When ServiceTitan dropped its S-1 notice of an impending public offering on November 18, many VCs likely rejoiced. A successful IPO by the company, which builds operating software for trade businesses, could be what the quiet IPO market needs to start shaking loose.

But the timing of ServiceTitan’s IPO may not be entirely based on the company predicting favorable market conditions. The company agreed to a deal term back in 2022 that essentially set a deadline for it to go public by May 2024 or risk having to dilute its shares. Now that the deadline has come and passed, each quarter ServiceTitan stays private, it will owe more of its company’s shares to certain investors at the IPO.

Let’s explain.

When ServiceTitan raised its $365 million Series H round in November 2022, the deal included a compounding IPO ratchet, as first pointed out by late-stage VC Meritech Capital and outlined in the company’s S-1 filing.

An IPO ratchet is a downside protection clause for investors that means if a company goes public at a valuation that equates to a lower share price than what investors most recently bought shares at, their number of shares will be adjusted so they remain “whole” on their investment, or own the same equity slice of the company. If a company goes public at a higher valuation than their last previous round, this clause essentially goes away.

ServiceTitan’s IPO ratchet is “compounding,” which adds another layer. This specific structure means that the terms of that ratchet clause change if the company didn’t go public by a set date, which was May 22, 2024, 18 months after their Series H round. Since the deadline has come and gone, the minimum valuation ServiceTitan would need to go public at to avoid diluting its shares more, also known as a hurdle rate, will compound each quarter at a rate of 11% annually.

This original agreement set ServiceTitan’s hurdle rate to $84.57 a share or higher to avoid having to give certain investors more shares. Since the deadline has already passed, that hurdle is closer to $90 a share, Meritech estimated. The longer ServiceTitan waited, the higher that hurdle would go up.

If ServiceTitan’s valuation continued to rise after its 2022 round, bringing up its share price with it, none of this would matter much. But that isn’t the case. Meritech estimated that the company is valued at about $70 a share. Secondaries trading website Caplight predicts the company’s current share price is valued at $81.59 a share, representing a $7.3 billion valuation. While Caplight’s estimate is higher than Meritech’s estimate, this still wouldn’t reach the hurdle rate.

It will all depend on how ServiceTitan prices its IPO. The company declined to comment.

Silicon Valley-based ServiceTitan was founded in 2012 and has raised more than $1.5 billion in venture capital from firms including Iconiq, Bessemer, and Coatue, among others. The company reported $685 million in revenue and a net loss of $183 million for the 12-month period that ended on July 31, 2024, according to its S-1.