have agreed to “dirty” term sheets, he wrote. “It is best to completely stay away from investors who demand ratchet aggravation.”
Clayton says he doesn’t quite agree with the “dirty term sheet” description, which implies that the founder has been cheated by the investor. ServiceTitan’s lawyers probably knew and understood the term and executives were willing to take the risk. The S-1 revealed that ServiceTitan had agreed to escalate terms (albeit not as complex) twice before, and was caught with depressed stock prices.
Founders typically agree to such terms because it gives them a higher valuation and/or avoids a valuation cut, also known as a down round. After all, the company agrees to protect the investor from overpayment. Down rounds can be devastating of all kinds – employee morale, future investment rounds, media headlines.
But such terms are an attack tactic.
“You can call it ‘sloppy’, which is a cliché term, but it’s an agreement between two parties that have a lengthy legal letter and it’s likely about the risk the founders were willing to take,” Clayton said.
All of this means a few things. For the founders, Gurley said on Xit’s better to only take a down round if that’s what the company is really worth, rather than play valuation term sheet games.
If ServiceTitan had done that, it might not have gone public right now — and handled the future quarterly financial audits that come with that.
“I agree. “This IPO seems to be about incentives,” Clayton says, adding that ServiceTitan “also burned a lot of money, so maybe they needed the money, too.”
This also means that the IPO window does not necessarily open. With 2022 seeing a lot of founders struggling to maintain their previously high valuations, Clayton believes we’ll likely see more of this stuff buried in S-1 disclosures.
Then again, if retail investors buy into the stock, this debut could open the IPO window. But some funders remain skeptical. As Miles Dieffenbach, managing director of investments at the Carnegie Mellon Endowment Posted on X,
“ServiceTitan is not going public because the IPO window is ‘open’, but because they have a combination ratchet from their last round. If they can raise clean private capital, I bet they’ll stay private!” he wrote.
ServiceTitan did not respond to a request for comment.
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