Square guaranteed investors a 20% return in its most recent round, S-1 shows
Some Of Square's Backers Were Guaranteed A 20% Return In IPO — The payments company revealed the special provision, known as a ratchet, in its IPO prospectus today. — Jack Dorsey, CEO of Square.
Context & Ripple Effects
Square's IPO filing on $560.6M revenue and a $77.6M first-half loss carried a buried detail: the prospectus disclosed a ratchet from its most recent round guaranteeing certain backers a 20% return no matter where the stock landed. When the IPO priced below the level implied by that guarantee, the clause fired exactly as designed — Square handed $93M in extra shares to investors including Rizvi Traverse and J.P. Morgan as compensation.
What makes this more than a footnote is how it resolved: even after paying the penalty, the stock closed its first day at $13.07, up 45% from the IPO price. The ratchet transferred all of last round's valuation risk onto Square and its new public shareholders while leaving late-stage investors whole — a clean demonstration of why pricing private rounds got so detached from market clearing.
First-order effects
- Rizvi Traverse, J.P. Morgan, and the other 2014-round holders are made whole on day one — Square pays out $93M in additional shares so their return clears the promised 20% floor regardless of the IPO price.
- Square's effective IPO proceeds shrink: every dollar of shortfall below the guaranteed level converts into dilution borne by the company rather than losses borne by its latest backers.
Second-order effects
- Underwriters gained a structural reason to price conservatively — a low IPO price triggers the ratchet against Square, not the investors, which helps explain a debut at $11.20 that promptly traded up more than 40%, handing public buyers an instant pop that insiders' guarantee never exposed them to.
- Every late-stage investor negotiating a term sheet now has a template case for demanding downside protection, raising the cost of capital for any company whose current round was priced at a peak the public market won't validate.
Third-order effects
- If ratchets become standard in late-stage rounds, reported unicorn valuations increasingly overstate what anyone would actually pay — the paper number holds only until an exit forces the issuer, not the investor, to absorb the gap, making pre-IPO marks systematically harder to trust.
- The asymmetry points toward a two-tier market structure: sophisticated late entrants with contractual floors, and public shareholders absorbing repricing risk at the IPO — a dynamic regulators and IPO-bound boards will face pressure to disclose more prominently than one line in an S-1.
The trend: Late-stage venture financing is shifting downside risk from investors back onto issuers through ratchet clauses, decoupling headline valuations from prices the public market will actually clear.