When ServiceTitan dropped its S-1 notice of an impending public offering on November 18, many VCs likely rejoiced. A successful IPO by the company, which builds operating software for trade businesses, could be what the quiet IPO market needs to start shaking loose. However, the timing of ServiceTitan’s IPO may not be entirely based on the company predicting favorable market conditions.
A Deal Term That Set a Deadline
In 2022, ServiceTitan agreed to a deal term that essentially set a deadline for it to go public by May 22, 2024, or risk having to dilute its shares. Now that the deadline has come and passed, each quarter ServiceTitan stays private, it will owe more of its company’s shares to certain investors at the IPO.
Understanding the Compounding IPO Ratchet
Let’s break down what this means. When ServiceTitan raised its $365 million Series H round in November 2022, the deal included a compounding IPO ratchet. This is a downside protection clause for investors that means if a company goes public at a valuation that equates to a lower share price than what investors most recently bought shares at, their number of shares will be adjusted so they remain ‘whole’ on their investment, or own the same equity slice of the company.
How Compounding Works
If a company goes public at a higher valuation than their last previous round, this clause essentially goes away. However, ServiceTitan’s IPO ratchet is ‘compounding,’ which adds another layer. This specific structure means that the terms of that ratchet clause change if the company didn’t go public by a set date.
A Compounding Hurdle Rate
The original agreement set ServiceTitan’s hurdle rate to $84.57 a share or higher to avoid having to give certain investors more shares. Since the deadline has already passed, that hurdle is closer to $90 a share, Meritech estimated. The longer ServiceTitan waited, the higher that hurdle would go up.
Impact on Valuation
If ServiceTitan’s valuation continued to rise after its 2022 round, bringing up its share price with it, none of this would matter much. But that isn’t the case. Meritech estimated that the company is valued at about $70 a share. Secondaries trading website Caplight predicts the company’s current share price is valued at $81.59 a share, representing a $7.3 billion valuation.
The Impact on ServiceTitan’s IPO
It will all depend 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 firms including Iconiq, Bessemer, and Coatue, among others.
Key Takeaways
- ServiceTitan’s IPO ratchet is a complex clause that may impact the company’s valuation.
- The deal term set a deadline for ServiceTitan to go public by May 22, 2024, or risk having to dilute its shares.
- The compounding hurdle rate will increase each quarter ServiceTitan stays private.
- If ServiceTitan goes public at a lower valuation than expected, investors may be affected.
What This Means for the IPO Market
The timing of ServiceTitan’s IPO may not be entirely based on the company predicting favorable market conditions. The impact of the compounding hurdle rate on the company’s valuation will depend on how it prices its IPO.
Silicon Valley-based ServiceTitan
- Founded in 2012
- Has raised more than $1.5 billion in venture capital from firms including Iconiq, Bessemer, and Coatue, among others
- Builds operating software for trade businesses
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