How Square’s Debut Draws Concerns Over IPO “Ratchets” & Impact on Tech Talent

We’ve been keeping a close eye on the tech market as news of prominent tech layoffs and devaluations of prized tech unicorns have drummed up talks of a market bubble. Square’s recent IPO gave similar cause for concern in the tech community.

Last week, Square–the mobile payments startup unicorn–set its initial public offering at $9, notably below the anticipated $11 – $14 range. However, there emerged two other stories from Square’s news.
Let’s start with the good story. Square apparently achieved something that hasn’t been seen in 17 years–after setting its IPO below the targeted range in its prospectus, the stock price actually rose. Square’s shares increased to $13.07 by market close, that’s a 45% increase within the same day.
The other story has to do with how the set IPO price was way under $15.46, the price Square’s investors paid in the last $150 million funding round that occurred over a year ago. However, that last round came with a caveat referred to as a “ratchet”–a guarantee of additional shares bestowed upon investors if the IPO price failed to reach a certain level–a penalty which Square indeed had to pay in additional shares amounting to $93 million.

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Why is this concerning? Because ratchets are great for late-stage investors, but bad for employees and early investors whose shares dilute immediately when ratchets trigger. This may ultimately hurt the company that could witness some of its earliest employees exiting at a crucial time in its post-IPO journey.
These exits have the potential to happen more often than we think. Ratchets have become a trend in Silicon Valley; the WSJ reports that 30% of private companies valued at $1 billion or more agreed to some type of ratchet agreement with their investors.
Will IPO ratchets tempt coveted tech talent to jump ship? And which companies, looking to recruit these in-demand workers, will benefit from the fallout?