S-1/A 1 smartsheets-1a1.htm S-1/A Smartsheet S-1/A #1

As filed with the U.S. Securities and Exchange Commission on April 16, 2018
Registration No. 333‑223914         
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Amendment No. 1 to
FORM S‑1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Smartsheet Inc.
(Exact name of Registrant as specified in its charter)
 
Washington
7372
20-2954357
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer Identification Number)
10500 NE 8th Street, Suite 1300
Bellevue, WA 98004
(844) 324-2360
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
Mark P. Mader
President and Chief Executive Officer
Smartsheet Inc.
10500 NE 8th Street, Suite 1300
Bellevue, WA 98004
(844) 324-2360
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Alan C. Smith
James D. Evans
Katherine K. Duncan
Fenwick & West LLP
1191 Second Avenue, Floor 10
Seattle, WA 98101
(206) 389-4510
Jennifer E. Ceran
Chief Financial Officer
Smartsheet Inc.
10500 NE 8th Street, Suite 1300
Bellevue, WA 98004
(844) 324-2360
Michael Nordtvedt
Jeana S. Kim
Patrick J. Schultheis
Wilson Sonsini Goodrich & Rosati
Professional Corporation
701 Fifth Avenue, Suite 5100
Seattle, WA 98104
(206) 883-2500
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or Securities Act, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨
If this Form is a post‑effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post‑effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
þ  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.         ¨
 
CALCULATION OF REGISTRATION FEE
Title of Securities to be Registered
Amount to be Registered(1)
Proposed Maximum Offering Price Per Share
Proposed Maximum Aggregate Offering Price
Amount of
Registration Fee(2)
Class A common stock, no par value per share.
13,377,892
$12.00
$160,534,704
$19,987
(1)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act. Includes additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)
The Registrant previously paid $12,450 of this amount in connection with the initial filing of this Registration Statement.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 



The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling shareholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued April 16, 2018
  11,632,950 Shares
smartsheets1logo.jpg
CLASS A COMMON STOCK
 
Smartsheet Inc. is offering 10,000,000 shares of its Class A common stock and the selling shareholders are offering 1,632,950 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling shareholders. This is our initial public offering and no public market currently exists for our shares of Class A common stock. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.
 
Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with regards to voting and conversion. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to 10 votes per share and will be convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately 98.7% of the voting power of our outstanding capital stock immediately following the closing of this offering, and outstanding shares of Class B common stock held by our directors, executive officers, and 5% shareholders, and their respective affiliates, will represent approximately 80.2% of the voting power of our outstanding capital stock immediately following the closing of this offering.
 
We have been approved to list our Class A common stock on the New York Stock Exchange under the symbol “SMAR.”
 
We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. Investing in our Class A common stock involves risks. See the section titled “Risk Factors” beginning on page 17.
 
PRICE $     A SHARE
 
 
Price to Public
 
Underwriting Discounts and Commissions(1)
 
Proceeds to Smartsheet
 
Proceeds to Selling Shareholders
Per share
$
 
$
 
$
 
$
Total
$
 
$
 
$
 
$
__________________
(1) See the section titled “Underwriters” for a description of the compensation payable to the underwriters.
We have granted the underwriters the right to purchase up to an additional 1,744,942 shares of our Class A common stock to cover over-allotments, if any.
The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of Class A common stock to purchasers on or about                  , 2018.
 
MORGAN STANLEY
J.P. MORGAN
JEFFERIES
RBC CAPITAL MARKETS
CANACCORD GENUITY
WILLIAM BLAIR
SUNTRUST ROBINSON HUMPHREY
                      , 2018



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TABLE OF CONTENTS
 
You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us and delivered or made available to you. Neither we, the selling shareholders, nor any of the underwriters have authorized anyone to provide you with additional information or information that is different from or to make any representations other than those contained in this prospectus or in any free-writing prospectus prepared by or on behalf of us to which we may have referred you in connection with this offering. Neither we, the selling shareholders, nor any of the underwriters take any responsibility for, and can provide no assurances as to the reliability of, any other information that others may give you. We and the selling shareholders are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock. Our business, financial condition, results of operations, and future growth prospects may have changed since that date.
Through and including                , 2018 (the 25th day after the date of this prospectus), U.S. federal securities laws may require all dealers that effect transactions in our Class A common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
For investors outside the United States, neither we, the selling shareholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus outside the United States.




PROSPECTUS SUMMARY
This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Class A common stock. You should carefully consider, among other things, our consolidated financial statements and related notes and the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our fiscal year ends on January 31.
SMARTSHEET INC.
We enable teams to get work done fast and efficiently. We are a leading cloud-based platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. As of January 31, 2018, over 92,000 customers, including more than 74,000 domain-based customers, 90 companies in the Fortune 100, and two-thirds of the companies in the Fortune 500, with annualized contract values, or ACVs, ranging from $99 to $2.3 million per customer, relied on Smartsheet to implement, manage, and automate processes across a broad array of departments and use cases. Our customers rapidly expand their use of Smartsheet because it is effective. They achieve higher productivity and faster time to market. A commissioned report by Forrester Research, Inc., or Forrester, demonstrated that organizations using Smartsheet could achieve a return on investment of over 480% over a three-year period. (1) 
The nature of work has changed. The growing volume and variety of information has complicated the process for executing work across teams that are increasingly multidisciplinary and geographically distributed. According to Gartner, Inc., approximately 60% of work today is unstructured.(2) Unstructured or dynamic work is work that has historically been managed using a combination of email, spreadsheets, whiteboards, phone calls, and in-person meetings to communicate with team members and complete projects and processes. It is frequently changing, often ad-hoc, and highly reactive to new information. Rigid applications, such as ticketing, enterprise resource planning, or ERP, or customer relationship management, or CRM, systems are poorly suited to manage unstructured work. For nearly 30 years, organizations have primarily relied on lightweight tools to manage dynamic or unstructured work. Reliance on these tools limits visibility and accountability, creates information silos that slow decision-making, and results in delays, errors, and suboptimal outcomes.
Business users need technology solutions they can configure and modify on their own. Today, many systems within an enterprise require IT to implement and manage them. Even tools that focus on the business user require some coding knowledge to incorporate business logic for workflows, integrate data from third-party systems, and adapt to changing business needs. Yet there were only 21 million developers worldwide in 2016 according to Evans Data Corporation. With an estimated 865 million knowledge workers worldwide according to Forrester,(3) tools that require even minimal coding knowledge are not accessible to the vast majority of knowledge workers.
Smartsheet was founded in 2005 with a vision to build a universal application for work management that does not require coding capabilities. Our platform serves as a single source of truth across work processes and fosters accountability and engagement within teams, leading to more efficient decision-making and better business outcomes. Our platform provides a number of solutions that eliminate the obstacles to capturing information, including a familiar and intuitive spreadsheet interface as well as easily customizable forms. Our reporting and automation capabilities further improve speed by reducing time spent on administration and repetitive work. We make it easy for teams to apply business logic to automate repetitive actions using an extensive list of conditions. Business users, with little or no training, can configure and modify our platform to customize workflows to suit their needs. Our familiar and intuitive user interface and functionality allows users to realize the benefits of our platform without changing the behaviors developed using everyday productivity tools.

 
1 
Forrester Research, Inc., The Total Economic Impact of Smartsheet , September 2017.
2 
Gartner, Inc., Effortless Visibility Is Key to Managing Empowered Workers Without Losing Control , March 30, 2017.
3 
Forrester Research, Inc., Info Workers Will Erase The Boundary Between Enterprise And Consumer Technologies, August 30, 2012.

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People across organizations have similar needs no matter where they work or what they do. They need to manage workflows across teams, gain visibility into progress on a project in real-time, capture inputs, track and r eport on deliverables, prioritize actions, and provide consistency in processes. Smartsheet is adaptable to manage virtually any type of work. Our customers use Smartsheet for over 2,000 documented use cases, including software migration planning, vendor and contract management, brand launches, compliance reporting, event planning, customer onboarding, budget approvals, patent application processing, talent acquisition, benefit and retirement tracking, sales enablement, pipeline management, sales operations, commissions calculations, marketing programs management, investor relations tracking, and website management, among others.
Examples of how some of our customers use Smartsheet include:
Cisco uses Smartsheet to oversee a $300 million annual spend on programs and technology, produce events, manage infrastructure projects, support service engagements, orchestrate marketing campaigns, and manage sale execution, creating transparency across groups and allowing for more informed decision-making by leadership.
Starbucks uses Smartsheet to seamlessly disseminate important and time-sensitive product and business updates across thousands of stores.
MOD Pizza built a standardized system in Smartsheet to manage and organize the company’s rapid growth, ensuring consistency and repeatability for 100 new store openings.
Weyerhaeuser uses Smartsheet to provide account executives with accurate, real-time insights into the status of accounts, simplify tracking and measurement of sales, and provide sales-related materials and information, helping to drive more efficient sales processes.
Cypress Grove uses Smartsheet to manage strategic planning, sales, and distribution of products nationwide; flag safety and quality issues; and enhance operational efficiency for facility maintenance and animal care.
South Water Signs uses Smartsheet to schedule shifts of workers, process permit applications and approvals, prioritize new client requests, schedule installations, and collaborate on art samples with clients, streamlining the process of coordinating signage projects nationwide.
We have over 92,000 customers, including more than 74,000 domain-based customers, 90 companies in the Fortune 100, and two-thirds of the companies in the Fortune 500. As of January 31, 2018, our Fortune 100 and Fortune 500 customers have ACVs ranging from $99 to $2.3 million per customer, and approximately half of these customers have ACVs lower than $5,000 per year. Our customers typically begin using our platform for a single initiative or project. Over time, as users realize the benefits of improved execution, adoption of our platform expands across an organization through new use cases and teams. Our platform is designed to serve the 865 million knowledge workers (4) who have historically relied on a combination of manual, email- and spreadsheet-based processes to manage work.
We deliver our cloud-based software platform through a subscription model. We have an unassisted sales model for self-service adoption through our website. We employ an efficient inside sales team that utilizes machine learning and lead scoring to respond to and convert other interested users within new and existing organizations. We also have a targeted field sales team dedicated to expanding our presence within existing enterprise relationships where we have identified significant opportunity for growth and have developed reseller relationships to more efficiently reach international markets. This blended go-to-market model allows us to serve a larger, diverse user base without incurring excessive costs. The breadth of solutions we offer reflects our users’ desire to purchase and use our platform in a way that most closely aligns with their needs and level of adoption.
We have achieved significant growth in recent periods. For the years ended January 31, 2017 and 2018, our total revenue was $67.0 million and $111.3 million , respectively, representing period-over-period total revenue growth of
 
4 
See note 3 above.

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66% . For the years ended January 31, 2017 and 2018, our net loss was $15.2 million and $49.1 million , respectively. For the years ended January 31, 2017 and 2018, cash provided by (used in) operations was $0.1 million and ( $13.6 ) million, respectively.
Industry Background
Digital disruption continues to raise the standards for organizations to compete effectively
To remain competitive, organizations must constantly innovate to differentiate themselves in increasingly crowded and fast-moving markets. Organizations are focused on greater productivity, faster time to market, new product innovation, and better customer experiences. Organizations must digitally transform to empower teams and organizations to drive work execution without being gated by resource-constrained IT departments, skill gaps, inefficient processes, and information silos that keep organizations slow and inflexible.
The nature of work is changing
The increasing volume and variety of information has inundated teams and organizations, which have finite time and resources, with more work to process. Teams, which have collective experiences and knowledge, are increasingly relied upon to interpret data and make decisions on behalf of organizations. While there are many benefits to collaboration, it has also created interdependencies that slow decision-making and create inefficiencies in how organizations plan, capture, manage, automate, and report on work. Workers are suffering from information overload, constant distractions, limited filters for relevancy, and few ways to measure progress.
Existing business tools have significant limitations when applied to work execution
Spreadsheets, email, meetings, calls
Knowledge workers still rely on manual processes to manage more than 60% of their work,(5) using a combination of spreadsheets, email, in-person meetings, calls, and written notes. Reliance on these manual tools limits visibility and accountability while creating errors and information silos that slow decision-making and result in suboptimal outcomes. Time spent administering these processes prevents employees and managers from spending time on more strategic initiatives. The inadequacies of these tools to manage work include:
lack of accountability with no clear assignment of responsibility or deadlines;
limited access controls or tracking functionality;
required manual transfer of data between systems;
significant time spent manually preparing reports;
lack of automation for updates, notifications, and approvals; and
inconsistent data input resulting in re-work and miscommunication.
Employees are forcing processes into tools that were not designed to manage work execution at scale. This mismatch of needs and solutions results in frustrated and less efficient teams. The productivity and economic costs associated with inefficient processes include:
61% of work time is spent reading and answering email, searching for and gathering information, communicating and collaborating internally according to the McKinsey Global Institute;(6) and
$575 billion per year is wasted on inefficient processes in the United States alone.(7) 
 
5 
McKinsey Global Institute, The social economy: Unlocking value and productivity through social technologies, July 2012.
6 
See note 5 above.
7 
Dave Wright, 3 Automation Initiatives to Boost Corporate Productivity , April 25, 2016, www.enterpriseappstoday.com/management-software/3-automation-initiatives-to-boost-corporate-productivity.html (last accessed Mach 23, 2018).

