Square's 2015 IPO: a down-round story with a strong comeback

Executive overview

Square launched in 2010 to let anyone accept credit card payments via a phone dongle — solving a real problem for the 24 million US small businesses locked out of merchant accounts. By 2015 it was a cloud point-of-sale leader with predictable, near-zero-churn cohort economics.

The IPO itself was badly executed: priced at $9 per share against a prior private valuation of $6 billion, it became a symbol of unicorn overvaluation. But the fundamentals were sound, and the stock tripled within 18 months.

The core insight: narrative and fundamentals diverged completely — reading the S-1 told a very different story than the press cycle did.

Founding and origin

• Jim McKelvey (co-founder) couldn't accept credit cards selling $2,000 handmade glass faucets in 2008.
• He called Jack Dorsey — his former teenage intern, freshly forced out of Twitter — with the idea.
• A third figure, professor Robert Morley, contributed foundational card-reading research; he was never formally included and later sued, settling for $50 million in 2016.
• The original name was Squirrel and the reader was shaped like an acorn; a meeting with Scott Forstall at Apple prompted a rename (Apple used "Squirrel Systems" for its café POS).

The real innovation: merchant access and fraud prevention

• Before Square, getting a merchant account required extensive documentation and a large established business; 24 of 36 million US small businesses under $100k revenue couldn't accept cards.
• Square removed upfront underwriting: it issued a free reader, charged a flat 2.75% per transaction, and trusted merchants incrementally.
• With each successful transaction it extended slightly more trust — a machine-learning-driven underwriting model that competitors like VeriFone couldn't replicate; VeriFone shut down its competing product due to fraud losses.
• Funds deposited in 1–2 business days versus the industry standard of 30–45 days.
• The flat fee replaced an incomprehensible multi-page sliding-scale fee structure.

The Starbucks deal: strategic forcing function, financial disaster

• Late 2012: Starbucks invested and committed to moving all US company-owned store payments to Square; Square was valued at ~$3.25 billion.
• Square was not ready for enterprise scale; the deal forced rapid build-out of cloud POS and enterprise-grade security.
• The pricing was deeply unprofitable for Square on every Starbucks transaction.
• A renegotiation led to Starbucks exiting entirely; the revenue line stayed in Square's filings as a separate breakout — still showing as zero in year-over-year comparisons at the time of the episode.

Path to IPO and the private-round trap

• 2014: Rather than IPO, Square raised a $150 million Series E from Singapore's sovereign wealth fund and Goldman Sachs at a $6 billion valuation.
• That round included a ratchet clause: investors were guaranteed a 20% return at IPO.
• Throughout 2015: Jack became permanent CEO of Twitter simultaneously; Starbucks deal unwound; employee stock options granted at $6 billion strike price became effectively worthless.
• Attrition accelerated as employees realised their options had no near-term value.
• The company was effectively forced to IPO — not primarily for growth capital but to restore equity compensation credibility via RSUs.

The IPO execution

• November 2015: priced at $9/share — below the stated $11–$13 range — implying a $2.9 billion valuation, roughly half the last private round.
• The ratchet triggered: Square issued ~$93 million in additional stock to Series E investors.
• Goldman Sachs earned ~$10 million in underwriting fees but ~$90 million from the ratchet — creating a direct incentive to price the IPO lower.
• Press narrative: first unicorn to die, proof that high private valuations were fiction.
• Actual outcome: stock reached ~$25.59 by episode date (August 2017), market cap ~$10 billion.

Business model and cohort economics

• Revenue split at time of episode: $482 million transaction-based, $59 million subscription/services, $10 million hardware (at a $14 million loss).
• Net cohort churn was zero: revenue lost from churned merchants was offset by growing transaction volume from retained merchants in the same cohort.
• Each new cohort stacked permanently on top of prior ones — highly predictable, compounding revenue base.
• Marketing spend yielded ~30% return within two years, making it safe to scale spend aggressively.
• Strategy: bundle inventory, employee management, payroll, lending (Square Capital), and appointment booking at low or no cost; monetise entirely through transaction volume growth.

Tech themes

• Founder mythology vs. reality: polished origin stories are common and not necessarily dishonest — they serve as the first user story for investors, employees, and customers.
• Timing: Square's product timing (2009–2010, two years post-iPhone) was near-perfect; the IPO timing was poor.
• Pre-IPO investor conflicts: letting a bank invest in a late private round and then lead the IPO can perversely misalign incentives if a ratchet is present.
• Valuations with liquidation preferences inflate headline numbers; founders and employees holding common stock bear all the downside when public markets reprice.

Grades

• Ben: C — right idea, wrong timing, terrible execution (Goldman conflict, employee equity damage).
• David: B– — acknowledges the Starbucks deal needed to be resolved first, more generous on the forced nature of the decision, but the Goldman conflict and employee impact drag it down.