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Original article

ServiceTitan S-1 Breakdown ‒ Meritech Capital

Compounding IPO ratchets

Key takeaway

• For entrepreneurs: ServiceTitan's experience with the IPO ratchet structure underscores the importance of strategic financial planning and understanding the implications of investor protection mechanisms when raising capital, especially in preparation for an IPO.
• For investors: The IPO ratchet structure in ServiceTitan's Series H round highlights the potential for downside protection in investments, but also the pressure it can put on a company to go public, potentially affecting the timing and valuation of the IPO.

Summary

ServiceTitan, a venture-backed software company, has raised significant capital over the years, with its most notable round being a $200M Series G in 2021 at a $9.5B valuation. However, its Series H round in November 2022 introduced a unique compounding IPO ratchet structure, which has implications for its upcoming IPO. This structure provides downside protection for investors if the IPO price falls below the Series H share price, but it also pressures ServiceTitan to go public sooner to minimize dilution. The company's valuation has fluctuated, with the most recent tender offer in July 2023 valuing it at approximately $6.7B.

Insights

• IPO Ratchet Structure: ServiceTitan's Series H round included a compounding IPO ratchet, a rare structure in SaaS IPOs, which could trigger if the IPO price is below the Series H share price of $84.57, potentially leading to dilution for existing shareholders.
• Valuation Fluctuations: The company's valuation peaked at $9.5B in 2021 but has since decreased, with the latest tender offer suggesting a valuation of around $6.7B, reflecting the challenges in maintaining high valuations in a changing market environment.
• Investor Protection: The ratchet structure was designed to protect investors from a down round IPO, ensuring they receive additional shares if the IPO price is lower than their investment price, thus maintaining their investment value.
• Pressure to Go Public: The compounding nature of the ratchet means that the longer ServiceTitan delays its IPO, the higher the hurdle price becomes, increasing the potential dilution if the IPO price is below this threshold.

Implications

• Strategic Timing: ServiceTitan is under pressure to go public as soon as possible to avoid significant dilution from the IPO ratchet, which could impact its strategic planning and market entry timing.
• Investor Confidence: The presence of the ratchet might signal to the market that the company and its investors are concerned about the IPO valuation, potentially affecting investor confidence.
• Dilution Impact: If ServiceTitan IPOs below the hurdle price, the dilution impact would be relatively small (1-2%), but it still represents a cost to existing shareholders and could influence the company's capital structure post-IPO.
• Market Perception: The use of such a structure might be viewed as a sign of caution or conservatism by the company, potentially affecting how it is perceived by public market investors.