
Square Prices Its IPO at $9, giving it a $2.7B valuation - jrbedard
http://techcrunch.com/2015/11/18/square-prices-its-ipo-at-9/
======
nugget
From a second market type broker who trades private tech company shares (Oct
1st 2015):

''We have only 4000 shares of Square left at $16.50. I believe Goldman is
going to price the IPO well north of $25 and the $16.50 is less than the price
that Square is granting stock options to employees!''

A good reminder that people are making (and losing) a lot of money behind the
scenes of our industry.

------
anupmm
A combination of things are responsible - a super old/competitive market
(processing), the ever changing risk dynamics and Square's targeting

Let me illustrate points 1 and 2 with an example.

a) Square earns $2 in revenue per $100 of transaction volume b) $0.5 would be
their gross margin accounting for expenses i.e. bank/visa fees c) The next
biggest line item to subtract would be risk. If there is a fraudulent
transaction of $100, then square has to compensate it with 200 transactions of
$100 each. (200 txns *0.5 gross margin). Net effect is not only do they have
to deal with low margins, they also have to manage risk very well. And this is
not something you accomplish overnight especially as you enter new markets.
Personal anecdote: I had $120 or so disappear from my Starbucks wallet a
couple of months ago and the merchant had to eat the loss.

Lastly, large payment processors get out of this loop because they manage the
big (Targets and Walmarts of the world) with the small and over time have fine
tuned their risk engine. Square went into it in the reverse order, targeting
mom-and-pop stores first (which have low volumes and high acquisition costs)
and then trying their hand at large merchants (Startbucks in this case and
they lost a ton doing this). In the process they never got risk management
right for either segment. And oh, they did not go with an online first
strategy which PayPal did in the 90s and the likes of Braintree and Stripe did
recently.

My 2c.

~~~
lakeeffect
I'm pretty sure Starbucks, the merchant, would have to cover the costs not
square as the processor. I used to work at MBNA and when there was fraud on an
card the retailer was responsible.

~~~
anupmm
In this case Starbucks paid for it. But something similar could happen with a
Square transaction where they may be held responsible. Was just making a point
that there are costly lessons to be learnt in the world of processing.

------
heydenberk
Is anyone willing to give a contrarian take? I'll give it a shot: Square is an
ambitious company with some great engineers, stellar UX and a giant total
addressable market. Their business loans are interesting and could grow into
something important. Square readers are a fashion accessory for hip
businesses. No sooner would a coffee shop be seen without a Square reader and
an Edison bulb than its yuppie hipsters patrons would be seen without a
MacBook or an iPhone. That brand equity might really be worth something.

~~~
throwaway2048
Are people really going to care if their joint of choice changes payment
providers?

Do people care how cool their bank and credit card company is?

Id almost certainly guess not.

~~~
singsong
Hmmm interesting.... I have had in depth conversations about this, and I
strongly feel that you are missing something. Sure, in certain areas having a
ipad/square reader combo is not necessary. It may actually be detrimental I
would imagine. I am not talking about some random small town in Missouri, I am
talking about less trendy districts of a city or a coffee shop with a more old
school vibe. BUT in large cities and metropolitan areas having a square reader
instantly makes your company more trendy and part of an in crowd. This trend
will continue to disseminate outward... not with the square reader
necessarily, but with some new point of sale system. But already square is at
the for front of this movement, we wont continue to use these old POS systems
forever. Change will occur.

~~~
potatolicious
I disagree - I live/work smack in the middle of Manhattan and I'm not really
seeing a Square dominance in coffee shops around me.

Yes, every coffee shop needs their cool iPad credit card processing machine,
but anecdotally I'm seeing more non-Square ones than Square ones.

The choice here isn't between "usable iPad thing made by Square" vs. "crappy
90s POS terminal", it's "usable iPad thing made by Square" vs. "other usable
iPad thing made not by Square".

I think a huge issue here is that merchants care about the bottom line, and it
turns out Square does not have a lock on producing reasonable
hardware/software around payment processing. Square may have invented the
category but from where I stand they don't look like they own it.

~~~
LordHumungous
You're lucky if they take cards at all in Manhattan, half the stores are cash
only.

------
steven2012
This is brutal. I know someone at Square that exercised his options, and I
guess he is underwater by a massive amount now. And since VCs are generally
move like flocks of birds, this will likely create a massive chill in terms of
funding. Either they are going to take a pound of flesh from the founders
coming for their next round of funding, or they will just pull away.

