Square’s IPO Miss Brings $93M Penalty

In the wake of an initial public offering that priced well below the range of $11 to $13 and instead came to market at $9, Square will have to pony up a fair chunk of change to satisfy some obligations to its early investors.

The Wall Street Journal reported last week that the payments firm will have to pay $93 million to make good on what is called a “ratchet” in Wall Street parlance, as investors, including Rizvi Traverse and JPMorgan, which contributed $150 million in funding rounds were guaranteed additional shares in the event that the IPO did not reach a certain level — which, in this case, happened.

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Under the agreements struck between Square and those investors, the latter was guaranteed returns of as much as 20 percent on their investments, with a threshold of $18.56. That level was off by more than half, judging from the $9 that the IPO fetched (of course, shares ended the day up more than 45 percent), with 10.3 million shares necessary for further issuance for those investors.

But, as WSJ noted, the two firms are at least partially “underwater” on part of their investments in the firm, which began in 2012 at about $11 a share.

The ratchets are proving to be a more prevalent financing mechanism, with similar agreements in place at companies such as Box Inc. In fact, WSJ noted that, according to law firm Fenwick & West LLP, about 30 percent of private companies sporting the “unicorn valuation” of at least $1 billion had a ratchet in place with at least some of their investors. Of course, if and when these companies come to market, they may have the same issue that Square has faced in terms of dilution.