Nov 20, 2015 · 5 minutes

At the beginning of the week I wrote this piece predicted Square would stoke another round of bubble talk. I was right about one thing and very, very wrong about another.

The wrong: I predicted the IPO everyone would be talking about all week would be Square. And then Sean Rad gave one of the worst interviews of the year where he confused Sodomy with Sapiosexuality, threatened a female journalist, and made sure we all knew that (unnamed) supermodels were “begging” to sleep with him. Match Group – much to the truth-bending, chairman Greg Blatt’s chagrin – won the battle of oxygen.

The right: I argued that a tech world that has spent much of the last six months talking itself into a correction, uneasy with this reality...

…wanted – was yearning for – a catalyst. Some deus ex free-market-a to justify the growing consensus that things are way over-valued, and way over-funded, and burning way too much money, and that it’s all just gonna stop right here and now.

That didn’t really happen. And that really does make Square the perfect flashpoint, the perfect descriptor, the perfect embodiment of exactly what the startup world is dealing with right now. A catalyst wrapped in a frustrating non-catalyst.

ICYMI: Square, cut its share price several times, including just the night before trading, to $9. That’s a decline of more than 40% from what it was valued at a year ago. It opened, traded, and ended the day in the range it had before the cut: $11 to $13. Better.

It popped decently. It didn’t crater. Executives spent the day making the rounds to the business press explaining that this pop meant investors didn’t think Square was “just” a payments business after all. That investors did get the promise of Square. That it meant they were right to push through with the deal.

At least one commentator felt differently. Richard Windsor, analyst at Edison Investment Research, argued that the IPO should be pulled given the tepid $9 price. The reason that wasn’t gonna happen? Not just Dorsey’s ego. Not just the company’s need to go public. But because those late stage investors made money no matter what, meaning there was a huge conflict of interest at play.

From the report:

In my opinion this creates a conflict of interest as it is becoming clear that the best interests of the company would be served by pulling the IPO. This is for a number of reasons: First, sentiment is starting to turn against hugely valued start-up companies making it a bad time to sell shares; second, Square’s growth is slowing and it is not making money nor is it generating cash - public companies tend to do better when they are profitable unless they are very fast growing; third, Square’s CEO is also the CEO of Twitter which is a far from ideal situation for either company.

Consequently, we think that the embarrassment of delaying the IPO is far outweighed by the benefit of waiting for a better time and getting the company into better shape before going public. The problem is that the investors in the latest round have no incentive to call off the IPO because as long as the shares don’t fall below $7.2 per share they will make money when the lock-up expires.

It’s an interesting point, given that a good number of the unicorns analyzed by Pitchbook similarly show ratchets and IPO guarantees galore. And most unicorns hoping to go public don’t have the star power (or MTV-esque video editor) of Jack Dorsey to help shove them over the roadshow finish line. Edison is right that, fundamentally, there is a conflict when later stage investors make money no matter what, early stage investors make money because they invested so long ago, but meanwhile the employees are basically left with shares worth way less then their value years ago.

As Bloomberg’s Shira Ovide put it:

The last guys into the Square investor boat before the IPO – including the J.P. Morgan funds and those of investment firm Rizvi Traverse – received a guarantee of extra shares if the IPO price wasn't at least 20 percent higher than their buy-in price…

...All the other Square stockholders will have to bear the dilution of the 10 million extra shares owed for the ratchet penalty. Still, the earliest investors in Square will make bank, even factoring in the extra shares and the tamped down IPO price.

So it is tough to have sympathy for anyone in this IPO, with the notable exception of those Square employees holding equity that is worth a lot less than they expected. There are no extra stock sweeteners for them. Employees, many of whom were barred from selling their equity when their company was private, are justified to take off work on Thursday in sullen protest. We'll explain it to your boss. 

But the whole misaligned incentives thing, too, would be a tidier narrative if the IPO had languished at $9. It didn’t. Which just gives us another mixed data point in an incredibly confusing world, where ultimate dollars going into start-ups rise as the number of deals fall, where far more money goes into an industry than comes out, and where mega deals continue to soar unabated.

We all know first day pops mean little. Square is like to suffer rough times ahead if this graph showing that US-based, VC-backed IPOs underperform the S&P a sad eight-to-one continues to be the rule. (Via CB Insights).

This graph shows that you’d make 8x your cash investing in the S&P 500 instead of every single VC-backed tech IPO since May 18, 2012 (i.e. post-Facebook). It’s more a slow-burn of suckiness than a catalyst.

If the investors, founders, and employees of the tech world wanted a disaster, a pulled IPO, or an unmitigated triumph to give them a clue what to do next…. they didn’t get it. They got more of the same “meh.”