Square case study

Please read the article I attached above and answer these questions:

1. How are venture capital private equity structured? How are private equity firms compensated? Why may Khosla Ventures be motivated to push for Square to seek an exit?

2. What characteristics do the firms in case Exhibit 2 have in common? Do you agree with Marc Andressen's thoughts regarding unicorn valuation levels? Why or why not?

3. What would the capitalization table look like after the series E issuance? What is the post-money valuation?

4. What returns would each class of investors realize if Square exited through an IPO rather than through a sale at valuations of $3 billion, $6 billion, or $9 billion? How would the returns change if the series E securities did not have the IPO ratchet?

5. Do you recommend investing in the series E preferred round?For the exclusive use of H. Zhang, 2018. W17626 SQUARE, INC.: FINANCING A UNICORN1 Mark Simonson wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-10-05 By September 2014, Square, Inc. (Square), the mobile payment company co-founded by Twitter co-founder Jack Dorsey in 2009, had raised US$371 million2 over five rounds of venture capital financing (see Exhibit 1). It had been nearly five years since the first, series A round on November 1, 2009. Some individual investors in that round—including Google executive Marissa Mayer and Twitter co-founder Biz Stone— may have been patiently waiting for an exit; however, private equity investors—like the Khosla Ventures fund that served as the lead investor in the Series A round—couldn’t always be so patient.3 The second half of a venture fund’s 10-year lifespan typically involved a process of exiting a company investment to provide a return for the fund’s partners.4 On September 12, 2014, the online technology publication TechCrunch reported that Square had turned down an offer to purchase the company for “around $3 billion” from Apple Inc. (Apple), significantly below the $6 billion it had reportedly been seeking.5 Another publication, citing a confidential source, reported that “Jack [Dorsey] does not want to sell to Google” and noted that “Square’s design aesthetic and values match up much more closely with Apple than Google” and that Square’s chief hardware designer, Jesse Dorogusker, had worked at Apple on the iPod, iPhone, and iPad.6 With no apparent suitable acquirers willing to pay a high enough price, Square also considered an initial public offering (IPO). However, although Square had reportedly been discussing an IPO with investment bankers since late 2013, analysts noted that the firm’s current level of revenue and lack of profitability would not allow it to achieve its desired $6 billion valuation because its “other revenue-generating products have either not yet launched or not yet taken off.”7 In need of cash to finance its unprofitable operations and fund its aggressive growth plans, Square began pursuing a sixth, Series E round of venture capital financing. The firm approached investors with private equity funds focused on late-stage investments, including Goldman Sachs Group, Inc. (Goldman Sachs) and Sapphire Ventures LLC.8 It was now up to the investors to determine whether they could agree to terms that were acceptable to Square and would allow the company to achieve its desired $6 billion valuation. This document is authorized for use only by Hongbin Zhang in FNAN 498-Spring 2018 taught by David R. Gallay, George Mason University from January 2018 to May 2018. For the exclusive use of H. Zhang, 2018. Page 2 9B17N021 UNICORNS Square was one of an increasing number of venture capital financed firms that was valued after investment (post-money valuation) above $1 billion. These firms had become known as unicorns, a term coined by venture capital investor Aileen Lee in an article written for TechCrunch in November 2013.9 Post-money valuations were calculated by multiplying the total number of shares of common stock, assuming that all convertible shares and stock options were converted into common stock, by the price paid for shares in the most recent round of financing. Square’s post-money valuation had grown from around $50 million in its November 2009 Series A round to $3.27 billion in its most recent Series D round in 2012 (see Exhibit 1). Prior to 2014, unicorn-level valuations were rare; only two companies reached this level between 2009 and 2013.10 However, by July 2014,