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Communications and document creation tools
Messaging and video-conferencing solutions, cloud storage applications, document creation tools, and content sharing applications have been introduced to help organizations increase connectivity and alignment among distributed teams by reducing friction in creating, communicating, and sharing information. While these solutions improve some aspects of collaboration, they are not designed to orchestrate workflows.
Workflow management and team collaboration solutions
Existing workflow management solutions help organizations with process automation that is most easily applied to the 40% of work that is structured, and are built, configured, and managed primarily by IT and developers. This severely reduces the applicability of these applications for the majority of business use cases. Many of these solutions do not extend to collaborators outside of an organization, further limiting their utility.
Reliance on IT and “citizen developers” to develop or customize applications is not viable
Business users rely on IT personnel and “citizen developers” who can code and manage complex administration tools to build and configure applications for their specific needs. However, the cost, time to develop, and rigidity of these solutions makes them ill-suited to support most business use cases. IT departments are also narrowing the scope of their objectives, focusing on the largest initiatives and reducing the number of department-level requests that they process. Many business applications used in organizations target the business user, yet they often require IT assistance or coding knowledge to configure and modify.
Business users are becoming significant buyers of business applications
Business users are seeking technology solutions to rapidly adapt to their changing business needs and are increasingly becoming significant buyers of business applications. Self-service adoption models have made it easy for employees and line of business owners to find and purchase the applications of their choice through the web while remaining in compliance with IT policy.
Organizations need scalable work execution solutions to compete
Organizations and teams need solutions with the following characteristics to facilitate team and employee productivity:
single solution providing unified planning, capturing, managing, automating, and reporting capabilities across a broad range of use cases;
automated application of business logic to repetitive elements of workflows and task accountability;
real-time, consistent insight into actionable data among internal users and external collaborators;
easy to deploy, configure, use, and modify by employees who lack coding ability;
integrated with other systems, collaboration tools, and applications;
enterprise-grade security capabilities to support data protection and compliance; and
scalable to meet the needs of organizations of any size.
Our Platform
Our platform is purpose-built to improve work execution for organizations and teams. We provide our customers with a robust set of capabilities to plan, capture, manage, automate, and report on work. Our platform enhances visibility and accountability in work execution and eliminates behaviors and processes that hinder productivity. We designed our platform to be accessible and valuable to all knowledge workers. Business users with no coding ability can share their work in Smartsheet across internal and external teams and create and modify workflows to address specific use cases with our platform. Smartsheet offers multiple ways for customers to plan

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and manage their work using projects, grids, cards, and calendars, and users can easily toggle between views to support their team’s preferred way of working. We offer capabilities and functionality to enable teams to accelerate execution while maintaining the flexibility to apply our platform to thousands of documented use cases.
Benefits of Our Platform
Automation across the organization saves time and minimizes manual processing
We enable users to organize their unstructured work and apply business logic to automate actions that shorten work execution timelines without the need to write code. Team members collaborating on a process can easily develop granular rule sets to ensure actions, such as deadline notifications, status updates, and approval requests, are timely, relevant, and impactful.
Real-time visibility drives more informed, faster decision-making
Our platform is designed to provide a single source of truth for all stakeholders. We break down information silos across teams and provide real-time visibility into the status of work. This visibility ensures clear ownership of actions and outcomes, leading to stronger engagement and faster time to completion. Line of business managers benefit from visibility into progress against goals, allowing them to react quickly to real-time information and enabling faster and more informed decision-making.
Ease of use enables broad adoption
Users can begin using Smartsheet within minutes and configure our platform for their needs with limited or no training. Because no coding or IT involvement is required to configure our platform, we can serve the entire 865 million knowledge worker population,(8) including the vast majority without coding capabilities. As of January 31, 2018, we had over 650,000 paying users and approximately 3.0 million additional free users called collaborators, who can engage and interact with our platform. While we do not monitor these numbers on a regular basis, we have made significant gains in the number of users over time and we believe that these metrics illustrate that there remains a significant opportunity to further penetrate the knowledge worker population. Our familiar and intuitive user interface and functionality allows users to realize the benefits of our platform without changing the behaviors developed using lightweight productivity tools. Teams and organizations buy into our platform because the productivity benefits derived through visibility and accountability are provided to all stakeholders. All team members can access the latest project information from a single location to act quickly and effectively. The entire team benefits from keeping all stakeholders informed and accountable without manual effort.
Multiple levels of integration to garner the most benefit from Smartsheet and other systems
We enable business users to engage with our platform through systems they currently use. Through our third-party Connectors, we extend the reach and consistency of data from systems, including those offered by Salesforce, Atlassian, and ServiceNow. We also integrate our platform into popular document and communication applications from Google, Microsoft, Dropbox, Box and others. In addition, we offer extensible application programming interfaces, or APIs, that enable a broad ecosystem of partners and customers to integrate directly into our platform, increasing the value of existing custom-built applications and improving the experience for our users.
Enterprise features and functionality for scalable adoption within businesses
We provide the scalability, compliance, and security needed to operate reliably for the more than 92,000 customers, including over 74,000 domain-based customers, that we serve. Our platform provides consistent program execution, enabling teams and organizations to administer programs with management, visibility, and reporting at scale. We also provide user management and compliance features that enable organizations to control user access and audit activity within our platform. We provide enterprise-grade security controls and data governance to enable customer compliance with applicable privacy regulations.
 
8 
See note 3 above.

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Our Market Opportunity
Our work management platform serves both the collaborative applications and project and portfolio management applications markets. In 2017, International Data Corporation, or IDC, estimated these two markets would be a combined $21.4 billion market opportunity in 2017, and grow to $31.6 billion in 2021.
Competitive Strengths
Focus on business users
We empower non-technical business users and teams to elevate how they manage and share dynamic work. From planning, data capture, managing, automating, and reporting on work at scale with both internal and external teams, we help organizations to be more productive, execute faster, and spend more time doing and delivering versus talking about work. Many software companies build tools for the 21 million developers worldwide in 2016, or those who are technically-adept “citizen developers.” We believe that the “easy to use” software and “flexible platforms” targeted at non-technical business users and teams consistently overestimate the amount of complexity or change in behavior a business user is willing to take on to achieve an outcome. Customers tell us they are looking for solutions to elevate their performance quickly and simply, versus building applications and having to reach out to IT for help at every turn. Smartsheet empowers business users with no coding skills to rapidly implement and automate workflows on their own.  
Single platform with broad capabilities
We offer a single platform to manage and execute work end-to-end. Traditional productivity tools can address part of a use case and, while it may be possible to stitch together a document, a workflow tool, and a reporting platform to solve for a particular use case, this approach is more complex, and often results in brittle solutions. Our customers tell us that one of the things they value most about Smartsheet is how easy it is to configure, get started, and adjust as necessary. We serve organizations of all sizes, supporting thousands of customer use cases across a wide range of industries. Over time this enables customers to consolidate dynamic work management on a single platform instead of using a collection of point solutions or purpose-built applications. We continuously innovate and add new capabilities to support additional customer use cases. The feedback and demand signal we receive from the more than 3.6 million users on our platform provides us a competitive advantage in defining our product roadmap and delivering differentiating capabilities to our customers.  
While the value we provide as a standalone platform is significant, customers can derive even more value when Smartsheet is used in conjunction with leading cloud platforms. For example, our integrations with Microsoft Office 365 and Google G Suite complement and enhance the utility of those products for executing collaborative work. We also integrate with a variety of other enterprise applications, including those from Salesforce, Atlassian, ServiceNow, Tableau, Dropbox, and Box. Complementing and enhancing the value of adjacent solutions through workflow integration and two-way data synchronization makes it easy for customers to incorporate Smartsheet into existing work patterns.
Viral growth within organizations
Our platform drives viral adoption by our customers. After the initial use by a team or department, we frequently expand to other users and departments as they realize the benefits of our platform. Many of these new users start out as free collaborators, and then become paying subscribers as they realize the benefits of Smartsheet. With increased adoption of Smartsheet across an organization, the strategic value of our platform grows as we provide broader visibility into the status of work, enabling better decision-making at all levels. This strategic relevance is demonstrated by our 130% dollar-based net retention rate for the trailing 12 months ended January 31, 2018. This rate climbs to 149% for customers with an ACV of $5,000 or more, indicating that as usage of Smartsheet grows, our customers are finding more ways to derive value from our platform.
Demonstrated impact to organizations
Our customers realize the benefit of our platform through improved visibility, agility, and speed in getting work done. According to a September 2017 commissioned Forrester report, using Smartsheet accelerates organizations’

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time-to-market and improves their overall productivity by approximately 15%. These efficiency gains enable organizations to ultimately deliver faster and better results to their customers. In the same September 2017 report, Forrester states that business leaders save an average of 300 hours per year by spending less time requesting status updates, sorting through emails, and hosting internal meetings before they make decisions. Customers realize the benefit of Smartsheet quickly, achieving payback of their initial investment in approximately six months. These efficiency gains increase as more users and teams adopt our platform. Based on the net present value of revenue impact and cost savings observed by Forrester, our customers achieve an estimated return on investment of over 480% by the third anniversary of deployment.(9)  
Efficient go-to-market strategy
We have achieved significant growth with a prudent approach to customer acquisition. Our go-to-market strategy consists of unassisted self-service adoption through our website, an efficient inside sales team, and a newly established reseller channel. More recently, we have added a targeted, strategic sales team to expand our presence within enterprises where we see significant opportunity. Having generated more than 100,000 new trials in each of the last 12 months, and with approximately 3.0 million free collaborators today, our self-service adoption model is fueled by a large and growing number of users. Free trial users and collaborators are able to upgrade to a paid plan without the assistance of our sales force. Our assisted sales model relies on machine learning and lead scoring to identify users based on their likelihood to purchase our platform. By analyzing user behavior and self-reported customer objectives, we are able to improve the allocation of our inside and strategic sales teams in targeting appropriate expansion and new customer opportunities. In addition, our customer success team drives expansion by working with our customers to increase use cases and develop custom solutions working in conjunction with our professional services team. We have accelerated adoption and driven retention within our largest customers as evidenced by customers with an ACV of $50,000 or more of annual spend growing at three times the rate of our other customers.
Our Growth Strategies
Our goal is to make our platform accessible for every organization, team, and worker relying on collaborative work to achieve successful outcomes. We plan to pursue this goal with the following strategies.
Attract more customers to Smartsheet
With over 865 million knowledge workers globally,(10) we believe there is significant opportunity to grow our user base. We will continue to invest in our unassisted sales model, direct sales force, brand, product, and partner marketing to continue to land new customers and increase enterprise adoption. In addition, we will continue to grow our professional services function and develop new and enhanced premium solutions like our Connectors and Control Center to help land larger accounts and increase the scale of our deployments with customers.
Expand within our existing customer base
Our customers frequently increase their use of our platform as they realize the value they derive from adopting Smartsheet. As a result, we are working with customers to help them define new use cases within existing deployments, and expand usage of Smartsheet to additional teams in their organizations that would benefit from our platform. We are focused on converting our approximately 3.0 million free collaborators to paid users, accelerating the growth of our premium solutions including our Connectors and Control Center, and expanding the use of our platform with the help of our professional services and customer success teams.
Expand internationally
We believe that there is significant opportunity to acquire new customers internationally. Our platform is available in eight languages. By expanding our direct and indirect sales force focused outside of the United States, establishing international sales territories, and partnering with strategic resellers, we plan to grow our international sales.
 
