| SAN FRANCISCO, Sept 29
SAN FRANCISCO, Sept 29 In the run-up to its
initial public offering, cloud computing company Nutanix
scrambled to avoid a situation that has increasingly marred
technology IPOs: a price that's below the most recent private
After bumping up its price Wednesday to $13 to $15 per
share, Nutanix will be valued at $1.9 billion at the mid-point
of that range, just shy of the $2 billion valuation it received
in a 2014 private funding round. The final price will be set
later Thursday in advance of trading on Friday.
Once a rarity, public offerings at a price below the private
market valuation have become common, especially for
venture-backed companies worth $1 billion or more - the
so-called unicorns. Such low-priced IPOs have been often been
followed by lackluster public market performance, and can lead
to problems with employee morale, recruitment and retention,
Of the 32 technology companies that went public with
downrounds since the start of 2012, 53 percent are trading below
their IPO price, based on an analysis of data provided by
venture capital database PitchBook Inc.
Shares of payments company Square Inc, storage firm Box Inc,
big data company Hortonworks and solar energy operator Sunrun
Inc, all of which had their valuations slashed, are trading
between $5 and $8 below their private market valuation.
"That high valuation can really come back to haunt you,"
said Nate Gallon, a partner with Hogan Lovells law firm.
In the most difficult situations, companies that IPO at a
lower valuation can trigger an anti-dilution provision called a
ratchet, which rewards later investors with more shares at the
expense of employees and early investors.
Nutanix has two ratchets that could be triggered by a low
valuation, though the company appears to have avoided that
Nutanix declined to comment for this story.
A study by law firm Fenwick & West found that, in 2014, 4
percent of IPOs had a ratchet that was triggered. In 2015, that
jumped to 50 percent of deals. The Honest Company, Simplivity
and DocuSign are among the other unicorns that are approaching
IPO and also have ratchets, according to PitchBook.
"It's safe to say that almost every (investor) now asks for
a ratchet," said Dave Peinsipp, a partner at Cooley law firm.
Many of those requests come from mutual funds, hedge funds
and sovereign wealth funds, which in recent years have joined
more late-stage rounds.
"If the company turns around and does a down IPO, those late
investors don't want to be left holding the bag," Gallon said.
Some investors argue that, after the IPO, downrounds and
ratchets are a distant memory. However, they can also signal
deeper problems in the company.
"I don't think you accept ratchets if you have a choice,"
said Hemant Taneja, managing director at General Catalyst
Partners. "What does it say about a management team that
overshot its valuation? Some bad decisions made somewhere."
For its Series B investment round, Nutanix chose Khosla
Ventures because the firm offered a valuation of more than $100
million, said Mohit Aron, co-founder of Nutanix who left the
company in 2013 to start a new startup, Cohesity. The firm
obtained a $1 billion valuation with its Series D, which
included a ratchet.
Compare that to software company Atlassian, whose valuation
jumped 32 percent at its December debut and whose stock is up 44
percent. The profitable company did not raise any venture
capital to fund its business operations, dismissing investors
who came knocking with offers of bigger valuations.
"What would the point be? It felt that it became this vanity
metric," said Jay Simons, Atlassian's president.
(Reporting by Heather Somerville in San Francisco. Additional
reporting by Lauren Hirsch in New York.; Editing by Jonathan
Weber and Bernard Orr)