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Square's IPO Terms Put Value Below Latest Funding Round

Payments startup Square known for its credit-card readers that attach to mobile devices, gave details of its IPO plans on Friday.

Payments startup Square known for its credit-card readers that attach to mobile devices, gave details of its IPO plans on Friday.


Associated Press


Douglas MacMillan and

Telis Demos

Updated Nov. 6, 2015 7:59 p.m. ET

Mobile payments startup Square Inc. is seeking a valuation of about $3.9 billion, according to a new securities filing, far less than the $6 billion price tag put on the firm a year ago and a sign that recent sky-high private values are facing increasing market skepticism.

The San Francisco-based company on Friday said it expects to sell 27 million shares at between $11 and $13 each in an initial public offering, much less than what some investors paid for their shares a year ago.

Square’s pricing could serve as a reality check for the more than 120 tech companies with valuations of at least $1 billion, a club that has ballooned this year. Six-year-old Square’s IPO comes as big-name investors pushed valuations into the stratosphere for companies including Airbnb Inc., Dropbox Inc., and Uber Technologies Inc., which could test the public market as soon as next year.

“It’s a chickens-coming-home-to-roost moment,” said Rett Wallace, CEO of Triton Research LLC, which analyzes pre-IPO companies. “It might be harder for future IPOs because of how difficult it is to predict what they’ll be worth.”

Square, which was co-founded and is now run by Twitter Inc.


Chief Executive Jack Dorsey, agreed to give extra shares to certain investors in its last round if its IPO price was below the private financing. If Square goes public at $12, it will have to give 5.3 million shares, or about 1.6% of its total, to investors including venture-capital firm Rizvi Traverse Management LLC, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.


It is not clear how many other startups valued at $1 billion or more have given investors similar protections, because investors and entrepreneurs rarely discuss such terms publicly. A March analysis by law firm Fenwick & West found that 30% of private companies valued at $1 billion or more had agreed to give investors protection against a down IPO.

Square’s offering comes in what has already been a tough IPO market. Recent sharp stock-market swings have deterred some firms from pursuing public offerings, with one of the year’s biggest IPOs—grocer Albertsons Companies Inc.—recently delaying plans due to market conditions.

As of Nov. 6, at least 13 of 50 venture-capital-backed U.S. technology companies with IPOs since the start of 2014 were trading below the per-share value where they last raised money as a private company, an analysis of stock-sale documents by The Wall Street Journal shows.

Those struggles have begun to affect the financing of private companies. In recent weeks, startups seeking funding have lowered expectations for valuations and mutual-fund investors have marked down the value of their stakes in private tech companies.

“The steroid era of startups is over,” Keith Rabois, a venture capitalist at Khosla Ventures who formerly ran operations at Square, tweeted on Friday. In a subsequent direct message, Mr. Rabois said he was referring primarily to private companies finding it more difficult to raise money and investors applying more diligence to deals.

Many highly valued companies armed with private capital have stayed away from the IPO market this year. There have been just 22 tech IPOs in 2015 through this week, compared with 51 by this point in 2014, according to deal tracker Dealogic.

Square, used by businesses ranging from retail shops and restaurants to cabdrivers, counts Starbucks Corp.


as one of its biggest customers. However, Square said Starbucks will stop using Square before the third quarter of next year. Last year, sales through Starbucks accounted for 17% of Square’s revenue.

Like many other Silicon Valley tech firms, Square has posted growing sales but swelling losses. The company said revenue rose 49% in the first nine months of this year, to $892.8 million. Over the same period, its loss widened to $131.5 million, from $117 million.


A $12 IPO price would give a gain to investors who bought shares before the final private funding round. Square would get as much as $386 million, if underwriters exercise an option to buy extra shares. That will allow the company to invest in other services, like its Square Capital unit that makes cash advances to small businesses, and software to manage payroll and other functions, according to the IPO prospectus.

In its prospectus, Square said it plans to use more outside funding to provide advances to businesses through Square Capital, rather than using its own cash. That will earn Square additional fees from those providing the financing.

Square added $75 million in these so-called “merchant cash advances” last quarter, to $300 million total since 2014. It doesn’t disclose how much revenue the business generates.

Next year will be crucial for the payments industry, as many merchants switch to new terminals that accept credit cards with embedded chips and via mobile device taps, as well as those that are swiped. This could help Square pick up more customers. But the shift is also attracting competitors such as startup Poynt Co.


, founded by a Google Inc. and PayPal Inc.


alumnus, and giant First Data Corp.


, that also want to sell next-generation sale terminals.

Friday’s filing was Square’s first attempt to estimate the value of its shares in an IPO. Such price ranges frequently are raised or lowered as companies move closer to going public. Including potential future share issuance tied to employee stock grants, Square would be valued at $6.2 billion at the top of its expected price range.

Mr. Dorsey’s Start Small foundation will also offer 1.35 million shares in the IPO directly to Square’s merchant customers and users of money-transfer app Square Cash.

Mr. Dorsey, Square’s co-founder, owns about a quarter of Square’s stock and will have a 22% equity stake after the IPO.

Including Mr. Dorsey’s stake, venture-capital firm Khosla Ventures’s 17.3% stake and smaller shares held by board members and executives, about two-thirds of Square is held by insiders.

Write to Douglas MacMillan at [email protected] and Telis Demos at [email protected]

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Square's IPO Terms Put Value Below Latest Funding Round Reviewed by on . ENLARGE Payments startup Square known for its credit-card readers that attach to mobile devices, gave details of its IPO plans on Friday. Photo: Associated Pres ENLARGE Payments startup Square known for its credit-card readers that attach to mobile devices, gave details of its IPO plans on Friday. Photo: Associated Pres Rating:
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