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When ServiceTitan recently filed for its IPO, with hopes of going public before the end of 2024, the tech industry speculated on whether this signaled a breakthrough in the IPO market. However, it appears that ServiceTitan’s IPO could represent a larger trend: late-stage companies being compelled to go public or disclose unfavorable terms agreed upon after the VC fundraising market declined in 2022, leading to decreased valuations.
## The Rise of ‘Dirty’ Term-Sheet IPOs
Venture capitalists, such as Alex Clayton from Meritech Capital, anticipate more companies with similar IPO structures to emerge as companies that raised substantial funds during the zero interest rate policy era approach their IPOs. These details, although complex and often obscured in legal jargon, are becoming more visible in S-1 filings, as evidenced by ServiceTitan’s disclosed terms.
### Understanding ServiceTitan’s IPO Ratchet Structure
ServiceTitan’s unique “compounding IPO ratchet structure” from its Series H raise in November 2022 showcases a novel approach to investor protection. This structure entails granting additional shares to investors if the IPO price is lower than the initial investment, compounding quarterly for each quarter the company delays going public past a specified deadline.
### Implications and Challenges for ServiceTitan
Analysts, including those from Meritech, suggest that ServiceTitan’s financials currently support a lower IPO price than what would offset the additional shares owed to Series H investors. Any delay in going public could necessitate a higher IPO price to avoid dilution for major investors, posing challenges in pricing the IPO effectively.
## Evaluating Founder-Investor Dynamics
While some characterize these terms as “dirty,” implying deception towards founders, others argue that such agreements are part of a calculated risk undertaken by companies to secure higher valuations and avoid down rounds. Founders and investors navigate between protecting their interests and mitigating risks, often leading to intricate legal discussions and strategic decisions.
In conclusion, the evolving landscape of late-stage company offerings, exemplified by ServiceTitan’s IPO terms, showcases the intricate dynamics between founders and investors. As the market scrutinizes these developments, the implications for future IPOs and investor relations remain a topic of ongoing debate and analysis.
