Square's stock market debut looks set to become an embarrassing comedown for one of Silicon Valley's most beloved startups, with the company saying Friday it will sell its shares at an initial valuation of approximately $3.9 billion, well below the $6 billion it was reportedly valued at in a financing round last year.
Big investors in the payments company will still turn a tidy profit regardless. As BuzzFeed News reported last month, participants in last year's funding round were guaranteed a 20% return, thanks to a provision negotiated in the deal.
Square promised these investors that if its shares were priced below $18.56 in an IPO — the level at which the investors would earn a 20% return — then the company would issue them additional shares to make up the difference. The range proposed by Square on Friday is significantly below that level, at $11 to $13 a share.
At the midpoint of the pricing range, the IPO would raise $324 million for Square. Neither Dorsey nor any of the other executives named in the prospectus plan to sell shares in the deal, with the only selling shareholder being the Silicon Valley Community Foundation, a local charity.
The disclosure of the price range is part of the IPO process and doesn't represent an actual valuation, which will only emerge once the shares are sold. But given the overall turbulence in the stock market, and growing questions about the valuations of Silicon Valley's star startups, Square may feel that it needs to offer its shares cheaply to drum up demand. If its bankers find more demand than expected, they could raise the price above the proposed range.
But the proposed pricing is nevertheless a humbling acknowledgment by Square that the public market may not be as generous as venture capitalists have been in private. A lackluster IPO could send chills through Silicon Valley, where flocks of young and unproven startups have been able to become so-called unicorns, with valuations above $1 billion.
Square’s business presents a number of possible risks for investors. While the company has introduced new products, like a program for advancing cash to merchants, it still relies on its credit card readers for the bulk of its revenue. And while that revenue is growing, Square continues to lose money.
Its CEO, Jack Dorsey, will be splitting his time between Square and Twitter, where he is also CEO. And running Twitter will be a time-consuming task. The social media company is gaining new users at a slowing pace, and it's struggling to produce the kind of financial results that Wall Street wants.