9     See note 1 above.
10     See note 3 above.

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Make additional investments in partnerships and integrations
To help drive adoption of Smartsheet and deliver value to our customers, we offer extensive embedded functionality at no cost to complement and enhance the use of the most common productivity tools from providers such as Microsoft, Google, Box, and Dropbox. We offer powerful out-of-the-box Connectors with Salesforce, Atlassian, and ServiceNow that we sell for an additional fee on top of our user-based pricing model. We will continue to invest in these integrations, develop new partnerships, and enhance our architecture to support a wider range of Connectors to increase the value, awareness, and adoption of our platform.
Expand product features and functionality
We have made, and will continue to make, significant investments in research and development to bolster our existing technology and enhance usability to improve our customers’ productivity. Many of the high-value solutions that we are developing are intended to be packaged and priced separately from our core user subscriptions.
Pursue selective strategic tuck-in acquisitions
We plan to pursue strategic acquisitions that we believe will be complementary to our existing offering, enhance our technology, and increase the value proposition we deliver to our customers.
Corporate Culture
We believe our culture is critical to our success. Our culture is rooted in six values, which are:
HONEST — Be truthful and do what is right.
AUTHENTIC — Be real and challenge directly.
DRIVEN — Operate with urgency and focus on results.
INNOVATIVE — Develop new ideas and think creatively.
SUPPORTIVE — Be kind and help each other succeed.
EFFECTIVE — Deliver quality.
In living these six values, our employees have built an environment of ownership, purpose, responsibility, and compassion. This, in turn, benefits our customers, users, partners and shareholders, and provides a strong foundation for collaboration, teamwork and decision-making. The impact of our culture is demonstrated by our high level of employee retention, our success recruiting top talent, an overall Glassdoor employee rating of 4.4 out of 5.0, a recommend to a friend rating of 92%, and a CEO approval rating of 100% as of January 31, 2018.
As of January 31, 2018, we had a total of 787 employees, of which 784 were full-time employees and 648 were located at our headquarters in Bellevue, Washington.
Selected Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:
it is difficult to predict our future operating results;
we have a history of cumulative losses and we may not achieve profitability in the foreseeable future;
the market in which we participate is highly competitive;
if our co-location data centers and computing infrastructure operated by third parties experience service outages, delays or disruptions, our business and operating results could be harmed;

8


if our security measures are breached or our customer data is compromised, customers may reduce or stop using our platform and we may incur significant liabilities;
we may be unable to attract new customers and expand sales to existing customers;
if we fail to manage our growth effectively, our business may be harmed;
our growth depends on being able to expand our sales force;
our quarterly operating results may fluctuate significantly and may not fully reflect the underlying performance of our business;
we derive substantially all of our revenue from a single offering; and
the dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, including our directors, executive officers, and 5% shareholders, and their affiliates, which limits or precludes your ability to influence corporate matters.
Corporate Information
We were incorporated as Navigo Technologies, Inc. in Washington in June 2005. We changed our name to Smartsheet.com, Inc. in February 2006 and to Smartsheet Inc. in February 2017. Our principal executive offices are located at 10500 NE 8th Street, Suite 1300, Bellevue, Washington 98004. Our telephone number is (844) 324-2360. Our website address is www.smartsheet.com. Any information contained on or accessed through our website is not incorporated into this prospectus, by reference or otherwise, and information found on our website should not be considered to be a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our Class A common stock.
Unless expressly set forth, or if the context indicates otherwise, the terms “Smartsheet,” “Company,” “we,” “us,” and “our,” as used in this prospectus, refer to Smartsheet Inc., a Washington corporation.
Smartsheet, the Smartsheet logo, and other registered or common law trade names, trademarks, or service marks of Smartsheet appearing in this prospectus are the property of Smartsheet. Trade names, trademarks, and service marks of other companies that are not owned by Smartsheet may appear in this prospectus. We do not intend any use or display of other companies’ trade names, trademarks, or service marks in this prospectus to imply a relationship with, or endorsement or sponsorship of Smartsheet by, these other companies. For convenience, use of our trade names, trademarks, or service marks in this prospectus appear without the ™ and ® symbols, but the failure to use any such trade names, trademarks, or service marks herein does not indicate, in any way, that we will not assert our rights, or the rights of the applicable licensor, to these trade names, trademarks, and service marks.
Emerging Growth Company
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:
being permitted to present only two years of audited consolidated financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;
not being required to comply with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board;

9


reduced disclosure about our executive compensation arrangements; and
exemptions from the requirements to obtain a non-binding advisory vote on executive compensation and a shareholder approval of any golden parachute arrangements.
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. Accordingly, the information contained in this prospectus may be different than the information you receive from other public companies in which you hold stock. We would cease to be an emerging growth company upon the earliest to occur of (1) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (2) the date we qualify as a “large accelerated filer,” under the rules of the SEC, which means the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years; and (4) January 31, 2024 (the last day of the fiscal year ending after the fifth anniversary of the completion of this offering).
In addition, the JOBS Act also provides that an emerging growth company can utilize extended transition periods for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, unless the company otherwise irrevocably elects not to avail itself of this exemption. While we have not made such an irrevocable election, we have not delayed the adoption of any applicable accounting standards.


10


THE OFFERING
Class A common stock offered by us
10,000,000 shares
Class A common stock offered by the selling shareholders
1,632,950 shares
Over-allotment option of Class A common stock offered by us
1,744,942 shares
Class A common stock to be outstanding after this offering
11,632,950 shares (13,377,892 shares if the over-allotment option is exercised in full)
Class B common stock to be outstanding after this offering
87,261,156 shares
Total Class A common stock and Class B common stock to be outstanding after this offering
98,894,106 shares (100,639,048 shares if the over-allotment option is exercised in full)
Use of proceeds
We estimate that we will receive net proceeds of approximately $99.3 million (or approximately $117.2 million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriter discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling shareholders.

We intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, including expanding our headcount and funding our growth strategies to scale with our business through sales and marketing activities, technology and product development, general and administrative matters, investing in hardware for our data center operations, international expansion, building out our office facilities, and other capital expenditures. We may also use a portion of the net proceeds that we receive to acquire or invest in third-party businesses, products, services, technologies or other assets. However, we do not have any definitive plans, agreements or commitments with respect to any acquisitions or investments at this time. See the section titled “Use of Proceeds” for additional information.

11


Voting rights
Shares of Class A common stock are entitled to one vote per share. Shares of Class B common stock are entitled to 10 votes per share.

Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated articles of incorporation. Following the completion of this offering, each share of our Class B common stock will be convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and upon the earliest of (1) the date specified by a vote of the holders of not less than a majority of the outstanding shares of Class B common stock, (2) seven years from the effective date of this offering, and (3) the date the shares of Class B common stock cease to represent at least 15% of all outstanding shares of our common stock.

The holders of our outstanding Class B common stock will hold 98.7% of the voting power of our outstanding capital stock following this offering, with our directors, executive officers, and 5% shareholders and their respective affiliates holding 80.2% in the aggregate. These holders will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of our directors and the approval of any change of control transaction. See the sections titled “Principal and Selling Shareholders” and “Description of Capital Stock” for additional information.
Risk factors
See the section titled “Risk Factors” beginning on page 17 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our Class A common stock.
New York Stock Exchange ticker symbol
“SMAR”
The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock and 88,760,473 shares of our Class B common stock outstanding as of January 31, 2018 (prior to the automatic conversion of 1,499,317 shares of our Class B common stock into an equivalent number of Class A common stock upon their sale by the selling shareholders in this offering), and excludes:
13,355,439 shares of our Class B common stock issuable upon the exercise of options outstanding as of January 31, 2018, with a weighted-average exercise price of $2.91 per share, of which 1,250,132 shares were issued upon the exercise of options between February 1, 2018 and April 9, 2018;
130,000 shares of our Class B common stock issuable upon the vesting of restricted stock units outstanding as of January 31, 2018;
137,270 shares of our Class B common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of January 31, 2018, with an exercise price of $0.29139 per share, in connection with which 133,633 shares of our Class B common stock will be issued upon its net exercise and automatically converted into an equivalent number of shares of Class A common stock upon their sale in this offering at the initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus; and
296,178 shares of our Class B common stock reserved for future issuance under our 2015 Equity Incentive Plan as of January 31, 2018 and 5,300,000 additional shares of our Class B common stock reserved for

12


future issuance after January 31, 2018, of which:
3,580,420 shares of our Class B common stock issuable upon the exercise of options were granted between February 1, 2018 and April 9, 2018, with an exercise price of $9.53 per share; and
2,181,274 shares of our Class B common stock were reserved for future issuance as of April 9, 2018 that will become available for future issuance under our 2018 Equity Incentive Plan upon the completion of this offering; and
8,740,000 shares of our Class A common stock reserved for future issuance under our share-based compensation plans, consisting of (1) 6,700,000 shares of our Class A common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus (which includes 536,500 shares of our Class A common stock issuable upon the exercise of options to be granted on the date of this prospectus with an exercise price of the initial public offering price per share); and (2) 2,040,000 shares of our Class A common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective on the date of this prospectus.
On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Equity Incentive Plan will become reserved for future issuance as Class A common stock under our 2018 Equity Incentive Plan, and we will cease granting awards under our 2015 Equity Incentive Plan. Our 2018 Equity Incentive Plan and 2018 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.
Except as otherwise indicated, all information in this prospectus assumes:
the filing and effectiveness of our amended and restated articles of incorporation on April 9, 2018 to redesignate our outstanding common stock as Class B common stock and create a new class of Class A common stock to be offered and sold in this offering;
the automatic conversion of all outstanding shares of our convertible preferred stock as of January 31, 2018 into an aggregate of 68,479,732 shares of our Class B common stock, which will occur upon the completion of this offering;
the filing and effectiveness of our amended and restated articles of incorporation and adoption of our amended and restated bylaws immediately prior to the completion of this offering;
the automatic conversion of 1,632,950 shares of our Class B common stock (including shares issued upon the net exercise of warrants to purchase shares of our Class B common stock and sold in this offering) into an equivalent number of our Class A common stock upon their sale by the selling shareholders in this offering;
no exercise of outstanding options after January 31, 2018;
the issuance of 133,633 shares of our Class B common stock upon the net exercise of a warrant to purchase 137,270 shares of Class B common stock and the automatic conversion of those shares into an equivalent number of Class A common stock upon their sale in this offering at the initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus; and
no exercise by the underwriters of their option to purchase up to an additional 1,744,942 shares of our Class A common stock from us in this offering to cover over-allotments.

13


SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
We have derived the following summary consolidated statements of operations data for the fiscal years ended January 31, 2016, 2017, and 2018 from our audited consolidated financial statements that are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any future period. You should read the following summary consolidated financial and other data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes and other financial information included elsewhere in this prospectus. Our fiscal year end is January 31 and references throughout this prospectus to a given fiscal year are to the 12 months ended on that date.
 
Year Ended January 31,
 
2016
 
2017
 
2018
 
(in thousands, except per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue
 
 
 
 
 
Subscription
$
39,568

 
$
62,416

 
$
100,368

Professional services
1,183

 
4,548

 
10,885

Total revenue
40,751

 
66,964

 
111,253

Cost of revenue
 
 
 
 
 
Subscription(1)
6,961

 
10,117

 
13,008

Professional services(1)
1,636

 
4,016

 
8,674

Total cost of revenue
8,597

 
14,133

 
21,682

Gross profit
32,154

 
52,831

 
89,571

Operating expenses
 
 
 
 
 
Research and development(1)
12,900

 
19,640

 
37,590

Sales and marketing(1)
28,440

 
40,071

 
72,925

General and administrative(1)
5,163

 
8,275

 
28,034

Total operating expenses
46,503

 
67,986

 
138,549

Loss from operations
(14,349
)
 
(15,155
)
 
(48,978
)
Interest expense and other, net

 
(29
)
 
(435
)
Net loss before provision (benefit) for income taxes
(14,349
)
 
(15,184
)
 
(49,413
)
Provision (benefit) for income taxes

 

 
(307
)
Net loss
(14,349
)
 
(15,184
)
 
(49,106
)
Deemed dividend(2)

 

 
(4,558
)
Net loss attributable to common shareholders
$
(14,349
)
 
$
(15,184
)
 
$
(53,664
)
Net loss per share attributable to common shareholders, basic and diluted(3)
$
(1.03
)
 
$
(1.00
)
 
$
(2.94
)
Weighted-average shares outstanding used to compute net loss per share attributable to common shareholders, basic and diluted(3)
13,877

 
15,241

 
18,273

Pro forma net loss per share attributable to common shareholders, basic and diluted(3)
 
 
 
 
$
(0.62
)
Weighted-average shares used to compute pro forma net loss per share attributable to common shareholders, basic and diluted(3) 
 
 
 
 
84,868


14


 
(1)
Amounts include share-based compensation expense other than related to the 2017 Tender Offer (see footnote 2) as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
 
(in thousands)
Cost of subscription revenue
$
23

 
$
35

 
$
43

Cost of professional services revenue
4

 
26

 
58

Research and development
235

 
452

 
905

Sales and marketing
1,348

 
428

 
1,124

General and administrative
69

 
193

 
864

Total share-based compensation expense
$
1,679

 
$
1,134

 
$
2,994


Amounts also include share-based compensation expense related to the 2017 Tender Offer (see footnote 2) as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
(in thousands)
Cost of subscription revenue
$

 
$

 
$
53

Cost of professional services revenue

 

 
9

Research and development

 

 
5,124

Sales and marketing

 

 
583

General and administrative

 

 
9,701

Total share-based compensation expense
$

 
$

 
$
15,470


(2)
See the section titled “Certain Relationships and Related-Party Transactions—2017 Tender Offer” for further information.
(3)
Please refer to Note 5 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common shareholders, basic and diluted, and pro forma net loss per share attributable to common shareholders, basic and diluted.
 
