DigitalOcean Holdings, Inc S-1/A, filed Mar 15, 2021

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DigitalOcean Holdings, Inc. (DOCN)

S-1/A 2021-03-15

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Delaware	7370	45-5207470
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)



Title of Each Class of Securities to be Registered	Amount to be Registered⁽¹⁾	Proposed Maximum Offering Price Per Share⁽²⁾	Proposed Maximum Aggregate Offering Price⁽¹⁾⁽²⁾	Amount of Registration Fee⁽³⁾
Common stock, par value $0.000025 per share	18,975,000	$47.00	$891,825,000	$97,299


	*Per Share*		*Total*
Initial public offering price		$		$
Underwriting discount⁽¹⁾		$		$
Proceeds, before expenses, to us		$		$


Morgan Stanley	Goldman Sachs & Co. LLC	J.P. Morgan

BofA Securities	Barclays	KeyBanc Capital Markets

Canaccord Genuity	JMP Securities	Stifel



(Name, address, including zip code, and telephone number, including area code, of agent for service)


	Page
A LETTER FROM YANCEY SPRUILL, OUR CHIEF EXECUTIVE OFFICER		ii
PROSPECTUS SUMMARY		1
RISK FACTORS		14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		51
MARKET, INDUSTRY AND OTHER DATA		52
USE OF PROCEEDS		53
DIVIDEND POLICY		54
CAPITALIZATION		55
DILUTION		57
SELECTED CONSOLIDATED FINANCIAL DATA		60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		64
BUSINESS		84
MANAGEMENT		112


	Page
EXECUTIVE COMPENSATION		121
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		134
PRINCIPAL STOCKHOLDERS		136
DESCRIPTION OF CAPITAL STOCK		138
SHARES ELIGIBLE FOR FUTURE SALE		143
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK		146
UNDERWRITING		150
LEGAL MATTERS		158
EXPERTS		158
WHERE YOU CAN FIND ADDITIONAL INFORMATION		159
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1


Common stock offered by us		16,500,000 shares

Common stock to be outstanding after this offering		105,303,340 shares

Option to purchase additional shares of common stock offered by us		2,475,000 shares

Use of proceeds		We estimate that our net proceeds from the sale of our common stock that we are offering will be approximately $700.1 million (or approximately $806.0 million if the underwriters’ option to purchase additional shares of our common stock from us is exercised in full), assuming an initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the capital markets and increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to repay our outstanding indebtedness, acquire complementary businesses, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time. See the section titled “Use of Proceeds” for additional information.

Risk factors		You should carefully read the “Risk Factors” beginning on page 14 and other information included in this prospectus for a discussion of facts that you should consider before deciding to invest in shares of our common stock.

Indication of Interest		One or more funds affiliated with Tiger Global Management LLC and AI Droplet Subsidiary LLC, which is affiliated with one of our principal stockholders, have indicated an interest in purchasing an aggregate of up to a maximum of $175 million in shares of common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to


		purchase, Tiger Global Management LLC and AI Droplet Subsidiary LLC could determine to purchase more, less or no shares of common stock in this offering, or the underwriters could determine to sell more, less or no shares to Tiger Global Management LLC and AI Droplet Subsidiary LLC. The underwriters will receive the same discount on any of our shares of common stock purchased by Tiger Global Management LLC and AI Droplet Subsidiary LLC as they will from any other shares sold to the public in this offering.

Proposed trading symbol		“DOCN”


	Year Ended December 31,
	2018			2019			2020
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue	$	203,136		$	254,823		$	318,380
Cost of revenue⁽¹⁾		97,042			122,259			145,532

Gross profit		106,094			132,564			172,848

Operating expenses:
Research and development⁽¹⁾		44,934			59,973			74,970
Sales and marketing⁽¹⁾		29,445			31,340			33,472
General and administrative⁽¹⁾		59,009			71,156			80,197

Total operating expenses		133,388			162,469			188,639

Loss from operations		(27,294	)		(29,905	)		(15,791	)
Other (income) expense		7,484			9,692			26,866

Loss before income taxes		(34,778	)		(39,597	)		(42,657	)
Income tax expense		1,221			793			911

Net loss attributable to common stockholders	$	(35,999	)	$	(40,390	)	$	(43,568	)

Net loss per share attributable to common stockholders, basic and diluted⁽²⁾	$	(1.06	)	$	(1.06	)	$	(1.05	)

Weighted-average shares used to compute net loss per share, basic and diluted⁽²⁾		33,971			38,004			41,658

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)⁽³⁾							$	(0.50	)

