ServiceTitan IPO Exposes Rising Trend of ‘Dirty Term Sheets’ in Tech
Why This IPO Signals Trouble for Late-Stage Startups
When ServiceTitan filed for its IPO last week, many hoped it signaled a reopening of the frozen IPO market. However, industry experts suggest it may instead reveal a darker trend: the forced disclosure of unfavorable funding terms agreed during 2022’s valuation crash.
The Compounding Ratchet Clause Explained
VC firm Meritech Capital’s analysis of ServiceTitan’s S-1 filing uncovered a particularly aggressive term:
- IPO Ratchet Structure: If ServiceTitan goes public below its Series H share price of $84.57, investors receive additional shares to compensate for losses
- Compounding Penalty: For each quarter delayed past May 2024, investors gain an extra 11% annually (compounding quarterly)
- Current Threshold: ServiceTitan must debut above $90/share to avoid triggering the clause
“This isn’t about reopening IPO windows,” says Alex Clayton of Meritech Capital. “It’s about ZIRP-era companies facing the consequences of their funding decisions.”
Why Founders Agree to These Terms
Several factors drive companies to accept such conditions:
- Avoidance of down rounds and valuation cuts
- Short-term preservation of employee morale
- Maintaining positive media narratives
- Immediate cash needs outweighing future consequences
Industry Reactions and Warnings
Prominent investors are sounding alarms:
- Bill Gurley (ex-Benchmark): “Best to steer WAY clear of investors asking for compounding ratchets”
- Meritech Capital: Estimates ServiceTitan’s fair value at $72/share based on financials
- Carnegie Mellon’s Miles Dieffenbach: “This IPO is driven by term sheet obligations, not market conditions”
The Bigger Picture for Tech IPOs
Key takeaways for the industry:
- Not an IPO Market Recovery: ServiceTitan’s move appears obligation-driven rather than opportunistic
- More Disclosures Coming: Many late-2022 funding rounds likely contain similar hidden terms
- Founder Warning: Short-term valuation games often lead to long-term consequences
“This isn’t about ‘dirty’ terms,” Clayton clarifies. “It’s about calculated risks that founders knowingly accepted during challenging times.”
As more companies from the 2022 funding crunch approach IPO timelines, investors should expect similar revelations in upcoming S-1 filings. The ServiceTitan case serves as both a cautionary tale and a preview of what’s to come in tech’s post-ZIRP reckoning.
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