Lessons from Square's IPO: all investors made at least a 20% return, the ratchet worked perfectly, and valuing companies is hard
Matt Levine / Bloomberg View :
Context & Ripple Effects
A month after Square's S-1 revealed that its last private round had guaranteed investors a 20% return, Matt Levine closes the loop: the IPO price cleared high enough that every investor made at least 20%, meaning the ratchet never had to trigger — but only because the company priced below what the private round implied.
The episode is a case study in why IPO pricing is hard: Square had to reconcile a marked-up private round, downside-protected late money, and a public market unwilling to pay that mark, a tension that resurfaces whenever hot private valuations meet public markets.
First-order effects
- Late-round Square investors walked away from the IPO with their promised minimum outcome intact, while common shareholders and earlier backers absorbed the cost of pricing low enough to make that promise self-executing.
- The ratchet mechanism functioned exactly as designed, converting what looked like a down-round risk into a contractual transfer rather than an open-market loss for protected holders.
Second-order effects
- Future late-stage term sheets come under scrutiny: any investor writing checks against a rich private mark now knows a ratchet is the enforceable hedge, shifting negotiating leverage toward whoever demands downside protection.
- Companies approaching IPO with inflated recent rounds face a pricing squeeze — either leave money on the table relative to the private mark (as Square did) or force the ratchet to pay out, a dynamic visible again where recent IPOs price below prior marks, as with Figma leaving potential upside on the table to lock in long-term institutional holders.
Third-order effects
- If late-stage guarantees become routine, the private-public valuation gap stops being an accident and becomes a priced product: sophisticated investors buy insurance on their entry marks while employees and early holders bear the residual risk.
- That structure points toward a durable split between paper private valuations and realizable public ones — the same gap driving concern over recent IPOs trading at revenue multiples not seen since the dot-com era.
The trend: Late-stage startup financing is evolving from plain equity into structured instruments — ratchets, guarantees, preferred terms — that shift valuation risk from investors onto companies and early shareholders.