In an attempt to engineer a big post-offering pop, and avoid an infectious fizzle, Square (SQ) priced its shares, which will start trading Thursday, at $9 apiece. The $9 price is 18 percent below the low-end of the expected range and 42 percent below the $15.46 price at which Square last sold shares to private investors in a Series E last year.
And at $9 per share, or around $3.2 billion on a fully diluted basis for the company overall, Square is effectively priced at over $2 per share below its Series D round in 2012, the investors in which will be diluted by a ratchet in the Series E terms which valued the company at $6 billion and guaranteed a 20 percent gain upon going public
In related Jack Dorsey and local tech news, Twitter (TWTR) closed at $25.90 per share today, a dime below the price at which the company went public in 2013, and short interest in the company is at an all-time high (59 million shares).
UPDATE (11/19): With the engineered pop and desired headlines secured (“Square Soars!”), Square closed its first day of trading up 45 percent at $13.07 a share. On a fully diluted basis, the company is now valued at around $4.6 billion, down from $6 billion at the same time last year.
UPDATE (11/25): Square closed today at $11.90 per share, down 9 percent in its first week of trading with underwriter support. And the short interest in Twitter, which closed the day at $26.06 per share, up $0.16 per share (0.6 percent) over the past week, has increased to 61 million shares, an increase of 2.1 million shares over the past two weeks.
Did those private shares that sold for $15.46 come with downside protection (e.g. liquidation preferences)? This is probably an apples to oranges comparison.
Supposedly. A week ago there were reports that Square would have to issue more shares to those investors. That dilutes all the shares somewhat but at least it rights their overvaluation and sets precedence for other overvalued unicorns to do the same. (Assuming Square stock holds up and doesn’t plummet)
From the Square S-1 (namelink):
Liquidation Preference
In the event of any liquidation or winding up of the Company, the holders of Series E convertible preferred stock shall be entitled to receive, in preference of the common stock holders and other preferred stock holders, an amount equal to $15.46345 per share of Series E preferred stock. After this Series E distribution, other holders of convertible preferred stock shall be entitled to receive, in preference to the common stock holders, an amount per share equal to $0.21627 per share for Series A, $0.71977 per share for Series B-1, $0.95369 per share for Series B-2, $5.79817 per share for Series C, and $11.014 per share for Series D. Thereafter remaining assets shall be distributed ratably to the holders of common stock.
…
Series E preferred stock contains a provision for the adjustment of conversion price upon a public offering. In the event of such offering, in which the price per share of the Company’s common stock is less than $18.55614 (adjusted for stock splits, stock dividends, etc.), then the then-existing conversion price for the Series E preferred stock shall be adjusted so that, as of immediately prior to the completion of such public offering, each share of Series E preferred stock shall convert into (A) the number of shares of common stock issuable on conversion of such share of Series E preferred stock; and (B) an additional number of shares of common stock equal to (x) the difference between $18.55614 and the public offering price, (y) divided by the public offering share price.
Those are very favourable terms for Series E holders.
It just shows the level of confidence investors and the board had during Series E negotiations.
Nevertheless square is an important ipo as it will validate, or invalidate, the risk appetite for unicorns in the public markets.
I like the way that’s written… the Series E shareholders can’t lose!
That’s the point, and it’s why valuations are all bullsh*t. Investors are paying a premium because they’re buying the downside protection.
They lose if the company went bankrupt.
The reason it’s $9/share is because the company’s name is square. 3 squared = 9.
I used to work at Square and have a fair amount of Square stock but my strike price is still quite below $9 so I will make out okay. It won’t be the home run I had hoped for though.
More importantly is what this implies for private market valuations in general. I suspect that this will send a chill through the VC community overall, as they depend on the IPO market for their exits. Square may do well in the coming weeks but if it does not, it will depress valuations across the board.
Congratulations NoeValleyJim! I’ll cross my fingers that we see a bump up from here. Square is a well-run, sound company.
I don’t know the details of Square’s various rounds of financing, but we do a lot of these deals (not me personally – I’m just going on what others here have told me). Along with the downside protections for the later investors that Jake notes, I suspect there is also a cap on the upside – something like 2X or 3X. I’m told that is very common.* In other words, the “stock” sales are really disguised debt. This is then misreported to goose the perceived corporate valuations (“worth $4 billion in the latest round of financing!!!”). The S-1 filings spell this all out if you read carefully. But many of the tech “unicorns” in fact simply have a ton of de facto debt on their books that is ignored by the press.
