Square is finding out that Wall Street is a much different place than Silicon Valley.
The payments provider led by Twitter CEO Jack Dorsey filed documents today (Nov. 6) indicating it will price its shares at somewhere between $11 and $13. That would value Square at $4 billion, substantially less than the $6 billion it was valued at during its most recent private funding round—a long Series E that started in Sept. 2014 and ended last month.
But Series E investors aren’t worried about it. That’s because Square included something that’s known in the industry as a “ratchet,” that protects their investment in case a company IPOs or sells itself to another company at a lower valuation down the line.
Basically, Square promised investors in the Series E round that it would sell them more shares if the price during the public offering wasn’t 20% higher—around $18 dollars per share—than what they paid ($15.46). That ratchet means Square will need to let go of an extra 1.6% of the company to make up the difference for investors.
Why the ratchet in the first place? Square’s situation highlights a growing disconnect between public and private market investors over valuing tech startups. Tech firms are raising money at extremely high valuations at a young age, and find it hard to live up to those valuations in subsequent rounds or in the public markets. At least in the case of Square, its investors were wise to the possibility that the company might not be as strong as they hoped.
The IPO pricing is disappointing for Square, but the company’s growing fast, and it managed to extricate itself from a terrible deal with Starbucks that cost it about $70 million over the last three years. And Square can still try to convince dealmakers that it deserves a high share price as it heads into its IPO roadshow. Square, under the ticker SQ, could be trading on the NYSE before Thanksgiving.