Forced IPO's and Compound Ratchets

My ears perked up on CNBC last month during the IPO coverage of ServiceTitan, one of the few high-profile IPO’s of 2024. I thought I’d seen all flavors and definitions of private company investor terms regarding raising startup capital… until the CNBC commentator said “Compound Ratchet”.

Long ago I learned the phrase “You name the price, I’ll name the terms” with respect to what the industry has come to call “dirty term sheets”. In other words, not all money raised is simple or clean. Like pawn shops or bail bonds companies, some terms that come along with raising capital have “hair” or are “dirty”. When you run across complex, hairy, or dirty terms, it’s nearly always a proxy for a mispriced valuation. Why do VC’s misprice a round? To avoid a “down round” and to be able to quote a flat round in terms of valuation price or even a higher valuation vs the last round by simply making the terms more dilutive...

To read the full blog post, head to https://open.substack.com/pub/jcookflix/p/forced-ipos-and-compound-ratchets?r=3pccdi&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true