As of January 31,
 
Actual
 
Pro Forma(1)
 
Pro Forma As Adjusted(2)(3)
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
Cash, cash equivalents, and short-term investments
$
58,158

 
$
58,158

 
$
157,458

Working capital
(1,234
)
 
(1,234
)
 
98,066

Total assets
116,604

 
116,604

 
215,904

Deferred revenue, current and non-current
57,281

 
57,281

 
57,281

Convertible preferred stock warrant liability
1,272

 

 

Convertible preferred stock
112,687

 

 

Total shareholders’ equity (deficit)
(80,741
)
 
33,218

 
132,518


(1)
The pro forma column reflects (a) the redesignation of our outstanding common stock as Class B common stock on April 9, 2018; (b) the automatic conversion of all outstanding shares of our convertible preferred stock as of January 31, 2018 into an aggregate of 68,479,732 shares of Class B common stock, which conversion will occur upon the completion of this offering; and (c) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, which conversion and reclassification will occur immediately prior to the completion of this offering, as if such conversion and reclassification had occurred on January 31, 2018.
(2)
The pro forma as adjusted column gives effect to (a) the pro forma adjustments set forth above; (b) the sale and issuance of 10,000,000 shares of our Class A common stock offered by us in this offering, based upon an assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses; and (c) the

15


automatic conversion of 1,632,950 shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling shareholders in this offering.
(3)
Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash, cash equivalents and short-term investments, working capital, total assets, and total shareholders’ equity by approximately $9.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of one million shares in the number of shares offered by us would increase or decrease, as applicable, our cash, cash equivalents and short-term investments, working capital, total assets, and total shareholders’ equity by approximately $10.2 million, assuming that the assumed initial public offering price of $11.00, which is the midpoint of the offering price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.
Key Business Metrics
We monitor the following key business metrics to help us measure our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Domain-based customers, defined as customers with a unique email domain name such as @cisco and @aramark, and average annualized contract values as of the periods presented were as follows:
 
As of January 31,
 
2016
 
2017
 
2018
Domain-based customers at period end
53,920

 
66,645

 
74,116

Average annualized contract value per domain-based customer
$
841

 
$
1,106

 
$
1,640

Our dollar-based net retention rates for all customers for the trailing 12 month periods were as follows:
 
Trailing 12 Months Ended
January 31,
 
2016
 
2017
 
2018
Dollar-based net retention rate for all customers
113
%
 
122
%
 
130
%
For additional information about our key business metrics, please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics.”


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RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our Class A common stock. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our Class A common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects.
Risks Related to Our Business and Industry
It is difficult to predict our future operating results.
Our ability to accurately forecast our future operating results is limited and subject to a number of uncertainties, including planning for and modeling future growth. We have encountered, and will continue to encounter, risks, and uncertainties frequently experienced by growing companies in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change due to industry or market developments, or if we do not address these risks successfully, our operating results could differ materially from our expectations and our business could suffer.
We have a history of cumulative losses and we cannot assure you that we will achieve profitability in the foreseeable future.
We have incurred losses in each period since we incorporated in 2005. We incurred net losses of $14.3 million in the year ended January 31, 2016, $15.2 million in the year ended January 31, 2017, and $49.1 million in the year ended January 31, 2018. As of January 31, 2018, we had an accumulated deficit of $106.6 million. These losses and accumulated deficit reflect the substantial investments we made to develop our platform and acquire new customers. We expect our operating expenses to increase in the future due to anticipated increases in sales and marketing expenses, research and development expenses, operations costs, and general and administrative costs, and therefore we expect our losses to continue for the foreseeable future. Furthermore, to the extent we are successful in increasing our customer base, we will also incur increased losses due to upfront costs associated with acquiring new customers, particularly as a result of the nature of subscription revenue, which is generally recognized ratably over the term of the subscription period. You should not consider our recent revenue growth as indicative of our future performance. Our revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our subscription solutions or professional services, reduced conversion from our free trial users to paid users, increasing competition, or our failure to capitalize on growth opportunities. Accordingly, we cannot assure you that we will achieve profitability in the foreseeable future, nor that, if we do become profitable, we will sustain profitability.
The market in which we participate is highly competitive, and if we do not compete effectively, our operating results could be harmed.
The market for collaborative work management platforms is fragmented, increasingly competitive, and subject to rapidly changing technology and evolving standards. Our competitors range in size from diversified global companies with significant research and development and marketing resources to smaller upstarts building on new technology platforms whose narrower offerings may allow them to be more efficient in deploying technical, marketing, and financial resources.
Certain of our features compete with current or potential products and services offered by Asana, Atlassian, Planview, and Workfront. We also face competition from Google and Microsoft, who offer a range of productivity solutions including spreadsheets and email that users have traditionally used for work management. While we currently collaborate with Microsoft and Google, they may develop and introduce products that directly or indirectly compete with our platform. As we look to sell access to our platform to potential customers with existing internal

17


solutions, we must convince their internal stakeholders that our platform is superior to the solutions that the organization has previously adopted and deployed. With the introduction of new technologies and market entrants, we expect competition to continue to intensify in the future.
Many of our current and potential competitors, particularly large software companies, have longer operating histories, greater name recognition, more established customer bases, and significantly greater financial, operating, technical, marketing, and other resources than we do. As a result, our competitors may be able to leverage their relationships with distribution partners and customers based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our platform, including by selling at zero or negative margins or using product bundling. Further, our competitors may respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. We could lose customers if our competitors introduce new collaborative work management products, add new features to their current product offerings, acquire competitive products, reduce prices, form strategic alliances with other companies, or are acquired by third parties with greater available resources. We may also face increasing competition if our competitors provide software and intellectual property for free. If our competitors’ products or services become more accepted than our platform, if they are successful in bringing their products or services to market sooner than ours, if their pricing is more competitive, or if their products or services are more technologically capable than ours, then our business, results of operations and financial condition may be harmed.
We depend on our co-location data centers and computing infrastructure operated by third parties and any service outages, delays or disruptions in these operations could harm our business and operating results.
We host our platform and serve our customers primarily from leased co-location data centers located in Chicago, Illinois, and Ashburn, Virginia and through public cloud service providers. While we control and have access to our servers and the components of our network that are located in our leased co-location data centers, we do not control the operation of these facilities. Public cloud service providers run their own platforms that we access, and we are, therefore, vulnerable to service interruptions, delays and outages. Our co-location data centers and public cloud service providers may experience events such as natural disasters, fires, power loss, telecommunications failures, and similar events. Our co-location data centers or those of our public cloud providers may also be subject to human or software errors, viruses, security attacks (internal and external), fraud, spikes in customer usage, denial of service issues, break-ins, sabotage, intentional acts of vandalism, malware, phishing attacks, acts of terrorism, and other misconduct. Further, we have experienced in the past, and expect that in the future we may experience, interruptions, delays and outages in service and availability from time to time with our public cloud service providers due to a variety of factors, including Internet connectivity failures, infrastructure changes, human or software errors, website hosting disruptions, and capacity constraints.
We may also be affected by problems relating to our co-location data center providers, such as financial difficulties and bankruptcy. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. The occurrence of any such events or other unanticipated problems at these co-location data centers or with our public cloud service providers could result in lengthy interruptions, delays, and outages in our service or cause us to not comply with customer needs or our business requirements.
Further, the owners of our co-location data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements with these providers on commercially reasonable terms, if our agreements with these providers are prematurely terminated for any reason, or if one of our co-location data center operators is acquired or ceases business, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.
Any errors, defects, disruptions or other performance problems with our platform could harm our reputation and may damage our customers’ businesses. Interruptions in our platform’s operation might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, cause customers to terminate their subscriptions, harm our renewal rates, and affect our reputation. Any of these events could harm our business and operating results.

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If our security measures are breached or unauthorized access to customer data or our data is otherwise obtained, our platform may be perceived as not being secure, customers may reduce or stop using our platform and we may incur significant liabilities.
Our services involve the storage, transmission, and processing of our customers’ sensitive and proprietary information, including business strategies, financial and operational data, personal or identifying information, and other related data. As a result, unauthorized access or use of this data could result in the loss, compromise, corruption, or destruction of our or our customers’ sensitive and proprietary information and lead to litigation, regulatory investigations and claims, indemnity obligations, and other liabilities. While we have security measures in place designed to protect the integrity of customer information and prevent data loss, misappropriation, and other security breaches and incidents, our platform is subject to ongoing threats. We have been subject to phishing attacks in the past, and may be subject to cyber-attacks, phishing attacks, malicious software programs, and other attacks in the future. These attacks may come from individual hackers, criminal groups, and state-sponsored organizations. In addition to these threats, the security, integrity, and availability of our and our customers’ data could be compromised by employee negligence, error or malfeasance, and product defects. If any of these threats circumvented our or our service providers’ security measures, they could result in unauthorized access to, misuse, disclosure, loss or destruction of our customers’ or our data, including sensitive and personal information, or could otherwise disrupt our or our customers’ business operations, which could lead to litigation, damage to our reputation, and could cause us to incur significant liabilities, including fines, penalties and other damages. Even the perception of inadequate security may damage our reputation and negatively impact our ability to win new customers and retain existing customers. Further, we could be required to expend significant capital and other resources to address any data security incident or breach.
We engage third-party vendors and service providers to store and otherwise process some of our and our customers’ data, including sensitive and personal information. Our vendors and service providers may also be the targets of cyberattacks, malicious software, phishing schemes, and fraud. Our ability to monitor our vendors and service providers’ data security is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized access to, misuse, disclosure, loss, or destruction of our and our customers’ data, including sensitive and personal information.
Techniques used to sabotage or obtain unauthorized access to systems or networks are constantly evolving and, in some instances, are not identified until launched against a target. We and our service providers may be unable to anticipate these techniques, react in a timely manner, or implement adequate preventative measures.
Further, we cannot assure that any limitations of liability provisions in our customer and user agreements or other contracts would be enforceable or adequate, or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover claims related to a security incident or breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
If we are unable to attract new customers and expand sales to existing customers, our growth could be slower than we expect and our business may be harmed.
Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenue in the future will depend, in large part, upon the effectiveness of our marketing efforts, both domestically and internationally, and our ability to predict customer demands and attract new customers. This may be particularly challenging where an organization is reluctant to try a cloud-based collaborative work management platform or has already invested significantly in an existing solution. If we fail to predict customer demands or attract new customers and maintain and expand those customer relationships, our revenue and business may be harmed.
Our future growth also depends upon expanding sales of our platform to, and renewing subscriptions with, existing customers and their organizations. In order for us to improve our operating results, it is important that our

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existing customers use our platform across their organization through new use cases and teams and purchase more subscriptions to our platform and our other premium solutions such as Connectors and Control Center. If our existing customers do not expand their use of our platform through their organization and purchase additional subscriptions or premium solutions, our revenue may grow more slowly than expected, may not grow at all, or may decline.
Additionally, increasing upsell to enterprise customers requires increasingly sophisticated and costly sales efforts targeted at senior management. There can be no assurance that our efforts would result in increased sales to existing customers or upsells, and additional revenue. If our efforts to upsell to our customers are not successful, our business would suffer. Moreover, many of our subscriptions are sold for a one-year term. While many of our subscriptions provide for automatic renewal, our customers have no obligation to renew their subscription after the expiration of the term and we cannot assure you that our customers will renew subscriptions with a similar contract period or the same or greater number of users. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our platform or services, our pricing or pricing structure, the pricing or capabilities of the products and services offered by our competitors, the effects of economic conditions, or reductions in our customers’ spending levels. If our customers do not renew their agreements with us, or renew on terms less favorable to us, our revenue may decline.
We have recently experienced rapid growth and expect our growth to continue. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and operational controls, or adequately address competitive challenges.
We have recently experienced a period of rapid growth in our employee headcount and operations. For example, we grew from 274 employees to 787 employees from January 31, 2016 to January 31, 2018. Further, we opened our Boston office in 2017, our first office outside of our headquarters in Bellevue, Washington, which has grown to over 100 employees. In addition, we have recently hired new senior members of management. We anticipate that we will continue to expand our operations and employee headcount in the near term. This growth has made our operations more complex and has placed, and future growth will place, a significant strain on our management, administrative, operational, and financial infrastructure. Our success will depend in part on our ability to manage this growth and complexity effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Failure to effectively manage growth or complexity could result in difficulties growing and maintaining our customer base, cost increases, inefficient and ineffective responses to customer needs, delays in developing and deploying new features, integrations or services, or other operational difficulties. Any of these difficulties could harm our business and operating results.
Our growth depends on being able to expand our sales force.
In order to increase our revenue and achieve profitability, we must increase the size of our sales force, both in the United States and internationally, to generate additional revenue from new and existing customers. We intend to further increase our number of sales personnel. We do not currently have dedicated sales personnel for international sales, and we may not be successful in expanding our sales and marketing operations outside of the United States.
We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take considerable time before they achieve full productivity, particularly in new sales territories. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow, a large percentage of our sales force may be new to our company and our platform, which may adversely affect our sales if we cannot train our sales force quickly or effectively. Attrition rates may increase and we may face integration challenges as we continue to seek to expand our sales force. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business could be adversely affected.

