(Updates with final share price)
By Heather Somerville
SAN FRANCISCO, Sept 29 In the run-up to its
initial public offering, cloud computing company Nutanix
scrambled to avoid a situation that has increasingly marred
technology IPOs: a price that is below the most recent private
After initially pricing shares at $11 to $13, a range that
set the company up for a valuation nosedive, Nutanix on Thursday
priced shares at $16 apiece. The higher-than-expected price
values Nutanix at $2.2 billion, a boost from the $2 billion
valuation it received in a 2014 private funding round.
Nutanix, which is unprofitable, begins trading Friday on the
Nasdaq under the symbol "NTNX."
Nutanix may have squeaked by, but public offerings at a
price below the private market valuation, once a rare event,
have become quite common, especially for venture-backed
companies worth $1 billion or more - the so-called unicorns.
Such low-priced IPOs have been often been followed by lackluster
public market performance, and can lead to problems with
employee morale, recruitment and retention, dealmakers say.
Of the 32 technology companies that went public with
downrounds since the start of 2012, 53 percent are trading below
their IPO price, based on an analysis of data provided by
venture capital database PitchBook Inc.
Shares of payments company Square Inc, storage firm
Box Inc, big data company Hortonworks Inc and
solar energy operator Sunrun Inc, all of which had their
valuations slashed, are trading between $5 and $8 below their
private market valuation.
"That high valuation can really come back to haunt you,"
said Nate Gallon, a partner with Hogan Lovells law firm.
In the most difficult situations, companies that IPO at a
lower valuation can trigger an anti-dilution provision called a
ratchet, which rewards later investors with more shares at the
expense of employees and early investors.
Nutanix, which makes technology to improve storage and data
center functions, has two ratchets that could have been
triggered by a lower valuation on its public offering. In that
case, early investors and employees would have been diluted.
Nutanix declined to comment.
A study by law firm Fenwick & West found that, in 2014, 4
percent of IPOs had a ratchet that was triggered. In 2015, that
jumped to 50 percent of deals. The Honest Company, Simplivity
and DocuSign are among the other unicorns that are approaching
IPO and also have ratchets, according to PitchBook.
"It's safe to say that almost every (investor) now asks for
a ratchet," said Dave Peinsipp, a partner at Cooley law firm.
Many of those requests come from mutual funds, hedge funds
and sovereign wealth funds, which in recent years have joined
more late-stage rounds.
"If the company turns around and does a down IPO, those late
investors don't want to be left holding the bag," Gallon said.
Some investors argue that, after the IPO, downrounds and
ratchets are a distant memory. However, they can also signal
deeper problems in the company.
"I don't think you accept ratchets if you have a choice,"
said Hemant Taneja, managing director at General Catalyst
Partners. "What does it say about a management team that
overshot its valuation? Some bad decisions made somewhere."
For its Series B investment round, Nutanix chose Khosla
Ventures because the firm offered a valuation of more than $100
million, said Mohit Aron, co-founder of Nutanix who left the
company in 2013 to start a new startup, Cohesity. The firm
obtained a $1 billion valuation with its Series D, which
included a ratchet.
Compare that to software company Atlassian, whose valuation
jumped 32 percent at its December debut and whose stock is up 44
percent. The profitable company did not raise any venture
capital to fund its business operations, dismissing investors
who came knocking with offers of bigger valuations.
"What would the point be? It felt that it became this vanity
metric," said Jay Simons, Atlassian's president.
(Reporting by Heather Somerville in San Francisco. Additional
reporting by Lauren Hirsch in New York.; Editing by Jonathan
Weber, Bernard Orr and Lisa Shumaker)