Jack Dorsey’s payments startup, Square, has just hired a CFO and it’s in the hunt for a reported $250 million round of fresh financing that would value it at anywhere between $2.5 billion and $4 billion, according to who you talk to.(Guess what: Sources close to Square are highballing it. Sources close to the mutual funds and other private-equity players it’s hitting up for cash are lowballing the number. Welcome to the world of price negotiations.)
Square’s last round, almost a year ago, valued the payments startup at $1.6 billion.
Even if Square hits the lower valuation figures being talked about, insiders and investors are going to win big. And now we know roughly how big.
Square does business all over the United States. So it has to register as a “foreign corporation” in most states.
The big surprise: Dorsey, the CEO and cofounder, owned less than 30 per cent of Square as of October 2011, according to the filing.
In this day and age, we’re used to founders having big, controlling stakes. But remember, Dorsey was not in the same position of power he holds today as executive chairman of Twitter and CEO of Square. He’d been cast out of Twitter by cofounder Ev Williams, and while he was titular chairman, he wasn’t welcome at the office.
So to get Square’s funding, he had to give a big chunk to the venture capitalist who was willing to take a bet on an outcast: Gideon Yu, then with Khosla Ventures. Khosla and the other Series A investors took a big, 25 per cent stake in the company at a valuation of $40 million—and Yu made sure Khosla got most of that.
By the way, we also know that other Series A investors are still valuing Square at roughly $1.6 billion.
How do we know this?
Palantir founder Joe Lonsdale’s Formation 8 is raising a new fund and is advertising its partners’ track record—including a return on investment on Square that has returned 30 times the initial investment. (Formation 8 did not invest in Square, but some of its partners did at previous firms.)
We know that JP Morgan Chase and Sequoia invested. They had just over 5 per cent apiece in October 2011.
These filings normally list all shareholders who own more than 5 per cent of a given company.
Kleiner Perkins, which invested in Square’s 2011 round and recently hired Square’s director of products, Megan Quinn, as its newest partner, did not make the cut.
We asked Kleiner to confirm it owns less than 5 per cent of Square, but haven’t heard back yet. The maths on the financing round, though, suggests that it’s almost impossible for Kleiner to have gotten more than 5 per cent of the company.
Kleiner partner Mary Meeker has a seat on Square’s board. But at less than 5 per cent, even if Square gets its highest possible valuation, the maths doesn’t work for Square to be a runaway hit for Kleiner. Kleiner simply doesn’t own enough of the company for its investment to move the needle on its $1 billion Digital Growth Fund which Meeker runs.
When we first asked Square about the numbers in the filing, they told us they were incorrect. Spokesman Ricardo Reyes declined to elaborate further. More on that later.
Here’s the chart:
UPDATE: This article has been corrected to note that Formation 8’s partners, not Formation 8 itself, invested iN Square.