Many VCs were probably happy when ServiceTitan withdrew its S-1 notice regarding its impending public offering on November 18th. A successful IPO by the company, which develops operating software for trading businesses, could be just what the quiet IPO market needs to start shaking up.
However, the timing of ServiceTitan's IPO may not be entirely based on the company's anticipated favorable market conditions. The company agreed to terms of the transaction in 2022, essentially setting a deadline for it to go public by May 2024 or risk diluting its stock. Now that the deadline has come and gone, ServiceTitan will remain private each quarter and borrow more of its stock from certain investors in an IPO.
Let me explain.
As first noted by late-stage VC Meritech Capital when ServiceTitan raised a $365 million Series H round in November 2022 and outlined in the company's S-1 filing, The deal included a compound interest IPO ratchet.
The IPO ratchet is a downside protection clause for investors. If a company goes public at a valuation equivalent to a lower stock price than the stock price at which the investor recently purchased the stock, the number of shares will be adjusted and the stock will be means to remain “complete”. their investments, or own a portion of the same stock in the company. If a company goes public at a higher valuation than the previous round, this provision essentially disappears.
ServiceTitan's IPO ratchet is “compound interest,” which adds another layer. This particular structure means that if the company does not go public by the set date (May 22, 2024, 18 months after the Series H round), the terms of the ratchet clause will change. Due to the impending deadline, the minimum valuation (also known as the hurdle rate) at which ServiceTitan must list to avoid further dilution of its shares will increase at an annual rate of 11% each quarter.
This original agreement set ServiceTitan's hurdle rate at or above $84.57 per share to avoid having to award more shares to any particular investor. With the deadline already passed, Meritech estimates that hurdle will be closer to $90 per share. The longer ServiceTitan waits, the higher the hurdle.
None of this would matter much if ServiceTitan's valuation continued to rise after the 2022 round, and its stock price rose accordingly. But that's not the case. Meritech values the company at approximately $70 per share. Secondary trading website Caplight estimates that the company's current stock price is valued at $81.59 per share, representing a valuation of $7.3 billion. Caplight's estimate is higher than Meritech's, but still falls short of the hurdle rate.
It all depends on how ServiceTitan prices its IPO. The company declined to comment.
Silicon Valley-based ServiceTitan was founded in 2012 and has raised more than $1.5 billion in venture capital from companies such as Iconiq, Bessemer, and Coatue. The company reported revenue of $685 million and a net loss of $183 million for the 12 months ended July 31, 2024, according to its S-1.