It looks like 2016 is going to see a lot of unicorns take a massive hit. You
can bet Stripe and other payment companies are going to take a hit to their
valuation, although Stripe seems pretty well-funded at this point.

~~~
brwnll
I assume you are referring to follow up rounds when you refer to a chill? Or
do you expect angel/seed funding to be reduced because they are going to lower
guesstimated valuations?

Will be Interesting to see if this pattern has an effect of pushing tech
companies to IPO sooner.

Is this behavior being replicated cross sector? It seems commonplace for a
tech company to write down a valuation of a purchased company (eg every
company MS has ever bought), I don't hear about it in health, finance, retail,
etc sectors.

~~~
chkuendig
You might not have heard about it, but most companies write down the value on
acquisitions to some degree.

IANAL, but legally you can be forced to realize tome deprecation on goodwill
payments...

[https://en.wikipedia.org/wiki/Goodwill_%28accounting%29](https://en.wikipedia.org/wiki/Goodwill_%28accounting%29)

------
msoad
With rumors about  device to device payment talks[1], Square is in tough
spot.

[1] [http://www.wsj.com/articles/apple-in-talks-with-u-s-banks-
to...](http://www.wsj.com/articles/apple-in-talks-with-u-s-banks-to-develop-
mobile-person-to-person-payment-service-1447274074)

~~~
hn9780470248775
Confusingly, my browser renders that symbol () as a... square.

~~~
delish
Chrome, it's a 't' surrounded by italicized parentheses. Unsuccessfully
searched for unicode lookup to find the text description of the character.

Edit: at
[http://www.fileformat.info/info/unicode/char/search.htm?q=%E...](http://www.fileformat.info/info/unicode/char/search.htm?q=%EF%A3%BF&preview=entity)

I found: <Private Use, Last>

Not sure what to make of it. Apple decided to assign to a Unicode character
their logo. Does anyone have context?

~~~
chc4
In firefow it's a w with two dots over it. Is it just some unicode point that
is unstandardized, and so overloaded somewhere with the Apple logo?

~~~
joelwilliamson
My Firefox renders it as an apple with a bite taken out of it. Probably
depends on your font.

------
josephjrobison
I've always wondered - why was it so easy to replicate Square's scanning
device? Seems like about 6 months after they really started gaining traction,
PayPal came out with their copycat triangle one, and then a cascade of
copycats.

It went from not being a thing to there being tons of them overnight. I would
imagine there would be somewhat of a barrier to entry, but it seems it's a
fairly easy device to create?

~~~
calcsam
"The Shakespearean model holds true today. Consider the Square card reader.
Square was the first company to do mobile handset credit card processing
right. It did the software piece and the hardware piece, and built a brand
with the iconic white square device.

Then there was a proliferation of copycat readers. PayPal launched one. They
shaped it like a triangle. They basically copied the idea of a simple
geometric-shaped reader. But they tried to one-up Square; 3 sides, after all,
was simpler than 4.

Before PayPal’s PR people could celebrate their victory, Intuit came out with
a competing card reader. It was shaped like a cylinder. Then Kudos came out
with its version, which it shaped like a semicircle. Maybe someone will
release a trapezoid version soon. Maybe then they’ll run out of shapes.

How will this all end? Do you really want to get involved in making a new card
reader at this point? One gets a distinct sense that the companies focused on
copycat readers are in a great deal of trouble. Much better to be the original
card reader and stay focused on original problems, or an original company in
another space entirely." \- Peter Thiel,
[http://blakemasters.com/post/23250566538/peter-thiels-
cs183-...](http://blakemasters.com/post/23250566538/peter-thiels-
cs183-startup-class-12-notes)

~~~
kethinov
Intuit's actually predates both Square's and PayPal's:
[http://venturebeat.com/2009/05/21/intuit-gopayment-lets-
you-...](http://venturebeat.com/2009/05/21/intuit-gopayment-lets-you-process-
credit-cards-on-your-phone/)

~~~
pbreit
That article just says you type in the credit card number into a web page.
Very different.

~~~
kethinov
From the article: "and you can also purchase a card scanner (so you don’t have
to type the number in)."

------
rdl
I don't really care about Square's investors (sunk costs are sunk, plus
ratchets and other protections), but what does this do to employee retention
(and hiring ability)?