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Our quarterly operating results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly operating results, including the levels of our revenue, billings, gross margin, profitability, cash flow, and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuations in quarterly operating results may reduce the value of our Class A common stock. Factors that may cause fluctuations in our quarterly results include, but are not limited to:
our ability to attract new customers, including internationally;
the addition or loss of large customers, including through acquisitions or consolidations;
the mix of customers obtained through self-service on our website and sales-assisted channels;
customer renewal rates and the extent to which customers subscribe for additional users and products;
the timing and growth of our business, in particular through our hiring of new employees and international expansion;
our ability to hire, train, and maintain our sales force;
the length of the sales cycle;
the timing of recognition of revenue;
the amount and timing of operating expenses;
changes in our pricing policies or offerings or those of our competitors;
the timing and success of new product and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation or new entrants among competitors, customers or strategic partners;
customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;
timing and effectiveness of new sales and marketing initiatives;
the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies;
network or service outages, Internet disruptions, security breaches or perceived security breaches, and the costs associated with responding to and addressing such failures or breaches;
changes in laws and regulations that affect our business, and any lawsuits or other proceedings involving us or our competitors;
changes in foreign currency exchange rates or adding additional currencies in which our sales are denominated; and
general economic, industry, and market conditions.
We derive substantially all of our revenue from a single offering.
We currently derive and expect to continue to derive substantially all of our revenue from our cloud-based collaborative work management platform. As such, the continued growth in market demand for our platform is

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critical to our continued success. Demand for our platform is affected by a number of factors, including continued market acceptance, the timing of development and release of competing products and services, price or product changes by us or by our competitors, technological change, growth or contraction in the markets we serve, and general economic conditions and trends. In addition, some current and potential customers, particularly large organizations, may develop or acquire their own internal collaborative work management tools or continue to rely on traditional tools that would reduce or eliminate the demand for our platform. If demand for our platform declines for any of these or other reasons, our business could be adversely affected.
As a substantial portion of our sales efforts are targeted at enterprise customers, our sales cycle may become longer and more expensive, we may encounter implementation and customization challenges, and we may have to delay revenue recognition for more complicated transactions, all of which could harm our business and operating results.
Our ability to increase revenue and achieve and maintain profitability depends, in large part, on widespread acceptance of our platform by large businesses and other organizations. In addition, to achieve acceptance of our platform by enterprise customers, we will need to engage with senior management as well and not just gain acceptance of our platform from knowledge workers, who are often the initial adopters of our platform. As a result, sales efforts targeted at enterprise customers involve greater costs, longer sales cycles, greater competition, and less predictability in completing some of our sales. In the large enterprise market, the customer’s decision to use our platform and services can sometimes be an enterprise-wide decision, in which case, we will likely be required to provide greater levels of customer education to familiarize potential customers with the use and benefits of our platforms and services, as well as training and support. In addition, larger enterprises may demand more customization, integration and support services, and features. As a result of these factors, these sales opportunities may require us to devote greater sales support, research and development, customer support, and professional services resources to these customers, resulting in increased costs, lengthened sales cycle, and diversion of our own sales and professional services resources to a smaller number of larger customers. Moreover, these larger transactions may require us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.
If our platform fails to perform properly, or if we are unable to scale our platform to meet the needs of our customers, our reputation could be harmed, our market share could decline and we could be subject to liability claims.
Our platform is inherently complex and may contain material defects or errors. Any defects in functionality or interruptions in the availability of our platform, as well as user error, could result in:
loss or delayed market acceptance and sales;
breach of contract or warranty claims;
issuance of sales credits or refunds for prepaid amounts related to unused subscription fees for our platform;
termination of subscription agreements and loss of customers;
diversion of development and customer service resources; and
harm to our reputation.
The costs incurred in correcting any material defects or errors might be substantial and could harm our operating results.
Because of the large amount of data that we collect and manage, it is possible that hardware failures, errors in our systems, user errors, or Internet outages could result in data loss or corruption that our customers regard as significant. Furthermore, the availability and performance of our platform and services could be diminished by a number of factors, including customers’ inability to access the Internet, the failure of our network or software systems, security breaches, or variability in user traffic for our platform. For instance, in

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December 2017, researchers identified significant CPU architecture vulnerabilities commonly known as “Spectre” and “Meltdown” that have required and continue to require us and providers of public cloud services to install software updates and patches to mitigate such vulnerabilities, sometimes causing servers to be offline or experience slowed performance. We may be required to issue credits or refunds for prepaid amounts related to unused fees or otherwise be liable to our customers for damages they may incur resulting from certain of these events. If a service provider fails to provide sufficient capacity to support our platform or otherwise experiences service failures, such failure could interrupt our customers’ access to our platform, damage their perception of our applications’ reliability, and reduce our revenue. In addition to potential liability, if we experience interruptions in the availability of our platform, our reputation could be harmed and we could lose customers.
Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.
Furthermore, we will need to ensure that our platform can scale to meet the evolving needs of our customers, particularly as we continue to focus on larger enterprise customers. We regularly monitor and update our platform to fix errors, add functionality, and improve scaling. Our customers have occasionally experienced latency issues during peak usage periods. If we are not able to provide our platform at the scale required by our customers and correct any platform functionality defects, potential customers may not adopt our platform and existing customers may not renew their agreements with us.
If we fail to manage our technical operations infrastructure, or experience service outages, interruptions, or delays in the deployment of our platform, we may be subject to liabilities and operating results may be harmed.
We have experienced significant growth in the number of users, projects, and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers and collaborators, as well as our own needs, and to ensure that our platform is accessible within an acceptable load time. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters, and the evolution of our platform. However, the provision of new hosting infrastructure requires significant lead-time. If we do not accurately predict our infrastructure requirements, if our existing providers are unable to keep up with our needs for capacity, if they are unwilling or unable to allocate sufficient capacity to us, or if we are unable to contract with additional providers on commercially reasonable terms, our customers may experience service interruptions, delays, or outages that may subject us to financial penalties, cause us to issue credits to customers, or result in other liabilities and customer losses. If our operations infrastructure fails to scale, customers may experience delays as we seek to obtain additional capacity, which could damage our reputation and our business. We may also be required to move or transfer our and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, and passion that we believe contribute to our success, and our business may be harmed.
We believe that a critical component of our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, including geographically expanding our presence outside of the greater Seattle area, and developing the infrastructure associated with being a public company, we will need to maintain our corporate culture among a larger number of employees dispersed in various geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
The loss of one or more of our key personnel, or our failure to attract, integrate, and retain other highly qualified personnel, could harm our business.
Our success depends largely upon the continued service of our senior management team, which provides leadership and contributions in the areas of product development, operations, security, marketing, sales, customer support, and general and administrative functions. From time to time, there may be changes in our senior

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management team resulting from the hiring or departure of executives, which could disrupt our business. Several members of our senior management team, including our Chief Financial Officer, Senior Vice President of Product, Senior Vice President of Worldwide Field Operations and General Counsel were hired between 2016 and 2018.
We do not have employment agreements other than offer letters with any employee, including our senior management team, and we do not maintain key person life insurance for any employee. The loss of one or more members of our senior management team, especially our Chief Executive Officer, Mark P. Mader, or other key employees may be disruptive to our business.
In addition, our growth strategy also depends on our ability to expand our organization with highly skilled personnel. Identifying, recruiting, training, and integrating qualified individuals will require significant time, expense, and attention. In addition to hiring new employees, we must continue to focus on retaining our best employees. Competition for highly skilled personnel is intense. We compete with many other companies for software developers with high levels of experience in designing, developing, and managing cloud-based software, as well as for skilled product development, marketing, sales, and operations professionals, and we may not be successful in attracting and retaining the professionals we need, particularly in the greater Seattle area, where our headquarters is located. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. In addition, certain domestic immigration laws restrict or limit our ability to recruit internationally. Any changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to recruit and retain highly qualified employees.
Additionally, many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees, alone or with our inducement, have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived or actual value of our equity awards declines, it may reduce our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.
If we do not keep pace with technological changes, our platform may become less competitive and our business may suffer.
Our industry is marked by rapid technological developments and innovations, and evolving industry standards. If we are unable to provide enhancements and new features and integrations for our existing platform, develop new products that achieve market acceptance, or innovate quickly enough to keep pace with rapid technological developments, our business could be harmed.
In addition, because our platform is designed to operate on a variety of systems, we will need to continuously modify, enhance, and improve our platform to keep pace with changes in Internet-related hardware, mobile operating systems such as iOS and Android, and other software, communication, browser, and database technologies. We may not be successful in either developing these modifications, enhancements, and improvements or in bringing them to market quickly or cost-effectively in response to market demands. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our products to keep pace with technological changes or operate effectively with future network platforms and technologies, or to do so in a timely and cost-effective manner, could reduce the demand for our platform, result in customer dissatisfaction, and reduce our competitive advantage and harm our business.
Failure to establish and maintain relationships with partners that can provide complementary technology offerings and software integrations could limit our ability to grow our business.
Our growth strategy includes expanding the use of our platform through complementary technology offerings and software integrations, such as third-party application programming interfaces, or APIs. While we have begun to establish relationships with providers of complementary technology offerings and software integrations, we cannot assure you that we will be successful in establishing or maintaining relationships with these providers. Third-party

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providers of complementary technology offerings and software integrations may decline to enter into, or may later terminate, relationships with us, change their features or platforms, restrict our access to their applications and platforms, or alter the terms governing use of and access to their applications and APIs in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party technology offerings and software integrations with our platform, which could negatively impact our offerings and harm our business.
Further, if we fail to integrate our platform with new third-party applications and platforms that our customers use, or to adapt to the data transfer requirements of such third-party applications and platforms, we may not be able to offer the functionality that our customers need, which would negatively impact our offerings and, as a result, could negatively affect our business, results of operations, and financial condition. In addition, we may benefit from these partners’ brand recognition, reputations, referrals, and customer bases. Any losses or shifts in the referrals from or the market positions of these partners generally, in relation to one another or to new competitors or technologies, could lead to losses in our relationships or customers, or a need to identify or transition to alternative channels for marketing our platform.
Our business depends on a strong brand, and if we are not able to develop, maintain and enhance our brand, our business and operating results may be harmed.
We believe that developing, maintaining, and enhancing our brand is critical to achieving widespread acceptance of our platform, attracting new customers, retaining existing customers, persuading existing customers to adopt additional features and services and expand their number of users, and hiring and retaining employees. We believe that the importance of our brand will increase as competition in our market further intensifies. Successful promotion of our brand will depend on a number of factors, including, the effectiveness of our marketing efforts; our ability to provide a high-quality, reliable and cost-effective platform; the perceived value of our platform; and our ability to provide quality customer success experience.
Brand promotion activities require us to make substantial expenditures. To date, we have not made significant investments in the promotion of our brand and our ability to successfully promote our brand is uncertain. However, we anticipate that our expenditures on brand promotion will increase as our market expands and becomes more competitive. The promotion of our brand, however, may not generate customer awareness or increase revenue, and any increase in revenue may not offset the expenses we incur in building and maintaining our brand. We also rely on our customer base and community of collaborators and customers in a variety of ways, including for feedback on our platform and services. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform, which could harm our business and operating results.
Our limited history with subscription and pricing models make it difficult to accurately predict optimal pricing necessary to attract new customers and retain existing customers.
We have limited experience with respect to determining the optimal prices for our platform and services and, as a result, we have in the past, and expect in the future, that we will need to change our pricing model from time to time. As the market for our platform and services matures, or as competitors introduce new products or platforms that compete with ours, and as we expand into international markets, we may be unable to attract and retain customers at the same price or based on the same pricing models as we have used historically, if at all, and some of our competitors may offer their products at a lower price. Pricing decisions may also affect the mix of adoption among our subscription plans and reduce our overall revenue. Moreover, larger enterprises may demand substantial price concessions. As a result, in the future we may be required to reduce our prices, which could harm our operating results.
Because we recognize revenue from subscriptions and support services over the term of the relevant service period, downturns or upturns in new sales or renewals may not be immediately reflected in our results of operations and may be difficult to discern.
We recognize subscription revenue from customers ratably over the terms of their subscription agreements, which are typically one year. As a result, most of the subscription revenue we report in each quarter is derived from