* If, in fact, there is no upside cap to counter the downside protections, then the Series E holders really do have a very, very favorable deal that does not speak well for the health of the company.
“Well-run, sound…”
Square IS a credit card processing company that loses money on every transaction. Plan B failed. Plan C, at this point, is to become a loan shark to small businesses.
Plan D would be to raise prices.
Plan E would be to sell the operation to a credit card processing company (and then they would raise prices).
I think the stock will open well above $9. Congrats!
Companies tend to price IPOs 30% below where they think it will be end of day. Im not as familiar with tech, but many of the biotech IPOs over the past 2 years opened at 2x the IP price.
Square has TONs of room for growth outside the US. I have travelled to 14 countries this year for work, and thought about how they could use square technology in about 12 of those.
Popped quite a bit early on – over $14. So it looks like the brilliant bankers and advisors priced this way too low and in the process screwed Square out of a lot of money.
Ah, only cost them maybe $100 million or so, and when you have already blown through more than half a billion…. In effect, the Series E cost them ~$30 million to finance another year of ~$150 million in losses, while they packaged this gem for less vigorish investors. But that’s SQ’s business model: lose money on every transaction, make it up in volume.
By raising less than $250 million, they haven’t bought as many future years of losses as the Twitter IPO funded. Wonder how it will affect the ~$100 billion in “valuation” of Uber+Airbnb+Dropbox+Pinterest and their appetite for more RE.
As long as the public will invest in money losing companies without any of the downside protections granted to private investors, why should the companies be profitable? Much more fun to stuff the money into the pockets of early employees, early investors, and downtown SF offices. Good thing NVJ got stock instead of profit sharing.
Jake, I’ve been waiting for your comments on Square. Curses though, as I had been saving up that SNL gem to use on them. Looks like the IPO gave them about another year and a half of life at the current burn rate. Fasten your safety belts…
Does it sound familiar? Low ball listing price in real estate follow by a bidding war?
Goldman gave them the credit line last year. No dutch auction or Open IPO … for you! In the words of Don Valentine from Sequoia Capital: “All you have is powers of persuasion, and the investment banking community has a single anatomical deficiency: They have no ears.” Pop ’til you drop.
And this is real estate news why?
Do you think that — perhaps — the condition of the SF tech industry might have some impact on the SF housing market? Perhaps a very substantial impact?
Tech accounts for 18 percent of Pacific Union’s all-cash sales according to the company.
Sí señor, tech unicorns imploding now would not be a good thing for the RE market, which is slowing down. When tech turns it has a tendency to crash, so anything that mitigates that into a softer slowdown is a good thing. Good for the workers, the local economy, and landlords too 🙂
They have been injecting $150 million PER YEAR into the Bay Area economy. You could make the case that a quarter(?) of that is finding its way into real estate either as rents or mortgages. Not to mention all the local companies that use Square have been receiving a discount on their credit card transactions.
To be clear, that is $150 million per year of VC capital (or GS credit line) used to cover their losses.
How many newly minted paper millionaires did Square produce today, that will be cashing out in 6 months to buy RE?
None (with respect to newly minted millionaires). But the offering did decrease the (paper) net worth for existing shareholders versus the last private valuation.
It will, however, provide a more efficient option for employee liquidity once the lockup expires. But keep in mind that some have already cashed out in the secondary market, while others have already borrowed against their shares.
I’m not a stock guy, but investing in companies that are losing money does not seem a good long-term strategy.
The QE monetary expansion has in part, IMO, contributed to the current boom. But how much of that boom is real – given that many unicorns like Square are not profitable. But these companies are leasing up space, paying high salaries and burning through money that is raised by the IPO.
Bill Gurley, general partner at Benchmark, a Silicon Valley venture capital firm and who is considered one of technology’s top dealmakers recently said.
“Companies are taking on huge burn rates to justify spending the capital they are raising in these enormous financings, putting their long-term viability in jeopardy. Late-stage investors, desperately afraid of missing out on acquiring shareholding positions in possible “unicorn” companies, have essentially abandoned their traditional risk analysis.”