I assume people who joined years ago will still do fine, but what about people
who joined in the past 6-12mo? Will they get repriced options? Are cash
salaries all people care about? Square _has_ (and still does) have some great
people, and it's a "robust job market".

~~~
jackgavigan
_> As recently as September, the company [Square] handed out stock options to
staff — one of the main perks of jobs in the Valley — valuing it at $15.39 a
share, or more than 50 per cent above what the shares were deemed to be worth
only six months earlier._

Source:
[http://www.ft.com/cms/s/0/6ad992e6-8792-11e5-9f8c-a8d619fa70...](http://www.ft.com/cms/s/0/6ad992e6-8792-11e5-9f8c-a8d619fa707c.html)

------
bpodgursky
According to crunchbase, they raised money at a $3.25B valuation in 2012.

If they are IPOing at $2.66B now, that means a lot of stock options granted
in-between are going to be worthless, unless they were granted at some very
different price...

~~~
gatsby
Yes, Square's private per share prices:

Series A: $0.21627

Series B: <$1

Series C: $5.79817

Series D: $11.014

Series E: $15.46345

IPO @ $9 is not great for lots of folks, but mostly late-stage employees
(assuming D & E investors have a liquidation preference - though I don't know
for sure).

~~~
stevecalifornia
Just went through an IPO and we had a stock split to bring the price down to a
number around $14. Square could also be doing a split so that $9 doesn't mean
D & E are getting screwed.

~~~
harryh
That's not how stock splits work. You can't somehow subvert a falling
valuation just by creating more shares.

------
american158931
Can someone help me understand...

Let's say an employee was granted 10,000 stock options at $1/share. They're
all vested.

Does this mean that each share will be worth $9? So if exercised and cashed
out, the employee would essentially earn $80,000 (before taxes)?

Trying to understand how the economics of all of this works.

Also, does this mean there are 300,000,000 shares? (How many shares do start-
ups usually start with before funding rounds and what not? Seems like Square
must've started with 100,000,000 or something.)

So many questions.

~~~
chrdlu
It all depends on the start up. Some start ups have a lot of authorized shares
and some have less. This is all reflected in the capitalization table
([https://en.wikipedia.org/wiki/Capitalization_table](https://en.wikipedia.org/wiki/Capitalization_table))
of the company. The cap table also contains information such as the number of
preferred shares and different rounds of preferred shares (Series A, B, ...).

What people sometimes don't realize are the liquidation preferences on the
preferred shares. The liq pref is usually 1-3x depending on who has the
negotiating leverage. Out in SF, most liq prefs are 1x. This means on an
acquisition, the investors get 1x whatever they invested first before any
common shareholders get paid. This means that many acquisitions are not
successful. A good recent example is Rdio
([https://www.crunchbase.com/organization/rdio#/entity](https://www.crunchbase.com/organization/rdio#/entity)).
They got acquired for 75M, but investors put in 126M. This means the investors
lost money, but common shareholders (shares from stock options) got nothing.

A good scenario would be an acquisition where everyone makes money. A good
recently example is Business Insider,investors put in 55M, but the company got
bought for 343M easily clearing the investor liq pref
([https://www.crunchbase.com/organization/business-
insider#/en...](https://www.crunchbase.com/organization/business-
insider#/entity)). Employees with common shares also probably made a good
amount as well.

One thing that also hurts employees are the AMT taxes that are associated with
exercising the stock options before a liquidation event. In the examples
above, employees have to pay taxes on the spread of the strike price to the
fair market value of when they exercised. If an employee had a lot of shares,
the taxes could end up quite
high.([http://employeestockoptions.com/amttax/](http://employeestockoptions.com/amttax/))

~~~
rlucas
What you may not realize is that in a qualified ipo the prefs go away. It's
basically the one time when prefs turn irrelevant. (there are still other
shenanigans like ratchet to min price sometimes).

In practice the qualifier on the ipo means the prefs only vanish on a big
(well above the pref stack) ipo number. But still an ipo is at the moment it's
done on paper much better for common holders.

------
calcsam
This is the best of all possible worlds for the late-stage investors. They get
double the shares from the ratchet and probably a big valuation pop tomorrow
too.

------
TazeTSchnitzel
> Square Prices Its IPO at 9$

Not a very helpful submission title. Without knowing the number of shares or
previous share price, this is meaningless. The market capitalisation would be
better. Including the previous projection better still.

~~~
jdoliner
It's not really the submitters fault though. In keeping with HN etiquette they
posted the title of the article. I'd be criticizing TC here.

~~~
TazeTSchnitzel
Yeah, I can't blame them for following the usual rules.

