On Tuesday, cloud business software provider ServiceTitan priced its initial public offering at $52 to $57 per share, expecting to raise between $446.2 million and $514.2 million in the midrange. I am.
It also made some other interesting disclosures about what it will use the money for and who it will sell its shares to.
In its latest S-1A SEC form, the company revealed that it plans to use significant cash (approximately $311 million) to buy back all of its non-convertible preferred stock at $1,000 per share. Investors paid.
In addition, those shareholders will also be paid any accrued dividends per share. According to these documents, the investors are Saturn FD Holdings, LP, and Coatue Tactical Solutions PS. The company was targeting dividends of 10% per year for five years and 15% for six years on these stocks. For comparison, the average dividend yield for publicly traded companies in the technology industry is 3.2%, according to Dividend.com. By the way, these are not the biggest VCs investing in ServiceTitan. ICONIQ Growth, Bessemer Venture Partners, and Battery Ventures. The document also states that the TPG entity is a major investor.
Eliminating expensive private capital investments is not what most companies say they will do with their IPO funds. They tend to use that money to run their own businesses or potentially make acquisitions. In this case, ServiceTitan says anything left over will be used as working capital for the company or other corporate uses.
This latest disclosure follows news that ServiceTitan has sold its soul, so to speak, by agreeing to raise a Series H round in 2022 and granting investors in that round a “compound interest IPO ratchet structure.” .
This price range means the company will almost certainly need to grant more shares to Series H shareholders as part of the IPO. If the IPO stock price is lower than what Series H investors paid, ServiceTitan agrees to cover the losses and by postponing the IPO on a quarterly basis to after May 22, 2024, the company agreed to owe more money to investors. They disclosed that they paid $84.57 per share.
VC Alex Clayton, a general partner at late-stage firm Meritech Capital and known for his IPO analysis, first pointed out the painful ratchet structure in a blog post that went viral. He told TechCrunch that it “makes sense” to spend most of the IPO money on ServiceTitan to get it out of the preferred stock deal.
“They obviously want a cleaner cap table and are using the proceeds to buy these back. They could buy this back at any time and now they have the cash to do so.” he said.
Still, the company also appears to need cash for its operations. Although losses are narrowing, the company still had an operating loss of $183 million at the end of fiscal 2024, and a net loss of $195 million after interest and other expenses.
But Clayton also believes bankers were playing a typical IPO pricing game in the $52 to $57 range, which was lower than he expected. This means the company may actually price above that range. This helps generate positive headlines and excitement about your product. If so, ServiceTitan can clean up the cap table and take home more cash.
“This is just an initial range. The price will set and it could trade higher. Remember, bankers want an 'IPO pop', but if the IPO is priced too high If it trades below the issue price, companies will be less inclined to cooperate. “I think the company will trade in the high $60s or low $70s,” he said.
In that vein, ServiceTitan has made it more clear who is eligible to purchase stock in its direct stock program. ServiceTitan has revealed that it is setting aside 5% of its stock to sell to friends and family of its founders, as well as certain executive decision makers at its customers.
Such private equity sales are becoming more common, although there can be conflict of interest issues where the customer is also the shareholder selecting the vendor. For example, Reddit, which went public earlier this year, did so for moderators.
All of this means that ServiceTitan's IPO may surprise or cry, but it doesn't reflect much on when tech IPOs will start getting serious again.
ServiceTitan did not immediately respond to a request for comment.