Square Takes an IPO Bullet for All of the Overpriced Unicorns

Square announced plans on Friday morning to price its IPO at $11 to $13 a share, meaning an IPO in that range would value the company at much less than the valuation it secured in its last round of private financing.

If the company prices at $13, Square would carry a value of about $4.2 billion based on the approximately 323 million shares it says will be outstanding. Square, Jack Dorsey’s payments company, was valued by private investors at about $6 billion in its last round of private financing, according to insiders.

To be sure, Square’s bankers could increase the price range before the IPO if they get feedback from investors that demand is higher than expected. But the range would have to jump a fair bit to even match what Square thought it was worth in its last round of funding.

As BuzzFeed previously pointed out, Square’s last round of private financing guaranteed investors at least a 20 percent return on investment. The terms of the deal meant that if Square’s IPO share price was less than $18.55, Square would have to issue these Series E investors shares to make up the difference. It looks like this will likely be the case. If Square ends up pricing its IPO at $12 a share — the midpoint of today’s range — it would have to issue these investors around 5.3 million additional shares, representing around 1.6 percent of all outstanding shares, according to today’s filing.

Square’s IPO pricing will likely give credence to the growing belief that there are a whole host of private companies valued at $1 billion or more — “unicorns,” in Silicon Valley parlance — that wouldn’t sniff such a high valuation if they decided to go public. Square’s revenue is growing quickly, but the company is still generating large losses, which accelerated in the third quarter. Square posted a net loss of $53.9 million on $332.2 million in revenue in the quarter.

One big contributor to Square’s losses has been a money-losing processing deal with Starbucks, that is ending soon. Under an agreement with Starbucks struck earlier this year, Square agreed to find a buyer for some 2.27 million shares that Starbucks owns at a price of at least $16.30 each by next October. Square is only required to do this, however, if it doesn’t go public in time for Starbucks to sell its shares on the open market by the October deadline. The provision was designed to protect Starbucks should Square fail to IPO.

Updated: Includes information on Square’s stock-selling agreement with Starbucks.

This article originally appeared on Recode.net.