When ServiceTitan filed documents last week for its IPO, hoping to have its debut before the end of 2024, the tech world wondered if a stuck IPO market was unlocking at last.
Alas, probably not.
But ServiceTitan could actually be a harbinger of something else entirely: a series of late-stage companies being forced to IPO or revealing other ugly terms they agreed to after the VC fundraising market tanked in 2022 and valuations plummeted.
“Yes, we will see much more of this as the ZIRP companies start to IPO. You can’t hide these details in an S-1, even if they’re hard to understand in the legalese writing that exists in S-1’s,” VC Alex Clayton tells TechCrunch, referring to companies that raised lots of money during the zero interest rate policy period that ended in 2021. Clayton is general partner at late-stage firm Meritech Capital, known for its IPO analysis. He and his Meritech colleagues, Anthony DeCamillo and Austin Wang, pointed out a wild term, disclosed in ServiceTitan’s S-1 documents, in an analysis post that went viral over the weekend.
To recap, as TechCrunch previously pointed out, with ServiceTitan’s November 2022 Series H raise, the company agreed to grant those investors a “compounding IPO ratchet structure.”
An IPO ratchet structure means that if a company goes public at a stock price that is less than what the venture investor paid, the company will cover the loss by granting the investor more shares, as if the VC bought at the lower price. If the IPO is priced above what the investor paid, there’s no problem.
In ServiceTitan’s case, as Meritech’s crew pointed out, it agreed to a “compounding” IPO ratchet structure. For every quarter ServiceTitan delayed going public after a deadline of May 22, 2024, the company would owe the Series H investors even more stock: 11% annually, compounding quarterly.
The stock price for that November 2022 round was $84.57 a share. Currently, Meritech calculates that ServiceTitan would have to debut at above $90 per sha …