Thanksgiving Edition 2024 + Special Announcement 2025
Boardroom Governance Newsletter #59 | Dec 1, 2024
Announcing the Boardroom Governance Podcast (BGP) Summit
Celebrating 5 Years of Conversations on Corporate Governance 🎙️ 🎉 🥳
After speaking with many of my listeners across the U.S., I am excited to announce the launch of the Boardroom Governance Podcast (BGP) Summit next year. This event will celebrate the fifth anniversary of the podcast, which has brought thoughtful, engaging, and insightful discussions to corporate directors and governance enthusiasts—not just in the U.S., but across the globe (with downloads from an impressive 169 countries!).
Over the past five years, the Boardroom Governance Podcast has delivered 156 episodes and counting, featuring directors, investors, academics, and experts from diverse fields who are shaping governance practices across industries. This milestone summit will bring together the BGP community, along with a select group of past guests, to reflect on the podcast’s journey, explore emerging boardroom trends, and inspire the future of governance.
The summit will feature renowned leaders sharing insights on corporate governance and intimate, in-depth conversations with some of the podcast’s most memorable guests and other featured speakers. The summit will also seek to build meaningful connections with fellow directors, governance professionals, and thought leaders in a relaxed, non-corporate environment.
Who Should Attend?
Board members, executives, governance professionals, and anyone passionate about advancing boardroom practices and governance strategies.
Location, Feedback, and Sponsorships
The summit will likely take place in Northern California, though I’m also considering other venues across the U.S. If you have any thoughts, feedback, or suggestions, I’d love to hear from you.
If you’re interested in exploring sponsorship opportunities, please reach out!
Stay tuned for more details, including the event date and final location. I can’t wait to celebrate this milestone with you and continue the conversation on corporate governance excellence!
ServiceTitan IPO & “Compounding Ratchet”
This is a great S-1 breakdown from Meritech Capital on ServiceTitan, only the 3rd venture-backed software company to IPO this year, behind Rubrik and OneStream.
Some interesting governance elements:
ServiceTitan was founded in 2007 (launched in 2012) and is run by founders Ara Mahdessian (CEO) and Vahe Kuzoyan (President). The co-founders started the company after having parents who worked in the trade industry and saw how the industry lacked modern software.
The company has raised almost $1.4B in equity capital from VC and crossover investors. In 2021, during the peak ZIRP (zero-interest-rate-policy) period, ServiceTitan raised $200M led by Dragoneer at a $9.5B post-money valuation, according to Pitchbook, its all-time peak valuation.
Its most recent publicly announced round was a $365M Series H at a $7.6B post-money valuation in November of 2022, according to Pitchbook. ServiceTitan disclosed it raised a $34M Series H-1 combined with a $136M employee tender in July of 2023 at a blended share price of $72.50, or roughly a ~$6.7B valuation.
The company has a multiclass stock structure: Class A shares have one vote, Class B shares 10 votes, and Class C has no votes. The co-founders Ara and Vahe will hold all Class B stock after the offering. ServiceTitan has 2,870 employees and is based in Glendale, California, with offices globally.
Compounding IPO ratchet structure: In the November 2022 Series H round, the company accepted a compounding IPO ratchet structure. With this structure, Series H investors received downside protection. If the company IPOs below the price of the round, the investor is “made whole” and receives more shares as if the original investment was made at the new lower price. If the company IPOs above the price of the round, there is no impact. *Note: for those familiar with Silicon Valley’s history, you may recall that Square’s IPO in 2015 also included an IPO ratchet.1
In this case, the “base” hurdle price is $84.57, the price of the Series H round, and Meritech Capital’s valuation analysis indicates ServiceTitan could trade below that price at ~$70 per share. ServiceTitan’s ratchet is also “compounding.” This means that after May 22, 2024, the 18-month anniversary of the round, the hurdle price begins to grow by 11% annually, compounding quarterly. Not only does this mean the clearing valuation to avoid the ratchet gets higher over time, but that (assuming the same IPO price) the magnitude of the ratchet increases and thus, the company incurs even more dilution the longer it waits before an IPO.
“Companies accept this structure as a way to maintain a higher headline share price and avoid the implications of a ‘down round’ and take less near-term dilution. You can assume that ServiceTitan made this trade because it believed it would go public before the cutoff date elapsed at a price higher than the hurdle price. Investors also wanted this to happen! It means the company is performing well and is on track with its IPO plans, but if it doesn’t happen, they are ‘protected.’ The moment this deal was signed, ServiceTitan was on the clock. At this point, the cutoff date has elapsed and the hurdle price is growing, so ServiceTitan is incentivized to get public ASAP. With all of this said, if they IPO below the hurdle price, based on our estimates, dilution from this event would be relatively small in the 1-2% range. And if they IPO above the hurdle price, none of this matters and there is no impact. We won’t know until it prices! It’s also worth noting that ServiceTitan’s two prior rounds, the Series F and Series G, also had ratchets (not compounding) at ~$106 and ~$116 per share, respectively. When the company raised its Series H at ~$85 per share, those ratchets were triggered and investors were made whole and had no remaining ratchet on the IPO price.”