“I’m not a stock guy, but investing in companies that are losing money does not seem a good long-term strategy.”
Yes, then you are clearly not a stock guy. There are value stocks and growth stocks. A very large number of growth stocks are unprofitable because their strategy is growth, not profit. Most of biotech and tech fit, as well as almost all young innovator companies, fit in the category of growth and non-profitability. I ahve very few stocks of profitable companies in my portfolio, and it has blown away the real estate market by far.
Growth? What are Square’s prospects for growth? What happens to Square when Apple releases peer-to-peer money transfers?
i take it you havent been to EU and Asia lately and seen the way you have to pay with credit card. its archaic. apples release of peer to peer transfers might take off in SF in 3 years, but its not becoming widely adopted WW for a long time
How is the EU/Asian way of paying by cc archaic? Seems safer to me to put in a PIN for every transaction
apple pay is barely being used now.
Short Square’s stock Mikey!
Yeah, that’s been pretty tough on Amazon investors over the last 20+ years. I mean, geez, Bezos is only the fourth richest man in the world, totally not the first.
It was tough on the Amazon investors of 1999 that lost 90% of value when the next greater fools didn’t show up in 2000 and 2001. Timing isn’t everything, it is the only thing.
I thought we were talking about the long term? Even if you bought at the absolute high in 1999 you’d still be showing a 500%+ gain now. Not a bad 15 year return. And of course much higher if you didn’t buy at the peak of 1999.
Exceptions prove the rule. Your argument is like saying, why not start a search engine company, because Google has done so well. Square is not in an uncrowded category and has tiny margins.
Exactly. Facebook, Apple, Google, Paypal and Amazon all want in on the mobile payment business. These are the big boys Square has to compete against.
.
Your argument was that investing in companies that don’t make money is not a good long-term strategy. That’s what I was responding to, not that Square was specifically a good company to invest (I don’t believe that it is at this point).
I’m kinda with Dave on this one (although it’s all academic for me as I’m effectively not allowed to trade stocks in individual companies given my work). I prefer companies that have a business model that actually yields profits. I recognize that preference results in missing out on some winning stock trades in constant money-losers (Amazon, Salesforce), but imho it also avoids the far larger numbers of losing stock trades.
you are a value investor then. if you own mutual funds, you probably own a lot of non-profitable companies
True, but just a very few in some index funds. My funds tend not to hold the perennial money losers. There aren’t even that many such companies in the S&P 500 (for obvious reasons). And I like high-growth companies (or industries) – just not unprofitable high-growth ones. I’m not mocking those who like to bet on future growth in spite of poor present performance. That can work out great if you’re right. But it generally doesn’t work out well, like most gambling.
you can still use fundamentals on high growth non profitable companies,. they are just differnet fundamentals. Its not gambling if you do your due diligence
Here’s the deal with all the tech-schmeck-stock-hype-gyrations. From an SF RE investor’s perspective, it doesn’t really matter who the winners and losers are. As long as some people win! It’s really similar to the gold rush from the mid 1850’s. I take the position of Levi Strauss and Co. Sell the limited jeans all the players need to compete in their arena. Then sit back with popcorn and enjoy the SF-tech-RE juggernaut do battle with the fierce SF-political-nimby-housing-activistas. It’s both a profitable and entertaining racket!
Actually trading at > $13
Square’s business has terrible margins. They are also burning cash, last time I heard. I’d bet that this company will not exist in 5 years, acquired at a fire sale price by someone. They are a bubble company.
This comment seems appropriate IMO.
Chamath Palihapitiya, partner in Social + Capital, warned that spending in some of the startups is out of control and that its keeping sub-par startups afloat for too long.
“There’s way too much money in the system ultimately chasing few really great companies. The problem with that is you have a bunch of imposter companies getting funded for a lot longer than is traditionally the case.”
Then you should short them. You’ll get rich!
(Of course, be careful, in case you’re wrong.)
You might be on to something Realist, as it would appear the last time you were daring people to short Twitter it was trading at $30 per share. Since then, the short interest has increased by a few million shares and the price has dropped by about $4 per share for an annualized return of around 200 percent.
Personally I rarely buy or short, but there are no shortage of people who loudly proclaim how Company X is about to go down the tubes. Talk is cheap, though! I wonder how many of the proclaimers actually back it up.
