Oct 23, 2015 · 3 minutes

“I’ll give you any valuation you want if you let me write the rest of the term sheet” – Every VC who has ever lived.

Yesterday, the Wall Street Journal revisited one of several less-than-savory recent tech IPOs: Chegg. From the piece:

In a candid interview, an early investor in Chegg revealed how the company gunned for the highest possible valuation in several funding rounds ahead of its public offering. Chegg in exchange granted venture capitalists a favorable term called a “ratchet” that guaranteed the share price in the IPO would be higher than what they paid.

The move backfired. When Chegg went public, it was motivated to set an IPO price that met the terms of the covenant, or Chegg would have to pay the difference in shares to the early investors. The stock plummeted on the first day of trading and hasn’t recovered.

As a private company, Chegg “went through three years of suffering and struggling for no reason whatsoever,” Oren Zeev, the early investor in Chegg, said in an onstage interview at a tech conference earlier this year. 

The Journal noted that Box and Kayak faced similar arduous penalties, and that Square faces potential penalties from its most recent investors if its IPO price isn’t 20% higher than what they paid. But it notes that “it isn’t clear exactly how many companies agree to such conditions.”


Pitchbook VC is disturbingly good at digging up terms on funding rounds, via everything from fillings to calling people on the phone and asking. They pulled together some data on the funding terms of 17 unicorns. And it shows plenty of downside protections to ensure IPO potentials, and a surprisingly low number of upside protections.

Want the details? Here you go. Spoiler: Honest and DocuSign had the most investor friendly terms.

The following companies have to IPO at at least their “unicorn” funding round levels:




Credit Karma

SunRun (with some extra protections for D and E investors)

Another group has minimum IPO threshholds to meet, as terms of their late stage deals. They include ContextLogic, Honest, DocuSign, LendKey, Tanium, BlueApron, Jand, and BlueBottle. Some are by price-per-share, others are by size of the offering.

Slack and Planet Labs were notable in their lack of downside protections. The only stipulation was that the IPO had to be $30 million and $150 million in total raised, respectively. That’s not really a downside protection, according to Pitchbook, as it doesn’t stipulate what price shares had to convert to.

Of the group, only Honest and DocuSign have multiple liquidation preferences – meaining investors get more than their money back at the time of exit, before anyone else gets anything. Most everyone has a single liquidation preference, and half of the companies – roughly – had term sheets where late stage investors had senior rights over early stage investors. Pitchbook’s latest unicorn report has a lot of these same details if you want more specifics.

What does this all mean at the end of the day? There are a shitload of Cheggs out there, and it explains the disparity between what the exact same investors will pay in a private deal and an IPO: They are getting all kinds of guarantees to limit the downside in exchange for the lack of liquidity.

Companies that can’t easily meet the agreed on minimums will have a hard choice: A down round they know they can live with as a public company at the risk their deals come with or inflated prices they can’t possibly support.

I hope the ones who’ve raised mega rounds spend that cash wisely. If this sample set is any indication, it came with strings.

[Update: An earlier version of this story incorrectly included SimpliVity in the list of companies with minimum IPO thresholds.] 


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