ServiceTitan has raised almost $1.4B in equity capital from venture and crossover investors. Select institutional investors with ownership disclosed in the S-1 include ICONIQ (19.4%), Bessemer (11.2%), Battery (6.0%), TPG (5.2%) and Index (2.5%). The cap table also includes many other institutional investors such as Dragoneer, Thoma Bravo, Coatue, Tiger, Sequoia, T.Rowe, Durable and Mucker. President and Co-Founder Vahe Kuzoyan owns 10.3% and CEO and Co-Founder Ara Mahdessian owns 9.0%.
Go public or Stay Private?
As I’ve noted many times before, Silicon Valley has long been engaged in a debate over Staying Private for Longer (SPL). In the current environment, some unicorns are raising substantial capital in private markets (particularly AI companies) so the debate continues:
Databricks is reportedly raising billions in private markets, Stripe just did a massive private market tender, OpenAI just raised the largest venture capital round in history, and Figma just completed a massive tender offer as well. Why are these companies choosing to stay private and not strut through the IPO window when there would clearly be healthy public investor demand? Incentives. For these best-in-class companies there are many billions of dollars of capital available in the private markets. You can still generate liquidity for early investors and employees and increase your valuation as a currency for M&A, all the while avoiding the headache of quarterly earnings calls and talking to Wall Street analysts about improving operating margins by basis points each quarter.
“Per our valuation analysis, they may trade below the hurdle price and have a ‘down-round IPO.’ This hurdle price is now growing every quarter, so they are genuinely on the clock to go public to reduce the dilution impact, even if it is relatively small. This is likely a significant driver of ServiceTitan’s push to go public right now and not remain in the private markets longer and take advantage of the abundance of private market capital. We can assume that ServiceTitan’s ambitions were always to go public, but this ratchet structure may have unnaturally accelerated their timeline.
Bill Gurley and Brad Gerstner discuss this “compounding ratchet” in the segment below, highlighting the dangers of “dirty” or structured term sheets:2
Bill Gurley: '“I personally hate doing business with people that write these kind of terms. And I would encourage investors and founders to stay away from any investors that would write a term like this.”
Boardroom Governance Podcast 🎙️
Check out the latest episodes of the BGP since my last newsletter:
E156 Drew Shagrin and David Chekroun: Co-Founders of ICG at ESCP Business School in Paris. Our conversation explores key contrasts between U.S., French, and broader European corporate governance practices. We discuss stakeholder dynamics, ESG, boardroom diversity and employee representation on boards. We also address the transformative impact of AI on corporate governance and explore innovative models like the Entreprise à Mission and Public Benefit Corporations, highlighting the growing emphasis on balancing profit with social responsibility.
You can listen to all Boardroom Governance Podcast episodes in your favorite apps including Apple and Spotify.
If you like this show, please add your rating and review on Apple Podcast! It will help others find the podcast 🙏
The podcast is sponsored by The American College of Governance Counsel
Other Relevant Corporate Governance News and Content.
VC-Backed Board Academy (VCBA) Prepares Startup Directors to Drive Growth and Innovation. Great summary of our program by UC Law SF.
The 5th Edition of our Startup Litigation Digest is out. In this project, we track notable startup litigation cases to spotlight for founders, investors, board members, and legal professionals. We’re up to 27 cases.
Skadden’s The Informed Board Fall 2024 Edition. In this edition they discuss directors’ tenure, which has been a target of activists when suggesting board refreshment. Also, they dig into the required disclosures about responsibility for cybersecurity and which board committees are best positioned to oversee those. With the new administration coming in, they address if AI national security regulations will remain or get rolled back. This issue also features a Q&A with Maggie Wilderotter, chairman of DocuSign, and my BGP E151 guest. They also host a podcast discussion on board refreshment.
SEC charges director for failing to disclose personal relationship bearing on independence. The SEC recently settled charges against James R. Craigie, former CEO, Chair, and board member of Church & Dwight Co. Inc., for violating proxy disclosure rules by failing to disclose a close personal friendship with a high-ranking company executive. This relationship included Craigie paying over $100,000 for the executive and his spouse to join him and his spouse on six trips across eight countries on five continents. Craigie’s nondisclosure led to the company's proxy statements incorrectly identifying him as an independent director, resulting in materially misleading statements. As part of the settlement, Craigie agreed to a five-year officer-and-director bar and a civil penalty of $175,000. As per this post from Cooley: “The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.”
Marc Andreessen on Joe Rogan Podcast. Some highlights:
“I’m super optimistic. I’m incredibly optimistic, and I was optimistic already with flashes of pessimism, but I’m really optimistic especially now. We have the real potential here for a Golden Age.”
“You can separate the concepts of the United States and America; you can be very optimistic about America but have all kinds of issues with the United States.”
“It is time to carve back the government, in terms of size and scope: There are more federal agencies (450) than in years that the United States has existed”
“Four of the ten wealthiest counties in the country are suburbs of Washington DC; these people don’t work for the government – instead, they extract money from the government.” “These consist mostly of lobbyists, also known as Beltway Bandits.”