------
deepGem
This thread is awesome. For someone sitting afar and looking to invest in
Square, the information on this thread is sufficient enough for me to dig
deeper on specific points. I wish Wall St analysts did something open like
this, rather than just publish some 'post facto' report.

------
gatsby
Wow, that's priced at ~2.8x 2015 revenue. So low.

~~~
danielpal
If you look at gross profit (164.4 million for the first semester 2015) it's a
much more comparable metric to what SaaS revenue would be. The problem with
overall revenue in this market it that it's a low margin and more that half of
it goes to the credit card companies.

With ~328 profit per year, they are getting about 8X multiple - very
comparable to Hubspot, Zendesk which are doing terrific in the public markets.

For anyone getting stock options, expect as much as 6X-8X multiple on revenue
if your gross margin is >60% and your year-to-year growth is >70% - the
10X-14X days are gone. Else, if year to year growth is below 70%, or gross
margin less that 55%, expect 2X-4X.

------
jgalt212
Why did they agree to go public at such a low valuation when compared to
recent rounds? Why wouldn't they wait until a time when the capital markets
valued their enterprise more favorably?

~~~
throwaway2048
maybe they were afraid that time is never comming.

------
ogezi
Due to a string of bad decisions, including but not limited to the Starbucks
deal and the Square Wallet, Square's undervalued. If they can sit up and grow
their processing volume, their share price will appreciate greatly and go much
higher than $9. They also need to find a way to minimize their losses on low
amount payments, since they make losses on some of them. Their small business
loans seem like an interesting and propitious part of their overall business
going forward.

------
outside1234
I think its amazing Square could do an IPO at all - $2.7B is an insane
valuation for a company that hasn't proven a scalable business model.

Frankly, its sort of irresponsible and short sighted for VCs to take something
like Square public. It will have all sorts of repercussions on real businesses
that want to go public in the future.

~~~
chmaynard
Agreed. It looks like Square will soon be competing head-to-head with Apple.
Both companies want a big slice of the payments business, and they're going to
be competing for the same customers. Any investment in Square is very risky,
public or private regardless of the price.

------
Scaevolus
It's "$9", not "9$".

~~~
theseatoms
Doesn't it make more sense to type it as it's read?

~~~
bdcravens
"$" is a modifier, not a word. Otherwise you'd be reading it as "9 dollar
sign", not "9 dollars".

~~~
gambogi
Just like we pronounce 9¢ "9 cent sign" right?

------
product50
Does Square compensates employees in stock options or RSUs? If options, aren't
the employees you joined post Series D completely screwed?

~~~
sawthat
It really depends on the way the shares are distributed. I suspect they aren't
"screwed" but they aren't exactly going to get rich from this.

------
econner
Why would they price it at such a low multiple of revenue? Massive liabilities
or something?

~~~
geoffwoo
Very low margin business. As a multiple of net revenue, it's at the high range
of comparable payment processors.

~~~
anupmm
A combination of things - a super old/competitive market (processing), the
ever changing risk dynamics and Square's targeting

Let me illustrate points 1 and 2 with an example.

a) Square earns $2 in revenue per $100 of transaction volume b) $0.5 would be
their gross margin accounting for expenses i.e. bank/visa fees c) The next
biggest line item to subtract would be risk. If there is a fraudulent
transaction of $100, then square has to compensate it with 200 transactions of
$100 each. (200 txns *0.5 gross margin). Net effect is not only do they have
to deal with low margins, they also have to manage risk very well. And this is
not something you accomplish overnight especially as you enter new markets.
Personal anecdote: I had $120 or so disappear from my Starbucks wallet a
couple of months ago and the merchant had to eat the loss.

Lastly, large payment processors get out of this loop because they manage the
big (Targets and Walmarts of the world) with the small and over time have fine
tuned their risk engine. Square went into it in the reverse order, targeting
mom-and-pop stores first (which have low volumes and high acquisition costs)
and then trying their hand at large merchants (Startbucks in this case and
they lost a ton doing this). In the process they never got risk management
right for either segment.

My 2c.

~~~
steven2012
Their net revenue should be about 100 bps, and their loss is 16 bps, at least
for 2015.

------
omarchowdhury
$9 is a good psychological price. This is going to pop tomorrow.

~~~
andirk
Just opened at 11.20, already up to 13. The company who helps small businesses
accept Visa, Mastercard, Apple Pay at 2.75% of all those transactions. This
company makes too much sense to me.

Going to the Blue Bottle coffee downtown SF in front of their office if anyone
wants to join me. Pat them on the back.