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)⁽³⁾								87,130


	December 31, 2020
	Actual			Pro Forma⁽¹⁾		Pro Forma As Adjusted^(2)(3(4)
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	100,311		$	100,311	$	800,424
Total assets		430,252			430,252		1,130,365
Total liabilities⁽⁵⁾		329,272			314,809		314,809
Convertible preferred stock		173,074			—		—
Total stockholders’ (deficit) equity⁽⁵⁾	$	(72,094	)	$	115,443	$	815,556


	As of December 31, 2020
	Actual			Pro Forma			Pro Forma As Adjusted⁽¹⁾
	(in thousands except share and per share amounts)
Cash and cash equivalents	$	100,311		$	100,311		$	800,424

Total liabilities⁽²⁾		329,272			314,809			314,809

Convertible preferred stock, $0.000025 par value; 45,780,861 shares authorized, 45,472,229 shares issued and outstanding, actual; and no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		173,074			—			—
Stockholders’ deficit:
Common stock, $0.000025 par value; 111,400,000 authorized, 43,331,111 shares outstanding, actual; 750,000,000 shares authorized, pro forma and pro forma as adjusted; 88,803,340 shares outstanding, pro forma; and 105,303,340 shares outstanding, pro forma as adjusted		1			2			2
Preferred stock, $0.000025 par value; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted		—			—			—
Treasury stock, at cost (1,968,228 shares at December 31, 2020)		(4,598	)		(4,598	)		(4,598	)
Additional paid-in capital⁽²⁾		99,783			287,319			987,432
Accumulated other comprehensive loss		(245	)		(245	)		(245	)
Accumulated deficit		(167,035	)		(167,035	)		(167,035	)

Total stockholders’ (deficit) equity⁽²⁾		(72,094	)		115,443			815,556

Total capitalization	$	100,980		$	115,443		$	815,556


Assumed initial public offering price per share			$	45.50
Historical net tangible book value per share as of December 31, 2020	$	1.47
Increase per share attributable to new investors purchasing shares in this offering		5.92

Pro forma as adjusted net tangible book value per share after this offering				7.39

Dilution in pro forma as adjusted net tangible book value per share to new investors participating in this offering			$	38.11


	Shares Purchased					Total Consideration					Average Price Per Share
	Number		Percent			Amount		Percent			Average Price Per Share
Existing stockholders		88,803,340		84	%	$	272,857,488		27	%	$	3.07
New investors		16,500,000		16	%		750,750,000		73	%	$	45.50

Totals		105,303,340		100	%	$	1,023,607,488		100	%


	December 31,
	2019			2020
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	32,906		$	100,311
Total assets		302,485			430,252
Total liabilities		251,501			329,272
Convertible preferred stock		123,264			173,074
Total stockholders’ deficit		(72,280	)		(72,094	)


	Three Months Ended
	March 31, 2019			June 30, 2019			September 30, 2019			December 31, 2019			March 31, 2020			June 30, 2020			September 30, 2020			December 31, 2020
	(in thousands)
Revenue	$	58,294		$	61,931		$	65,299		$	69,299		$	72,792		$	76,911		$	81,160		$	87,517
Cost of revenue⁽¹⁾		28,462			29,860			30,900			33,037			34,683			35,205			37,063			38,581

Gross profit		29,832			32,071			34,399			36,262			38,109			41,706			44,097			48,936
Operating expenses:
Research and development⁽¹⁾		13,515			14,566			16,633			15,259			19,477			15,130			19,706			20,657
Sales and marketing⁽¹⁾		7,110			7,861			7,566			8,803			9,454			6,957			7,700			9,361
General and administrative⁽¹⁾		18,810			16,031			17,860			18,455			21,665			17,841			23,411			17,280

Total operating expenses		39,435			38,458			42,059			42,517			50,596			39,928			50,817			47,298
(Loss) income from operations		(9,603	)		(6,387	)		(7,660	)		(6,255	)		(12,487	)		1,778			(6,720	)		1,638
Other (income) expense		1,801			2,146			2,738			3,007			3,698			4,097			3,628			15,443

Loss before income taxes		(11,404	)		(8,533	)		(10,398	)		(9,262	)		(16,185	)		(2,319	)		(10,348	)		(13,805	)
Income tax expense (benefit)		134			127			162			370			748			251			(134	)		46

Net loss attributable to common stockholders	$	(11,538	)	$	(8,660	)	$	(10,560	)	$	(9,632	)	$	(16,933	)	$	(2,570	)	$	(10,214	)	$	(13,851	)


	Payments Due By Period
	Total		Less than 1 Year		1-3 Years		3-5 Years
	(in thousands)
Long-term debt obligations⁽¹⁾	$	293,868	$	26,713	$	57,883	$	209,272
Operating lease commitments⁽²⁾		115,473		43,605		48,624		23,244
Purchase obligations⁽³⁾		22,265		9,530		6,954		5,781

