As Silicon Valley prepares for its first IPO of 2017, the hangover from the frothy funding environment is front and center.
AppDynamics, whose software helps businesses spot and fix bugs in their applications, is expected to raise up to $165.6 million next week, selling shares for $10 to $12 each.
If investor enthusiasm picks up in the coming days, the stock could certainly price at the top of that range or higher. But at $11 — the middle of the current range — AppDynamics would be subject to the dreaded ratchet.
Here's what that means:
When AppDynamics last raised private funding in late 2015 in a round led by General Atlantic and Altimeter Capital, the $1.9 billion valuation included certain protective terms. Backers bought 11.6 million shares for $13.71 a share, with the caveat that should an IPO price at $11 or less, giving the company a market cap around $1.4 billion, the investors would be granted an additional 2.3 million shares, diluting other stakeholders.
Venture capitalists refer to it as "structure," and it was a commonly used tactic by late-stage start-ups in recent years to show valuation growth from one round to the next. Square and Box are the two most prominent companies to fork over additional stock to investors after selling shares in their IPOs below the ratchet price.
Silicon Valley spent last year sobering up from the excesses of the 2012-2015 era, when billion-dollar companies were minted so frequently that the term "unicorn" entered into everyday conversation, often as the butt of a joke. Public market investors simply weren't willing to pay up for the prospects of future growth, turning 2016 into the weakest year for tech IPOs since the financial crisis.