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the recognition of unearned revenue relating to subscriptions entered into during previous quarters. A decline in new or renewed subscriptions in any single quarter will likely only have a minor effect on our revenue for that quarter, and such a decline will reduce our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform, and potential changes in our pricing policies or customer retention rates, may not be fully reflected in our operating results until future periods. We may be unable to adjust our cost structure to reflect the changes in revenue. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new customers is recognized over the applicable subscription term. In addition, a significant majority of our costs are expensed as incurred, while subscription revenue is recognized over the life of the subscription period. Growth in the number of our customers could result in our recognition of more costs than revenue in the earlier periods of our customer agreements.
We may not receive significant revenue from our current development efforts for several years, if at all.
Developing our platform is expensive and the investment in such technological development often involves a long return on investment cycle. We invested $12.9 million, $19.6 million, and $37.6 million in the years ended January 31, 2016, 2017 and 2018, respectively, in research and development. We have made and expect to continue to make significant investments in development and related opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate significant resources to our development efforts to maintain and improve our competitive position. However, we may not receive significant revenue from these investments for several years, if at all.
We provide service level commitments under our subscription agreements. If we fail to meet these contractual commitments, we could be obligated to provide credits for future service, or face contract termination with refunds of prepaid amounts, which could lower our revenue and harm our business, results of operations, and financial condition.
Certain of our customer agreements contain service level commitments. If we are unable to meet the stated service level commitments, including failure to meet the uptime requirements under our customer agreements, we may be contractually obligated to provide these affected customers with service credits which could significantly affect our revenue in the period in which the uptime failure occurs and the credits could be due. We could also face subscription terminations, which could significantly affect both our current and future revenue. Any service level failures could also damage our reputation, which would also affect our future revenue and operating results.
If we fail to offer high-quality customer support, our business and reputation may be harmed.
Our customers rely on our customer support organization to resolve issues with their use of our platform and to respond to customer inquiries relating to our platform. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenue, could increase costs and harm our operating results. In addition, our sales process is highly dependent on the ease of use of our platform, our business reputation, and positive recommendations from our existing customers. Any failure to maintain a high-quality customer success and support organization, or a market perception that we do not maintain high-quality customer support, could harm our reputation, our ability to sell to existing and prospective customers, and our business.
The loss of one or more of our key customers, or a failure to renew our subscription agreements with one or more of our key customers, could negatively affect our ability to market our platform.
We rely on our reputation and recommendations from key customers in order to promote subscriptions to our platform. The loss of, or failure to renew by, any of our key customers could have a significant effect on our revenue, reputation, and our ability to obtain new customers. In addition, acquisitions of our customers could lead to cancellation of such customers’ contracts, thereby reducing the number of our existing and potential customers.

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Our platform uses third-party software and services that may be difficult to replace or cause errors or failures of our platform that could lead to a loss of customers or harm to our reputation and our operating results.
We license third-party software and depend on services from various third parties for use in our platform. In the future, this software or these services may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of the software or services could result in decreased functionality of our platform until equivalent technology is either developed by us or, if available from another provider, is identified, obtained, and integrated, which could harm our business. In addition, any errors or defects in or failures of the third-party software or services could result in errors or defects in our platform or cause our platform to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects, or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software and service providers and to obtain software and services from such providers that do not contain errors or defects. Any failure to do so could adversely impact our ability to deliver our platform to our customers and could harm our operating results.
Our use of “open source” software could negatively affect our ability to offer and sell access to our platform and subject us to possible litigation.
We use open source software in our platform and expect to continue to use open source software in the future. There are uncertainties regarding the proper interpretation of and compliance with open source licenses, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to use such open source software, and consequently to provide or distribute our platform. Additionally, we may from time to time face claims from third parties claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works, or our proprietary source code that was developed using such software. These claims could also result in litigation and could require us to make our software source code freely available, require us to devote additional research and development resources to change our platform, or incur additional costs and expenses, any of which could result in reputational harm and would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our platform or incur additional costs to comply with the changed license terms or to replace the affected open source software. Further, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Although we have implemented policies to regulate the use and incorporation of open source software into our platform, we cannot be certain that we have not incorporated open source software in our platform in a manner that is inconsistent with such policies.
Our long-term growth depends in part on being able to expand internationally on a profitable basis.
Historically, we have generated a substantial majority of our revenue from customers in the United States. We have begun to expand internationally and plan to continue to expand our international operations as part of our growth strategy. There are certain risks inherent in conducting international business, including:
fluctuations in foreign currency exchange rates or adding additional currencies in which our sales are denominated;
new, or changes in, regulatory requirements;
tariffs, export and import restrictions, restrictions on foreign investments, sanctions, and other trade barriers or protection measures;
costs of localizing our platform and services;
lack of or delayed acceptance of localized versions of our platform and services;
difficulties in and costs of staffing, managing, and operating our international operations;

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tax issues, including restrictions on repatriating earnings, and with respect to our corporate operating structure and intercompany arrangements;
weaker intellectual property protection;
the difficulty of, and burden and expense involved with, compliance with privacy, data protection, and information security laws, such as the European Union Data Protection Directive, or the Data Protection Directive, and the General Data Protection Regulation, or the GDPR, which will supersede the Data Protection Directive in May 2018;
economic weakness or currency related crises;
the burden of complying with a wide variety of laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, the U.K. Bribery Act 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell access to our platform in certain foreign markets, and the risks and costs of non-compliance;
generally longer payment cycles and greater difficulty in collecting accounts receivable;
our ability to adapt to sales practices and customer requirements in different cultures;
political instability and security risks in the countries where we are doing business; and
our ability to maintain our relationship with resellers to distribute our platform internationally.
Any of these risks could adversely affect our business. For example, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In addition, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or applicable U.S. laws and regulations. As we grow, we continue to implement compliance procedures designed to prevent violations of these laws and regulations. There can be no assurance that all of our employees, contractors, resellers, and agents will comply with the formal policies we will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees, contractors, resellers, or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the import or export of our software and services, and could have a material adverse effect on our business and results of operations.
Further, our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully, or in a timely manner, our business and results of operations will suffer.
The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecasts in this prospectus, including the size and expected growth in the addressable market for collaborative work management platforms, may prove to be inaccurate. Even if these markets experience the forecasted growth described in this prospectus, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

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Changes in privacy laws, regulations, and standards may reduce the effectiveness of our platform and harm our business.
Our customers can use our platform to collect, use, share, and store personal or identifying information. National and local governments and agencies in the countries in which we and our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage, processing and disclosure of personal or identifying information obtained from consumers and other individuals, which could reduce our ability to offer our platform and services in certain jurisdictions or our customers’ ability to deploy our platform globally. Privacy-related laws and regulations can vary significantly from jurisdiction to jurisdiction and are particularly stringent in Europe. The costs of compliance with, and other burdens imposed by privacy laws, regulations, standards, and other obligations, may limit the use and adoption of our platform; reduce overall demand for our platform; lead to regulatory investigations, litigation, and significant fines, penalties, or liabilities for actual or alleged noncompliance; or slow the pace at which we close sales transactions, any of which could harm our business. Moreover, if we or any of our employees fail to adhere to adequate data protection practices around the usage of our customers’ personal data, it may damage our reputation and brand.
For example, in the United States, protected health information is subject to the Health Insurance Portability and Accountability Act, or HIPAA. HIPAA has been supplemented by the Health Information Technology for Economic and Clinical Health Act with the result of increased civil and criminal penalties for noncompliance. Under HIPAA, entities performing certain functions and creating, receiving, maintaining, or transmitting protected health information provided by covered entities and other business associates are directly subject to HIPAA. Since we, at times, process protected health information through our platform for certain customers, we are obligated to comply with certain privacy rules and data security requirements under HIPAA. Any systems failure or security breach that results in the release of, or unauthorized access to, personal data, or any failure or perceived failure by us to comply with our privacy policies or any applicable laws or regulations relating to privacy or data protection, could result in proceedings against us by governmental entities or others. Such proceedings could result in the imposition of sanctions, fines, penalties, liabilities, or governmental orders requiring that we change our data practices, any of which could harm our business, operating results, and financial condition.
Additionally, privacy laws, regulations, standards, and other obligations may be interpreted in new and differing manners in the future, may be inconsistent among jurisdictions, and we expect these obligations to continue to evolve significantly. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance, penalties for non-compliance, and limitations on data collection, use, disclosure, and transfer for us and our customers. The European Union, or EU, and the United States agreed in 2016 to a framework for data transferred from the EU to the United States, called the Privacy Shield, but this framework has been challenged by private parties and may face additional challenges by national regulators or additional private parties. Additionally, in 2016 the EU adopted the General Data Protection Regulation, or GDPR, a new regulation governing data privacy, which will become effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to 4% of worldwide revenue.
The costs of compliance with, and other burdens imposed by, privacy, data protection, and information security-related laws and regulations that are applicable to the businesses of our customers may reduce our or our customers’ ability and willingness to process, handle, store, use, and transmit certain types of information, such as demographic and other personal information, which could limit the use, effectiveness, and adoption of our platform and reduce overall demand for our platform. If we or our customers are unable to transfer data between and among countries and regions in which we operate, it could decrease demand for our platform, require us to modify or restrict our business operations, and impair our ability to maintain and grow our customer base and increase our revenue. Further, any changes we consider necessary or appropriate for compliance with privacy-related laws, regulations, standards, or other obligations, may not be able to be made in a commercially reasonable manner, in a timely fashion, or at all. Even the perception of privacy concerns, whether or not valid, may inhibit the adoption, effectiveness or use of our platform.
In addition to government regulation, privacy advocates and industry groups may establish or propose various new, additional, or different self-regulatory standards that may place additional burdens on us. Further, our

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customers may expect us to comply with more stringent privacy and data security requirements. If we are unable to meet any of these standards, it could reduce demand for our platform and harm our business.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our platform and could have a negative impact on our business.
U.S. federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations relating to Internet usage. The adoption of any laws or regulations that could reduce the growth, popularity, or use of the Internet, including laws or practices limiting Internet neutrality, could decrease the demand for, or the usage of, our platform and services, increase our cost of doing business, and harm our operating results. Changes in these laws or regulations could also require us to modify our platform in order to comply with these laws or regulations. In addition, government agencies or private organizations may begin to impose taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications, or reduce demand for Internet-based services and platforms such as ours.
We use email as part of our platform for communication and workflow management. Government regulations and evolving practices regarding the use of email could restrict our use of email. We also depend on the ability of Internet service providers, or ISPs, to prevent unsolicited bulk email, or “spam,” from overwhelming users’ inboxes. ISPs continually develop new technologies to filter messages deemed to be unwanted before they reach users’ inboxes, which may interfere with the functionalities of our platform. Any restrictions on our use of email would reduce user adoption of our platform and harm our business.
In addition, the use of the Internet and, in particular, the cloud-based solutions could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet has been adversely affected by “viruses,” “worms,” and similar malicious programs; businesses have experienced a variety of outages and other delays as a result of damage to Internet infrastructure. These issues could diminish the overall attractiveness of, and demand for, our platform.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in part upon our intellectual property. Unauthorized use of our intellectual property or a violation of our intellectual property rights by third parties may damage our brand and our reputation. As of January 31, 2018, we had nine issued patents in the United States that expire between 2019 and 2034, three issued patents internationally, as well as seven pending patent applications in the United States. In addition, we primarily rely on a combination of copyright, trade secret and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively protect every significant feature of our products. In addition, we believe that the protection of our trademark rights in an important factor in product recognition, protecting our brand, and maintaining goodwill. If we do not adequately protect our rights in our trademarks from infringement and unauthorized use, any goodwill that we have developed in those trademarks could be lost or impaired, which could harm our brand and our business.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Our failure to secure, protect, and enforce our intellectual property rights could seriously damage our brand and our business.