Total	$	431,606	$	79,848	$	113,461	$	238,297


Name	Age	Position

Executive Officers:
Yancey Spruill	53	Chief Executive Officer and Director
William Sorenson	65	Chief Financial Officer
Carly Brantz	42	Chief Marketing Officer
Barry Cooks	49	Chief Technology Officer
Jeffrey Guy	55	Chief Operating Officer
Matthew Norman	48	Chief People Officer
Alan Shapiro	52	General Counsel

Non-Employee Directors:
Warren Adelman	57	Director
Pratima Arora	41	Director
Amy Butte	53	Director
Warren Jenson	64	Director
Pueo Keffer	39	Director
Peter Levine	60	Director
Hilary Schneider	59	Director


	Fees Earned or Paid in Cash		Option Awards⁽³⁾⁽⁴⁾		Total
Warren Adelman	$	—	$	865,057	$	865,057
Pratima Arora⁽¹⁾		—		—		—
Amy Butte		—		—		—
Bradford Gillespie⁽²⁾		—		—		—
Warren Jenson		—		970,346		970,346
Pueo Keffer		—		—		—
Peter Levine		—		—		—
Hilary Schneider		—		865,057		865,057
Benya Uretsky⁽²⁾		—		—		—
Moisey Uretsky⁽²⁾		—		—		—


	Number of Securities Underlying Unexercised Options Exercisable		Number of Securities Underlying Unexercised Options Unexercisable		Option Exercise Price		Option Grant Date
Warren Adelman^(a)		2,083		97,917	$	17.37		11/5/2020
Pratima Arora		—		—		—		—
Amy Butte^(a)^(b)		66,666		33,334		3.43		4/16/2018
		15,625		34,375		5.61		9/12/2019
Bradford Gillespie		—		—		—		—
Warren Jenson^(a)		—		100,000		19.47		12/16/2020
Pueo Keffer		—		—		—		—
Peter Levine		—		—		—		—
Hilary Schneider^(a)		2,083		97,917		17.37		11/5/2020
Benya Uretsky		—		—		—		—
Moisey Uretsky		—		—		—		—


Name and Principal Position	Salary			Bonus⁽¹⁾		Option Awards⁽²⁾		Non-Equity Incentive Plan Compensation⁽³⁾		All Other Compensation⁽⁴⁾		Total
Yancey Spruill	$	450,000		$	—	$	—	$	626,400	$	13,847	$	1,090,247
Chief Executive Officer
Carly Brantz		320,000			—		1,416,357		245,000		11,548		1,992,905
Chief Marketing Officer
Jeffrey Guy		304,792	⁽⁵⁾		50,000		1,636,407		262,500		18,269		2,271,968
Chief Operating Officer


	Option Awards⁽¹⁾
Name	Number of Securities Underlying Unexercised Options Exercisable			Number of Securities Underlying Unexercised Options Unexercisable			Option Exercise Price		Option Expiration Date
Yancey Spruill		1,166,666	⁽²⁾		2,333,334		$	5.61		8/13/2029
Carly Brantz		—			435,000	⁽³⁾		6.72		3/12/2030
Jeffrey Guy		—			500,000	⁽⁴⁾		6.72		3/12/2030


Stockholder	Shares of Series C Preferred Stock		Total Purchase Price
AI Droplet Holdings LLC⁽¹⁾		4,674,685	$	49,500,005.74
Andreessen Horowitz Fund III, L.P.⁽²⁾		32,434		343,442.01
AH Parallel Fund III, L.P.⁽²⁾		14,786		156,568.22


	Shares Beneficially Owned Prior to Offering					Shares Beneficially Owned After Offering
Name of Beneficial Owner	Shares		Percentage			Shares		Percentage
5% Stockholders
Entities affiliated with AI Droplet Holdings LLC⁽¹⁾		23,737,790		26.55	%		23,737,790		22.42	%
Entities affiliated with Andreessen Horowitz Fund III, L.P.⁽²⁾		15,662,344		17.52	%		15,662,344		14.79	%
Entities affiliated with IA Venture Strategies Fund II, LP⁽³⁾		14,808,964		16.57	%		14,808,964		13.98	%
Benya Uretsky⁽⁴⁾		6,515,621		7.29	%		6,515,621		6.15	%
Moisey Uretsky⁽⁵⁾		8,073,078		9.03	%		8,073,078		7.62	%

Named Executive Officers and Directors
Yancey Spruill⁽⁶⁾		1,458,333		1.61	%		1,458,333		1.36	%
Carly Brantz⁽⁷⁾		135,937		*			135,937		*
Jeffrey Guy⁽⁸⁾		145,833		*			145,833		*
Warren Adelman⁽⁹⁾		10,416		*			10,416		*
Pratima Arora		—		*			—		*
Amy Butte⁽¹⁰⁾		94,791		*			94,791		*
Warren Jenson⁽¹¹⁾		8,333		*			8,333		*
Pueo Keffer		—		*			—		*


