Square sets initial price for its IPO — at a lower valuation than in its latest round of funding
Kimberly White/Getty Images for Vanity FairJack Dorsey, the Twitter cofounder and chairman and Square CEO, on stage at "From 7 Dwarves to 140 Characters" at the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 9, 2014, in San Francisco.
The payments company Square, headed by Twitter CEO Jack Dorsey, says it expects its initial public offering to price at $11 to $13 per share, raising up to $403.7 million.
If this pricing sticks, it will be well below its last round of private funding.
In its final, Series E investment, Square shares were valued at $15.50, with a $6 billion valuation.
Its 2012 Series D funding valued shares at $11, so at the low end those investors aren't making money.
At the high end of the initial IPO pricing, Square would be valued at $4.1 billion, notes Dan Primack at Fortune.
This is just the initial pricing. Often times it's set low to entice investors.
Next, Square will hit the road to sell the IPO to investors. If investor interest is strong, the price could rise.
However, even if it rises, it's unlikely to get above a $6 billion valuation.
One reason for a discount on the stock: Neither Twitter nor Square has been clear about how Dorsey will split his time between the two companies — a cause of concern for some investors of both companies.
REUTERS/Rebecca CookJack Dorsey, chairman of Twitter and CEO of Square, listens to a fellow panelist during a Techonomy Detroit panel discussion held at Wayne State University in Detroit, Michigan September 17, 2013.
Square's IPO comes at a time when people in the tech and finance communities are debating whether private valuations are overinflated relative to valuations on the public markets. Private investors have, perhaps, been overly optimistic leading higher valuations.
At the same time, a lot of late-stage investments, which are increasing valuations, aren't pure equity investments.
Square's most recent investors, for instance, were guaranteed a 20% return on their investment, according to the IPO filing. According to the filing, Square promised a share price at $18.55 or higher for its latest investors. If it doesn't hit that, it will issue additional stock to the latest investors on the day of the IPO to make up for the gap in price.
There's more. In the newest S1, it says it agreed to sell 2.27 million shares of Series D stock held by Starbucks for $37 million. That equals $16.80 per share, which is well above its current IPO pricing. If Starbucks doesn't get $37 million for its shares, then Square has to make up the difference. It has until next October to complete this transaction.
Here's the language from the IPO filing on Starbucks:
As part of the amendment of our payment processing agreement with Starbucks in August 2015, certain warrants held by Starbucks to purchase shares of our common stock contingent upon achievement of certain performance thresholds were canceled. Additionally, as part of this amendment, we agreed to facilitate the sale of 2,269,830 shares of our Series D preferred stock held by Starbucks to a third party. If the aggregate purchase price in a sale to a third party of the Series D preferred stock is less than $37 million, then we will pay Starbucks the difference. This obligation terminates upon the expiration of any applicable lock-up period following an initial public offering. In the event that such obligation has not terminated, and the shares have not been sold, by October 30, 2016, we are obligated to repurchase the shares for an aggregate purchase price of $37 million. This obligation is being accounted for as a derivative instrument initially valued at $1.5 million and recorded as a reduction to Starbucks transaction revenue. To the extent this obligation remains outstanding, we will measure the fair value of this derivative instrument on a quarterly basis with incremental increases or decreases in its value, if any, recorded as changes to Starbucks transaction revenue in the applicable quarter.
Goldman Sachs & Co, Morgan Stanley & Co LLC, and JPMorgan Securities LLC are among 10 firms underwriting the offering.
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