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We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends on not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities, including non-practicing entities, and individuals, may own or claim to own intellectual property relating to our industry. From time to time, our competitors or other third parties may claim that we are infringing upon or misappropriating their intellectual property rights, and we may be found to be infringing upon such rights. In addition, we cannot assure you that actions by other third parties alleging infringement by us of third-party patents will not be asserted or prosecuted against us. In the future, others may claim that our platform and its underlying technology infringe or violate their intellectual property rights, even if we are unaware of the intellectual property rights that others may claim cover some or all of our technology, platform, or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our platform or services or using certain technologies, implement expensive work-arounds, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation, and to obtain licenses, modify our platform or services, or refund fees, which could be costly. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty or license fees, modification of our products, or refunds to customers. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business operations. During the course of any litigation, we may make announcements regarding the results of hearings and motions, and other interim developments. If securities analysts and investors regard these announcements as negative, the market price of our Class A common stock may decline.
The requirements of being a public company, including maintaining adequate internal control over our financial and management systems, may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.
As a public company we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act, the rules subsequently implemented by the U.S. Securities and Exchange Commission, or SEC, the rules and regulations of the listing standards of the New York Stock Exchange, and other applicable securities rules and regulations. Compliance with these rules and regulations will likely strain our financial and management systems, internal controls, and employees.
The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. Moreover, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures, and internal control, over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures, and internal control over, financial reporting to meet this standard, significant resources and management oversight may be required. If we have material weaknesses or deficiencies in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. Effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud.
In addition, we will be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act when we cease to be an emerging growth company. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations, and financial condition. Although we have already hired additional employees to assist us in complying with these requirements, our finance team is small and we may need to hire more employees in the future, or engage outside consultants, which will increase our operating expenses.

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We also expect that being a public company and complying with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain and maintain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers.
We have identified a material weakness in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.
In connection with the audit of our consolidated financial statements for the year ended January 31, 2017, our independent registered public accounting firm noted in its reports to our audit committee that there were a number of audit adjustments to our consolidated financial statements for the period under audit. We identified that the cause of the audit adjustments was a lack of qualified accounting and financial reporting personnel with an appropriate level of experience. Given that during the year ended January 31, 2017, we did not retain a sufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge, we determined that this control deficiency constituted a material weakness in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. This deficiency could result in additional misstatements to our consolidated financial statements that would be material and would not be prevented or detected on a timely basis.
During fiscal year ended January 31, 2018, we added personnel as well as implemented new financial systems and processes. We intend to continue to take steps to remediate the material weakness described above through hiring additional qualified accounting and financial reporting personnel, and further evolving our accounting processes. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time. Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to the New York Stock Exchange listing requirements, investors may lose confidence in our financial reporting, and our share price may decline as a result.
We may be subject to litigation for a variety of claims, which could adversely affect our results of operations, harm our reputation or otherwise negatively impact our business.
From time to time, we may be involved in disputes or regulatory inquiries that arise in the ordinary course of business. These may include claims, lawsuits, and proceedings involving labor and employment, wage and hour, commercial, alleged securities law violations or other investor claims, and other matters. We expect that the number and significance of these potential disputes may increase as our business expands and our company grows larger. While our agreements with customers limit our liability for damages arising from our platform, we cannot assure you that these contractual provisions will protect us from liability for damages in the event we are sued. Although we carry general liability insurance coverage, our insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, financial condition, results of operations, and prospects.

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We intend to evaluate acquisitions or investments in third-party technologies and businesses, but we may not realize the anticipated benefits from, and may have to pay substantial costs related to, any acquisitions, mergers, joint ventures, or investments that we undertake.
As part of our business strategy, we continually evaluate acquisitions of, or investments in, a wide array of potential strategic opportunities, including third-party technologies and businesses. For instance, in December 2017, we completed our acquisition of Converse.AI, Inc., a company that provides intelligent natural language bots to support business process automation. We may be unable to identify suitable acquisition candidates in the future or to make these acquisitions on a commercially reasonable basis, or at all. Any transactions that we enter into could be material to our financial condition and results of operations. Such acquisitions may not result in the intended benefits to our business, and we may not successfully evaluate or utilize the acquired technology, offerings, or personnel, or accurately forecast the financial effect of an acquisition transaction. The process of integrating an acquired company, business, technology, or personnel into our own company is subject to various risks and challenges, including:
diverting management time and focus from operating our business to acquisition integration;
disrupting our respective ongoing business operations;
customer and industry acceptance of the acquired company’s offerings;
our ability to implement or remediate the controls, procedures, and policies of the acquired company;
our ability to integrate acquired technologies in our own platform and technologies;
retaining and integrating acquired employees;
failing to maintain important business relationships and contracts;
failure to realize any anticipated synergies;
using cash that we may need in the future to operate our business or incurring debt on terms unfavorable to us or that we are unable to pay;
liability for activities of the acquired company before the acquisition;
litigation or other claims arising in connection with the acquired company;
impairment charges associated with goodwill and other acquired intangible assets; and
other unforeseen operating difficulties and expenditures.
Our limited experience acquiring companies increases these risks. Our failure to address these risks or other problems we encounter with our future acquisitions and investments could cause us to not realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business.
Our reported financial results may be harmed by changes in the accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. For example, in May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), for which certain elements affected our accounting for revenue and costs incurred to acquire contracts. We have adopted Topic 606 using the full retrospective transition method. Other companies in our industry may apply these accounting principles differently than we do, adversely affecting the comparability of our

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consolidated financial statements. See Note 2 to our accompanying consolidated financial statements for information about Topic 606.
We could be subject to additional sales tax or other tax liabilities.
States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our platform in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. Additionally, we do not collect such transaction taxes in all jurisdictions in which we have sales, based on our understanding that such taxes are not applicable or an exemption from such taxes applies. If we become subject to sales tax audits in these jurisdictions and a successful assertion is made that we should be collecting sales taxes where we have not historically done so it could result in substantial tax liabilities for past sales, discourage customers from purchasing our products or otherwise harm our business, results of operations and financial condition.
Further, an increasing number of states and foreign jurisdictions have considered or adopted laws or administrative practices, with or without notice, that impose new taxes on all or a portion of gross revenue or other similar amounts or impose additional obligations on remote sellers to collect transaction taxes such as sales, consumption, value added, or similar taxes. If new laws are adopted in a jurisdiction where we do not collect such taxes, we may not have sufficient lead time to build systems and processes to collect these taxes. Failure to comply with such laws or administrative practices, or a successful assertion by such states or foreign jurisdictions requiring us to collect taxes where we do not, could result in substantial tax liabilities, including for past sales, as well as penalties and interest. In addition, if the tax authorities in jurisdictions where we are already subject to sales tax or other indirect tax obligations were successfully to challenge our positions, our tax liability could increase substantially.
Our ability to use our net operating loss to offset future taxable income may be subject to certain limitations.
As of January 31, 2018, we had U.S. federal net operating loss carryforwards, or NOLs, of approximately $43.3 million due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes and in addition, may become subject to limitations in connection with this offering. Future changes in our stock ownership, the causes of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs may also be impaired under state laws. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.
Changes in tax laws or regulations could be enacted or existing tax laws or regulations could be applied to us or our customers in a manner that could increase the costs of our platform and services and harm our business.
Income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted or amended at any time, possibly with retroactive effect, and could be applied solely or disproportionately to products and services provided over the Internet. These enactments or amendments could reduce our sales activity due to the inherent cost increase the taxes would represent and ultimately harm our operating results and cash flows.
Additionally, any changes to or the reform of current U.S. tax laws that may be enacted in the future could impact the tax treatment of our foreign earnings. We currently have no accumulated foreign earnings; however, this could change on a go-forward basis because of the early stage of our international operations. In addition, due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

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The application of U.S. federal, state, local and international tax laws to services provided electronically is unclear and continuously evolving. Existing tax laws, statutes, rules, regulations, or ordinances could be interpreted or applied adversely to us, possibly with retroactive effect, which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties, as well as interest for past amounts. If we are unsuccessful in collecting such taxes due from our customers, we could be held liable for such costs, thereby adversely affecting our operating results and harm our business.
Further, the Tax Cuts and Jobs Act, or TCJA, was recently enacted into law, bringing about a wide variety of potential changes to the U.S. tax system, particularly at the corporate level. Although the TCJA includes a provision for lower corporate income tax rates, these rate reductions could be offset by other changes intended to broaden the tax base, for example, by limiting the ability to deduct interest expense and net operating losses. We continue to examine the impact the TCJA may have on our business and financial results.
We may face exposure to foreign currency exchange rate fluctuations.
While we have historically transacted in U.S. dollars with the majority of our customers and vendors, we have transacted in some foreign currencies and may transact in more foreign currencies in the future. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our revenue and operating results due to transactional and translational remeasurement that is reflected in our earnings. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and operating results. In addition, to the extent that fluctuations in currency exchange rates cause our operating results to differ from our expectations or the expectations of our investors, the trading price of our Class A common stock could be lowered. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
Failure to comply with anti-corruption and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010, and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit companies and their employees and third-party intermediaries from promising, authorizing, offering, or providing, directly or indirectly, improper payments or anything of value to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations.
In addition, we use various third parties to sell access to our platform and conduct our business abroad. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, and our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We have implemented an anti-corruption compliance program but cannot assure you that all our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Any violation of the FCPA, other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have a materially adverse effect on our reputation, business, operating results, and prospects. In addition,

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responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.
Governmental export or import controls could limit our ability to compete in foreign markets and subject us to liability if we violate them.
Our platform may be subject to U.S. export controls, and we incorporate encryption technology into certain features. U.S. export controls may require submission of a product classification and annual or semi-annual reports. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export authorization for our platform, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our platform may create delays in the introduction of our feature releases in international markets, prevent our customers with international operations from using our platform or, in some cases, prevent the export of our platform to some countries altogether.
Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons identified by U.S. sanction programs. If we fail to comply with export control regulations and such economic sanctions, we may be fined or other penalties could be imposed, including a denial of certain export privileges. In March 2018, we determined that a small number of persons may have accessed our platform from one or more embargoed countries. We have made an initial voluntary self-disclosure to the U.S. Department of Treasury’s Office of Foreign Assets Control to report these potential violations. While we have implemented additional controls that are designed to prevent similar activity from occurring in the future, these controls may not be fully effective. Although as of the date of this prospectus we do not expect this matter to have a material effect on our business, the maximum potential fine permitted under the regulations and costs related to this matter could be substantial.
Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our platform by, or in our decreased ability to export or sell access to our platform to, existing or potential customers with international operations. Any decreased use of our platform or limitation on our ability to export or sell access to our platform would likely adversely affect our business.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all.
We have funded our operations since inception primarily through equity financings, capital lease arrangements, and subscription fees from our customers. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, declines in subscriptions for our platform, or unforeseen circumstances. We may not be able to timely secure debt or equity financing on favorable terms, or at all. Any debt financing obtained by us could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, we may not be able to generate sufficient cash to service any debt financing obtained by us, which may force us to reduce or delay capital expenditures or sell assets or operations. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
Adverse economic and market conditions and reductions in productivity spending may harm our business.
Our business depends on the overall demand for cloud-based collaborative work management platforms and on the economic health of our current and prospective customers. The United States has experienced cyclical downturns from time to time that have resulted in a significant weakening of the economy, more limited availability of credit, a

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reduction in business confidence and activity, and other difficulties that may affect one or more of the industries to which we sell subscriptions and professional services. Economic uncertainty and associated macroeconomic conditions make it extremely difficult for us and our customers to accurately forecast and plan future business activities which could cause customers to delay or reduce their information technology spending. This could result in reductions in sales of our platform and services, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies, and increased price competition. Any of these events could harm our business and operating results. In addition, there can be no assurance that cloud-based collaborative work management and productivity spending levels will increase following any recovery.
Catastrophic events may disrupt our business.
Natural disasters or other catastrophic events may cause damage or disruptions to our operations. Our corporate headquarters are located in the greater Seattle area, an earthquake-prone area. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, and sales activities. In the event of a major earthquake, hurricane, or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our product development, lengthy interruptions in our platform and services, breaches of data security, and loss of critical data, all of which could harm our operating results.
Risks Relating to Ownership of our Common Stock and this Offering
There has been no prior public market for our Class A common stock, the stock price of our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
There has been no public market for our Class A common stock prior to this offering. The initial public offering price for our Class A common stock will be determined through negotiations among the underwriters, the selling shareholders, and us and may vary from the market price of our Class A common stock following this offering. The market prices of the securities of other newly public companies have historically been highly volatile. Following the completion of this offering, the market price of our Class A common stock may be higher or lower than the price you pay in the initial public offering. The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
negative publicity related to the real or perceived quality of our platform, as well as the failure to timely launch new features, integrations or services that gain market acceptance;
actual or anticipated fluctuations in our revenue or other operating metrics;
changes in the financial projections we provide to the public or our failure to meet these projections;
failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the expectations of investors;
price and volume fluctuations in the overall stock market or in the trading volume of our shares or the size of our public float;
changes in accounting standards, policies, guidelines, interpretations, or principals;
the economy as a whole and market conditions in our industry;
rumors and market speculation involving us or other companies in our industry;
failures or breaches of security or privacy, and the costs associated with responding to and addressing any such failures or breaches;

