What is a Ratchet (IPO Edition)?

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Square Reveals Ratchet Right

In corporate speak, a ratchet usually refers to a form of anti-dilution calculation, however, the term has expanded its meaning to apply to initial public offerings. Square, the mobile payment processing company, filed its S-1 with the Securities and Exchange Commission yesterday. In the prospectus, it was revealed that certain institutional investors would be guaranteed a return of at least 20% in the initial public offering (“IPO”), regardless of whether the IPO is valued lower than the last round of private financing.

What is a Ratchet

What is a ratchet in the IPO context? A ratchet in the IPO context is similar to a ratchet in the anti-dilution context and provides that investors will receive additional shares of the company’s stock if the IPO is priced at a low value.

A Lawyer’s Take

This application of the ratchet right is great for lawyers representing investors in a late stage investment where the company is targeting an IPO. Depending on the amount of leverage your client may have, the amount of investment and a host of other factors, this may be a negotiable ask. Square’s prospectus isĀ also a great example that although a prospectus can be lengthy and difficult to sift through, sometimes they contain nuggets of great information that one can use to be a better equipped lawyer. Learn from good examples and expand your knowledge base.

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