On “Operation Choke 2.0”: “We’ve had like 30 founders debanked in the last four years. It’s been a big recurring pattern.”
“Every CEO in China has an officer of the CCP sitting down the hall who will override company decisions if it is not aligned with the interests of the party.”
Full video:
NVIDIA AI Summit Fireside Chat with Jensen Huang and Masayoshi Son. A must watch on AI. Jensen Huang praises Softbank’s Masa Son and jokes with him about selling NVIDIA too early: “At one point, Masa was one of the largest shareholders of NVIDIA. It’s OK. We can cry together.” *Nvidia is currently the most valuable company in the world with a ~$3.4T market cap. SoftBank’s stake in NVIDIA was 4.9%, acquired through its Vision Fund in May 2017. In January 2019, SoftBank sold its entire stake for about $3.6 billion, realizing a profit of $3.3 billion. However, by Nov 2024, the value of that stake would have exceeded $170 billion!
Some trackers:
Bitcoin $100K Watch: https://x.com/CoinDesk/status/1862520768497951048
The US National Debt has hit $36 trillion for the first time: https://www.usdebtclock.org/
Benedict Evans’ Nov 2024 Presentation “AI eats the world”.
SEC Chair Gensler to Depart Agency. In a statement, the SEC has announced that Chair Gary Gensler will step down from his position on January 20, 2025.
Elon Musk and Vivek Ramaswamy: The DOGE Plan to Reform Government. Their plan is laid out in this WSJ opinion piece. “The two of us will advise DOGE at every step to pursue three major kinds of reform: regulatory rescissions, administrative reductions and cost savings.” “Our top goal for DOGE is to eliminate the need for its existence by July 4, 2026—the expiration date we have set for our project. There is no better birthday gift to our nation on its 250th anniversary than to deliver a federal government that would make our Founders proud.”
Archegos Founder Bill Hwang Sentenced to 18 Years in Prison. The firm’s collapse wiped out $100 billion in market value, according to prosecutors. Credit Suisse’s $5 billion hit, alongside several other financial scandals, contributed to the bank’s eventual forced sale to rival UBS in 2023.
Stan Druckenmiller: “The major thing I learned [from Soros] is that it’s not whether you're right or wrong, it's how much you make when you're right and how much you lose when you're wrong. And that's what he was probably as good as anybody who's ever been at.”
Tracking Trump’s Cabinet and Staff Nominations:
Onward and upward.
Sincerely,
Evan Epstein
Per the WSJ, Nov 18, 2015: “The payments company's IPO priced at $9 per share—below the expected range of $11 to $13 and significantly under the $15.46 that investors had paid in a funding round the previous fall. [In the Square case], investors sought a 20% return on their investment, setting the IPO price in the ratchet at $18.56. Square missed that price by more than half, so it has to give the investors 10.3 million shares.”
From Bill Gurley’s On the Road to Recap (2016): The Sharks Arrive With Dirty Term Sheets. Who are the Sharks? These are sophisticated and opportunistic investors that instinctively understand the aforementioned biases of the participants and know exactly how to craft investments that can exploit the situation. They lie in wait of these exact situations, and salivate at the opportunity to exercise their advantage.
“Dirty” or structured term sheets are proposed investments where the majority of the economic gains for the investor come not from the headline valuation, but rather through a series of dirty terms that are hidden deeper in the document. This allows the Shark to meet the valuation “ask” of the entrepreneur and VC board member, all the while knowing that they will make excellent returns, even at exits that are far below the cover valuation.
Examples of dirty terms include guaranteed IPO returns, ratchets, PIK Dividends, series-based M&A vetoes, and superior preferences or liquidity rights. The typical Silicon Valley term sheet does not include such terms. The reason these terms can produce returns by themselves is that they set the stage for a rejiggering of the capitalization table at some point in the future. This is why the founder and their VC BOD member can still hold onto the illusion that everything is fine. The adjustment does not happen now, it will happen later.
Dirty term sheets are a massive problem for two reasons:
They “unpack” or “explode” at some point in the future. You can no longer simply look at the cap table and estimate your return. Once you have accepted a dirty offering, the payout at each potential future valuation requires a complex analysis, where the return for the Shark is calculated first, and then the remains are shared by everyone else.
They are a massive problem is that their complexity will render future financings all but impossible. Any investor asked to follow a dirty offering will look at the complexity of the previous offering and likely opt out. This severely heightens the risk of either running out of money or a complete recapitalization that wipes out previous shareholders (founder, employees, and investors alike). So, while it may seem innocuous to take such a round, and while it will solve your short term emotional biases and concerns, you may be putting your whole company in a much riskier position without even knowing it.
Some later-stage investors may be tempted to become Sharks themselves and start including structured terms into their own term sheets. Following through and succeeding at such a strategy will require these investors to truly embrace being a Shark. They will need to be comfortable knowing that they are adverse to and in conflict with the founders, employees, and other investors on the capitalization chart. And they will need to be content knowing that they can win while others lose. This is not for the faint of heart, and certainly is not consistent with the typical investor behavior of the past several years.