Name	Number of Shares
Morgan Stanley & Co. LLC
Goldman Sachs & Co. LLC
J.P. Morgan Securities LLC
BofA Securities, Inc.
Barclays Capital Inc.
KeyBanc Capital Markets Inc.
Canaccord Genuity LLC
JMP Securities LLC
Stifel, Nicolaus & Company, Incorporated

Total:		16,500,000


	Page
Report of Independent Registered Public Accounting Firm		F-2
Financial Statements:
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Comprehensive Loss		F-5
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit		F-6
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8


	Convertible Preferred Stock				Common Stock				Treasury Stock						Additional Paid-In Capital		Accumulated Other Comprehen- sive Loss			Accumulated Deficit			Total
	Shares		Amount		Shares		Amount		Shares			Amount			Additional Paid-In Capital		Accumulated Other Comprehen- sive Loss			Accumulated Deficit			Total
Balance at December 31, 2017		40,750,324	$	123,264		32,162,660	$	1		(1,968,228	)	$	(4,598	)	$	13,102	$	1		$	(47,078	)	$	(38,572	)
Issuance of common stock under stock option plan		—		—		5,795,483		—		—			—			5,201		—			—			5,201
Stock-based compensation		—		—		—		—		—			—			12,560		—			—			12,560
Other comprehensive loss		—		—		—		—		—			—			—		(54	)		—			(54	)
Net loss attributable to common stockholders		—		—		—		—		—			—			—		—			(35,999	)		(35,999	)

Balance at December 31, 2018		40,750,324		123,264		37,958,143		1		(1,968,228	)		(4,598	)		30,863		(53	)		(83,077	)		(56,864	)
Issuance of common stock under stock option plan		—		—		3,137,706		—		—			—			5,819		—			—			5,819
Stock-based compensation		—		—		—		—		—			—			19,214		—			—			19,214
Other comprehensive loss		—		—		—		—		—			—			—		(59	)		—			(59	)
Net loss attributable to common stockholders		—		—		—		—		—			—			—		—			(40,390	)		(40,390	)

Balance at December 31, 2019		40,750,324		123,264		41,095,849		1		(1,968,228	)		(4,598	)		55,896		(112	)		(123,467	)		(72,280	)
Issuance of common stock under stock option plan		—		—		4,203,490		—		—			—			13,905		—			—			13,905
Issuance of convertible preferred stock		4,721,905		49,810		—		—		—			—			—		—			—			—
Stock-based compensation		—		—		—		—		—			—			29,982		—			—			29,982
Other comprehensive loss		—		—		—		—		—			—			—		(133	)		—			(133	)
Net loss attributable to common stockholders		—		—		—		—		—			—			—		—			(43,568	)		(43,568	)

Balance at December 31, 2020		45,472,229	$	173,074		45,299,339	$	1		(1,968,228	)	$	(4,598	)	$	99,783	$	(245	)	$	(167,035	)	$	(72,094	)


Property and Equipment Category		Useful Life
Computers and equipment		5 years
Furniture and fixtures		5 years
Leasehold improvements		Lesser of lease term or remaining useful life
Internal-use software		3 years


Cash	$	12
Prepaid expenses and other assets		4
Intangible assets		910

Total identifiable assets acquired		926
Accounts payable and accrued liabilities		56

Total liabilities assumed		56
Net identifiable assets acquired		870
Goodwill		2,674

Net assets acquired	$	3,544


	December 31, 2019				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
LEVEL 3
Warrant liability	$	1,638	$	1,638	$	14,463	$	14,463


Expected life in years	Risk-Free Rate	Expected volatility	Dividend yield
10	2.34%-2.82%	76%-78%	0%


Balance at January 1, 2019	$	1,227
Fair value adjustment		411

Balance at December 31, 2019		1,638
Fair value adjustment		12,825

Balance at December 31, 2020	$	14,463


	2019			2020
Credit Facility
Term Loan⁽¹⁾	$	68,970		$	165,051
Revolving Credit Facility		84,500			63,200
Capital lease obligations		3,801			—
Notes payable		33,789			31,432

Total debt	$	191,060		$	259,683

Less: current portion
Credit Facility	$	(5,156	)	$	(7,438	)
Capital lease obligations		(938	)		—
Notes payable		(9,063	)		(10,030	)

Current portion of long-term debt	$	(15,157	)	$	(17,468	)

Total long-term debt	$	175,903		$	242,215


Year ending:
2021	$	43,605
2022		27,473
2023		21,151
2024		19,897
2025		3,347

Total minimum operating lease payments	$	115,473