ServiceTitan (NYSE: TTAN), a Prime Unicorn Index component, makes its public debut today at $71 per share, raising $625M and valuing the company at $6.3B. While this pricing came in above the expected range of $65-67, there’s an interesting detail in its 2022 financing that impacts the final economics.
What is an IPO Ratchet?
An IPO ratchet is a protective provision that gives investors additional shares if a company goes public below their investment price. Think of it as price protection – if you invested at $100/share and the company goes public at $80, the ratchet “trues up” your economics by giving you more shares. These became popular during the 2015-2016 tech correction, with companies like Square and Box having notable ratchets. While traditional ratchets provide simple price protection, more sophisticated versions can include time-based components.
ServiceTitan’s Compound Ratchet
ServiceTitan’s 2022 financing included a particularly interesting ratchet structure for its Series H ($84.57/share). If the company went public within 18 months, investors got simple price protection. But after 18 months, the protection price would grow at 11% annually, compounding quarterly. This created strong incentives for a timely IPO – the longer they waited, the more expensive the protection became.
With today’s $71 IPO price and the 18-month window elapsed, Series H investors will see their conversion price adjust down to about $67.21, providing them additional shares to maintain their economics. While this structure helped ServiceTitan raise capital at the time, it’s important to note who bears the cost: when the ratchet triggers, the additional shares issued to Series H holders dilute all other shareholders (including employees and earlier investors). It’s a zero-sum adjustment – the Series H maintains its value by taking a larger slice of the pie.
