Twitter chief executive Jack Dorsey’s other company, Square, has seen at least a third shaved off its 2014 valuation at $6bn, resulting in an IPO share price of between $11 and $13 a share. To make up the shortfall, the company may have to issue extra stock to preferred shareholders.
As more and more “unicorn” companies come under scrutiny for current financial practices rather than the hope of future returns, the conservative share price for Square, which deals in mobile debit and credit payment, raised eyebrows across Silicon Valley. Part of the reason for the drop may be Square’s partnership with Starbucks, a deal that has been leaking cash and is due to end next year.
The price would put the company’s full value at around $3.85bn.
“Somebody is paying for that drop in valuation,” said Maarten Hooft, managing partner at Quest Venture Partners, “and I assume it’s going to be the common shareholders rather than the preferred, meaning that that common shareholders will get diluted to pay back the preferred.”
Re/Code estimates Square will have to issue 5.3m additional shares to preferred shareholders, in order to make up the 20% return on investment it promised in its last round of private funding. The reduction, Hooft said, probably means mean that common stock will be worth a few per cent less.
“It works out to around a couple percentage points of dilution [per share] from the common, and that’s real money,” he said.
In the long term, said Hooft, the change will be better for Silicon Valley than it might be for investors. Hooft continues to preach cost-consciousness, especially in the early, cash-hemorrhaging stages of tech startup-hood. As Square, which is still losing money, battens down its hatches and prepares to enter the open market, its reduction in valuation will serve as a warning to investors to be more disciplined.
Seeing $2bn vanish from one of the most promising companies on the market is a shock to any system.
“That, maybe, is a good thing,” Hooft said. “It doesn’t change very much for us [Quest Venture Partners specializes in early stage investment], but from a later-stage perspective there are these consequences that we keep talking about.”
Dorsey’s imprimatur shields Square from much of the reputational damage a similar move might inflict upon a less-seasoned entrepreneur. The shares are certainly priced to sell, which may avoid some of the pitfalls of other high-profile IPOs that have launched and flopped. Even Facebook struggled to get off the ground when it first went public, in 2012.
The company, of course, can also change its share price again before shares go on sale later this quarter, under the ticker symbol SQ.
