Why Square could be a game changer for tech IPOs

SquareDan Frommer, Business InsiderSquare is expected to start trading on Thursday.

When Square prices its initial public offering on Wednesday night, it could set a precedent for scores of other tech startups like it.

The IPO is controversial for a couple of reasons, including the fact that it’s expected to price below the $US15.46 per share price at which it sold stock in its last private funding round.

That round valued the company at $US6 billion.

Square set a price range of $US11-$US13, but it’s been reported that the company could even price below the bottom end of that range.

While it’s not uncommon for tech startups to reach a $US1 billion valuation — about 140 such “unicorn” companies exist right now — it is rare to see one go public at a lower valuation than its last private funding round.

Facebook shares went for $US4.50 in its last private round before pricing at $US38 per share in 2012. Twitter’s last private round priced shares at $US16, before that company IPO’d at $US26 per share.

That means Square’s IPO will be carefully watched on Wall Street and in Silicon Valley.

A successful pricing and first day of trading, and more offerings could follow. A tough debut and other Silicon Valley unicorns might think again about going public.

‘The world won’t implode’

“If Square trades stably or continues to increase in value, I think what it will do is it will provide some confidence to other unicorn companies that they can actually tap the public markets even at a price below what they might have last raised in the private market — and the world won’t implode,” Phil Haslett of EquityZen, a marketplace for investors looking to buy shares from startup employees, told Business Insider.

“If Square is a big success, there’s not necessarily going to be a flood — but a big increase in companies tapping the public markets for further financing,” Haslett said.

DorseyPointRebecca CookSquare (and Twitter) CEO Jack Dorsey.

Of course, if things go poorly for the company, “you’re going to have about 130 really nervous CEOs and founders wondering what their exit strategy is in the near-term if they can’t continue to meet the goals of their aforementioned billion dollar valuation,” he said.

In Haslett’s view, IPO prices shouldn’t be taken too seriously. He said IPO is really just a pricing mechanism, and we shouldn’t overthink its significance.

“In reality, if a public company drops 15% — that could happen on an earnings report, right? It would be a new headline for a day and then it would go away,” he said. But, “when it’s an IPO, it starts to attract a little more attention.”

Square is expected to begin trading on Thursday. We’ll find out in the days and weeks to come whether or not it can weather the storm.

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