When Tech Investors Can Block the Exits

Source: PitchBook; The Information Research

Investors looking to boost their returns have long attached strings to how private tech companies can sell or go public. But those purse strings can look more like chains as more high-value companies offer investors concessions like the right to block IPOs or accrue dividends paid out in an acquisition.

Twenty-four percent of high-value companies raising money in the fourth and first quarters granted investors the right to veto an IPO if it’s not priced at a high enough valuation. That’s up from 15% in the three quarters before that.

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And it’s a direct result of a “ratchet” granted certain investors, which allowed Square to raise money at a theoretical valuation of nearly $6 billion. These investors were protected at any price that Square went public by being promised extra shares. Yet some employee options were issued with an exercise price equivalent to the $6 billion valuation. So when Square went public at a fully diluted valuation close to $4 billion, the investors got the extra shares. And employees were left holding options that are now underwater.

Matt Greenfield and John Danner commented on this article.
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