Not sure the price was engineered to pop and Square could have decided to pull the IPO at any time and go another day. If anything, Square should be upset with the $9 pricing. Funny how these IPOs tend to move in dollar increments. But it’s an interesting day for Silicon Valley and tech in general.
UPDATE: With the engineered pop and desired headlines secured (“Square Soars!”), Square closed its first day of trading up 45 percent at $13.07 a share. On a fully diluted basis, the company is now valued at around $4.6 billion, down 23 percent from $6 billion at the same time last year.
Why do you say the pop was engineered?
I don’t really care what anybody thinks about the founders or the drama surrounding the IPO or past funding rounds… developing a $4.3B business from scratch in 6 years is a monumental achievement and should be celebrated as an epic business success story. How the sausage got made is really pretty much irrelevant now.
To be clear (from the S-1) it’s a $1 billion business that loses around $150 million a year (to be fair losses are a bit better, around $120 million, when you lose the Starbucks business — which they will be doing). Not too bad, and even two beers likes you.
On the other hand, calling it a $1 billion business is being charitable. Of that billion dollars, $600 million is immediately passed on to payment card networks and card issuers. Essentially you’re left with $400 million to scratch out a living.
totally agree. what theyve done is tremendous. a lot of sore losers.
So just to be clear, it’s important to do your due diligence and understand the numbers, but if you do your due diligence and come to the conclusion that a company, property or market is overvalued, that doesn’t make you a smart investor but rather a sore loser? Or does it just make you a “hater?”
if you do your DD, and find something is overvalued, you short it and a make money, then you are indeed a smart investor. If you whine on MB about how tech is overvalued and it doesnt make sense to invest in companies without profit because they will not succeed, then you are a sore loser or hater, or whatever you want to call it. I love SF, but one thing i dont like about it is there are so many people wanting others to fail.
Jimmy, its more relevant now than ever, as they will be having to present and defend their “sausage making process” each quarter as a public company. They must have REALLY needed cash a year ago to agree to those series E terms. Or owed someone something.
Jimmy, with about $1 billion cash invested now, that’s a lot of scratch. Gonna take a lot of scratching for a business used to losing 20 cents per dollar of revenue to survive enormous competitors used to thriving on single digit margins. In time we will find out how much of the sausage is sustenance and how much is just another monumental achievement of epic celebration.
I hope SQ survives and grows. AFAIK, they’ve been on-the-level far more than Uber and Airbnb. And I’d rather them profit from micropayments than Pay Pal or Visa or Citibank or Apple or Bank of China or Deutsche Bank or a consortium of the usual bankster rabble.
Regardless, Jack Dorsey should be celebrated for SQ (and Twitter) enriching many San Franciscans that toil in a heroic effort to replace pocket change with larger smartphones.
Glad we agree 🙂 I’m not an active stock market investor so I guess I don’t really care if the shares go up or down … but people building great businesses is something I love to see happening. One day they’ll raise their margins and curtail the kamikaze push for top-line growth and then the profits will flow. Have faith.
Not exactly sure how they’ll just “increase their margins”; admittedly, if they cut ALL of their “General and Administrative” expenses, they’ll break even. As business stands today, it looks like merchants pay around 3% to Square with 2% immediately going to payment card networks and card issuers. They’ve already raised prices once and given the competitive landscape, they’d be taking their customers for granted if they did it again.
My money’s on Paypal and the MuniMobile app.
Jimmy-brah, don’t you own SF RE? (Or are you just peninsula and flipper, err not keeper?) If you do own than you should care about SQ profits…at least I do as it helps their employees pay their (my) rent!
My RE portfolio is on the Peninsula, “West of El Camino” as I like to put it. I’m not smart or motivated enough to game the rent control system.
UPDATE: Square closed today at $11.90 per share, down 9 percent in its first week of trading with underwriter support. And the short interest in Twitter, which closed the day at $26.06 per share, up $0.16 per share (0.6 percent) over the past week, has increased to 61 million shares, an increase of 2.1 million shares over the past two weeks.
UPDATE: Square closed today at $10.22 per share, down 21 percent since “soaring!” in its public debut. Twitter closed the day at $17.94 per share, down 31 percent since our last update above (and the price at which it went public in 2013).
UPDATE: Square Trading within Pennies of IPO Price, Twitter near All-Time Low