When ServiceTitan dropped its S-1 notice of an impending public offering on November 18, many venture capitalists likely rejoiced, hoping that a successful IPO by the company would be the catalyst to revitalize the quiet IPO market. However, the timing of ServiceTitan's IPO may not be entirely based on the company predicting favorable market conditions. Instead, a deal term agreed upon in 2022 has essentially set a deadline for the company to go public by May 2024 or risk having to dilute its shares.

This deal term, known as a compounding IPO ratchet, was included in ServiceTitan's $365 million Series H round in November 2022. An IPO ratchet is a downside protection clause for investors that means if a company goes public at a valuation that equates to a lower share price than said investors most recently bought shares at, their number of shares will be adjusted so they remain "whole" on their investment, or own the same equity slice of the company.

What makes ServiceTitan's IPO ratchet unique is that it is "compounding," which adds another layer of complexity. This specific structure means that the terms of that ratchet clause change if the company didn't go public by a set date, which was May 22, 2024, 18 months after their Series H round. Since the deadline has come and gone, the minimum valuation ServiceTitan would need to go public at to avoid diluting its shares more, also known as a hurdle rate, will compound each quarter at a rate of 11% annually.

This original agreement set ServiceTitan's hurdle rate to $84.57 a share or higher to avoid having to give certain investors more shares. However, since the deadline has already passed, that hurdle is closer to $90 a share, according to estimates by late-stage VC Meritech Capital. The longer ServiceTitan waited, the higher that hurdle would go up.

ServiceTitan's current valuation is estimated to be around $70 a share by Meritech, while secondaries trading website Caplight predicts the company's current share price is valued at $81.59 a share, representing a $7.3 billion valuation. While Caplight's estimate is higher than Meritech's estimate, this still wouldn't reach the hurdle rate.

The company's IPO pricing will ultimately determine whether it meets the hurdle rate or not. ServiceTitan declined to comment on the matter. Founded in 2012, the Silicon Valley-based company has raised more than $1.5 billion in venture capital from firms including Iconiq, Bessemer, and Coatue, among others. The company reported $685 million in revenue and a net loss of $183 million for the 12-month period that ended on July 31, 2024, according to its S-1 filing.

The implications of ServiceTitan's IPO ratchet are far-reaching, and could have a ripple effect on the venture capital ecosystem. It highlights the importance of deal terms and their potential impact on a company's IPO strategy. As the IPO market continues to evolve, it will be interesting to see how companies and investors navigate these complex agreements.

In conclusion, ServiceTitan's IPO is not just a sign of a reviving IPO market, but also a testament to the intricate dance between companies, investors, and deal terms. As the company prepares to go public, all eyes will be on its IPO pricing and how it will impact its valuation and share structure.