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announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
lawsuits threatened or filed against us;
other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;
the expiration of contractual lock-up or market stand-off agreements; and
sales of additional shares of our Class A common stock by us or our shareholders.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and harm our business.
Sales of a substantial amount of our Class A common stock in the public markets may cause the market price of our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers, and principal shareholders, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline. Based on no shares of our Class A common stock and 88,760,473 shares of our Class B common stock outstanding as of January 31, 2018, we will have 11,632,950 shares (13,377,892 shares if the over-allotment option is exercised in full) of our Class A common stock and 87,261,156 shares of our Class B common stock outstanding after this offering.
All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144 and any applicable lock-up agreements described below. The remaining shares of our common stock are also subject to the lock-up agreement or market stand-off agreements described below.
In connection with this offering, subject to certain exceptions, we, all of our directors and executive officers, and substantially all of our security holders, have entered into lock-up agreements with the underwriters or were subject to market stand-off agreements with us pursuant to which they agreed not to offer, sell, or agree to sell, directly or indirectly, any shares of Class A common stock and Class B common stock for a period of 180 days from the date of this prospectus.
When the applicable lock-up and market stand-off periods described above expire, we and our security holders subject to a lock-up agreement or market stand-off agreement will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
In addition, as of January 31, 2018, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 13,355,439 shares and 130,000 shares of Class B common stock, respectively. All of the shares of common stock issuable upon the exercise of stock options or settlement of RSUs, and the shares reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be freely tradable in the public market upon issuance subject to existing lock-up or market stand-off agreements and applicable vesting requirements.

38


Immediately following this offering, the holders of 71,305,114 s hares of our Class B common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for us or other shareholders.
We may also issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investment, or otherwise. Any further issuance could result in substantial dilution to our existing shareholders and cause the market price of our Class A common stock to decline.
The dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, including our directors, executive officers, and 5% shareholders, and their affiliates, which limits or precludes your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.
Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock being offered in this offering, has one vote per share. Following this offering, our directors, executive officers, and holders of more than 5% of our common stock, and their respective affiliates, will hold in the aggregate 80.2% of the voting power of our capital stock. Because of the 10-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our shareholders for approval until the earliest of (1) the date specified by a vote of the holders of not less than a majority of the outstanding shares of Class B common stock, (2) seven years from the effective date of this offering , and (3) the date the shares of Class B common stock cease to represent at least 15% of the aggregate number of shares of Class A common stock and Class B common stock then outstanding. This concentrated control limits or precludes your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring shareholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our shareholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain permitted transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.
We cannot predict the impact our dual class structure may have on our stock price or our business.
We cannot predict whether our dual class structure, combined with the concentrated control of our shareholders who held our capital stock prior to the completion of this offering, including our executive officers, employees and directors and their affiliates, will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. In July 2017, FTSE Russell announced that it plans to require new constituents of its indexes to have greater than 5% of the company’s voting rights in the hands of public shareholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indexes. Because of our dual class structure, we will likely be excluded from these indexes and we cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

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We are an “emerging growth company” and intend to take advantage of the reduced disclosure requirements applicable to emerging growth companies which may make our Class A common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (2) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (3) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies,” including:
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board;
being permitted to present only two years of audited consolidated financial statements in addition to any required unaudited interim consolidated financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We currently intend to take advantage of the available exemptions described above. We have taken advantage of reduced reporting burdens in this prospectus. In particular, we have provided only two years of audited consolidated financial statements and have not included all of the executive compensation information that would be required if we were not an emerging growth company. We cannot predict if investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and the price of our Class A common stock may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, unless the company otherwise irrevocably elects not to avail itself of this exemption. While we have not made such an irrevocable election, we have not delayed the adoption of any applicable accounting standards. We may delay adopting applicable accounting standards, which may make comparison of our consolidated financial statements with another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period, difficult because of the potential differences in accounting standards used.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market, and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us on a regular basis, demand for our Class A common stock could decrease, which might cause our share price or trading volume to decline.

40


We will have broad discretion over the use of the net proceeds we receive in this offering and may not use them effectively.
We will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our senior management team to apply these funds effectively could harm our business, financial condition, results of operations, and prospects, and the market price of our Class A common stock could decline. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government that may not generate a high yield to our shareholders. These investments may not yield a favorable return to our shareholders.
Provisions in our corporate charter documents and under Washington law could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management.
Provisions in our articles of incorporation and our bylaws that will become effective immediately prior to the closing of this offering may discourage, delay, or prevent a merger, acquisition, or other change in control of our company that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our Class A common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors. Among other things, these provisions:
establish a classified board of directors so that not all members of our board are elected at one time;
permit only the board of directors to establish the number of directors and fill vacancies on the board;
eliminate the ability of our shareholders to call special meetings of shareholders;
prohibit shareholder action by written consent unless the consent is unanimous, which requires all shareholder actions to be taken at a meeting of our shareholders;
establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by shareholders at annual shareholder meetings;
prohibit cumulative voting;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our shareholders;
require super-majority voting to amend some provisions in our amended and restated articles of incorporation and amended and restated bylaws; and
authorize the issuance of “blank check” preferred stock that our board could use to implement a shareholder rights plan, also known as a “poison pill.”
In addition, under Washington law, shareholders of public companies can act by written consent only by obtaining unanimous written consent. This limit on the ability of our shareholders to act by less than unanimous consent may lengthen the amount of time required to take shareholder action.
Moreover, because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, or WBCA, which prohibits a “target corporation”

41


from engaging in any of a broad range of business combinations with any “acquiring person,” which is defined as a person or group of persons who beneficially owns 10% or more of the voting securities of the “target corporation,” for a period of five years following the date on which the shareholder became an “acquiring person.”
Any of these provisions of our charter documents or Washington law could, under certain circumstances, depress the market price of our Class A common stock. See the section titled “Description of Capital Stock.”
Our amended and restated articles of incorporation will designate the federal and state courts located within the State of Washington as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents.
Our amended and restated articles of incorporation that will become effective immediately prior to the completion of this offering will provide that, unless we consent in writing to an alternative forum, the federal and state courts located within the State of Washington, or Washington Courts, will be the sole and exclusive forum for any internal corporate proceedings (as defined in the WBCA), subject to such courts having personal jurisdiction over the indispensable parties named as defendants therein and the claim not being one that is vested in the exclusive jurisdiction of a court or forum other than in Washington Courts, or for which the Washington Courts do not have subject matter jurisdiction. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated articles of incorporation.
This choice of forum provision may limit our shareholders’ ability to bring a claim in a judicial forum that it finds favorable for internal corporate proceedings, which may discourage such lawsuits even though an action, if successful, might benefit our shareholders. Shareholders who do bring a claim in Washington Courts could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near the State of Washington. Washington Courts may also reach different judgments or results than would other courts, including courts where a shareholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our shareholders. Alternatively, if a court were to find this provision of our amended and restated articles of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have an adverse effect on our business, financial condition or results of operations.



42


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. You should understand that the following important factors, in addition to those discussed in the section titled “Risk Factors” and elsewhere in this prospectus, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
the highly competitive nature of work execution software and product introductions, and promotional activity by our competitors and our ability to differentiate our platform and applications;
our ability to introduce new and enhanced product offerings and the continued market adoption of our platform;
the effect of litigation, complaints or adverse publicity on our business;
our ability to attract new customers and expand sales to existing customers;
our ability to provide effective customer support;
our ability to execute our “land-and-expand” strategy;
the security and reliability of our co-location data centers and the public cloud infrastructure that we use;
our ability to expand our sales force to address effectively the new industries, geographies and types of organizations we intend to target;
our ability to forecast and maintain an adequate rate of revenue growth and appropriately plan our expenses;
our liquidity and working capital requirements;
our ability to attract and retain qualified employees and key personnel;
our ability to protect and enhance our brand and intellectual property;
the costs related to defending intellectual property infringement and other claims;
privacy and data protection laws, actual or perceived privacy or data breaches or other data security incidents, or the loss of data;
future regulatory, judicial, and legislative changes in our industry;
future arrangements with, or investments in, other entities or associations, products, services or technologies;
our use of the net proceeds from this offering; and
the increased expenses and administrative workload associated with being a public company.

43


These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this prospectus are more fully described in the section titled “Risk Factors” and elsewhere in this prospectus. The risks described in the section titled “Risk Factors” are not exhaustive. Other sections of this prospectus describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

44


MARKET AND INDUSTRY DATA
This prospectus contains statistical data, estimates, and forecasts from various sources, including independent industry publications and other information from our internal sources. This information is based upon a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk Factors,” and “Special Note Regarding Forward-Looking Statements,” that could cause results to differ materially from those expressed in these publications and reports.
Certain information in the text of this prospectus is contained in independent industry publications and publicly available reports, as set forth below:
Evans Data Corporation, Global Developer Population and Demographic Study 2017, Volume 1, September 2017.
Forrester Research, Inc., The Forrester Wave: Enterprise Collaborative Work Management, Q4 2016, October 17, 2016.
Forrester Research, Inc., Info Workers Will Erase The Boundary Between Enterprise And Consumer Technologies, August 30, 2012.
Gartner, Inc., Effortless Visibility Is Key to Managing Empowered Workers Without Losing Control, March 30, 2017, or the Gartner Report.
International Data Corporation, Semiannual Software Tracker, November 2017.
McKinsey Global Institute, The social economy: Unlocking value and productivity through social technologies, July 2012.
Dave Wright, 3 Automation Initiatives to Boost Corporate Productivity, April 25, 2016, www.enterpriseappstoday.com/management-software/3-automation-initiatives-to-boost-corporate-productivity.html (last accessed March 23, 2018).
Industry publications, surveys, and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein.
The Gartner Report represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., or Gartner, and are not representations of fact. The Gartner Report speaks as of its original publication date, and not as of the date of this prospectus, and the opinions expressed in the Gartner Report are subject to change without notice. Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
The Total Economic Impact Of Smartsheet, dated September 2017, by Forrester Research, Inc., or Forrester, was commissioned by us, and represents data, research, opinions or viewpoints prepared by Forrester and are not representations of fact. We have been advised by Forrester that its studies speak as of the original date (and not as of the date of this prospectus) and any opinions expressed in its studies are subject to change without notice.
Certain information included in this prospectus concerning our industry and the markets we serve, including our market share, are also based on our good-faith estimates derived from management’s knowledge of the industry and other information currently available to us.

45


USE OF PROCEEDS
We estimate that the net proceeds from the sale of 10,000,000 shares of our Class A common stock that we are selling in this offering will be approximately $99.3 million, based upon an assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, we estimate that our net proceeds would be approximately $117.2 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling shareholders.
Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $9.3 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of one million in the number of shares of Class A common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $10.2 million, assuming that the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and facilitate future access to the public equity markets for us and our shareholders. While we have no specific plans at this time, we may use some of the proceeds that we will receive from this offering for working capital and other general corporate purposes, including expanding our headcount and funding our growth strategies to scale with our business through sales and marketing activities, technology and product development, general and administrative matters, investing in hardware for our data center operations, international expansion, building out our office facilities, and other capital expenditures. We may also use a portion of the net proceeds that we receive to acquire or invest in third-party businesses, products, services, technologies, or other assets. However, we do not have any definitive plans, agreements, or commitments with respect to any acquisitions or investments at this time.
We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering or the amounts we actually spend on the uses set forth above. Accordingly, our management will have broad discretion in the application of the net proceeds from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, money market accounts, bank deposit, or direct or guaranteed obligations of the U.S. government.

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DIVIDEND POLICY
We have never declared or paid any cash dividend on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and growth of our business and do not expect to pay any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

47


CAPITALIZATION
The following table sets forth our cash and cash equivalents, as well as our capitalization, as of January 31, 2018 as follows:
on an actual basis;
on a pro forma basis, giving effect to (1) the redesignation of our outstanding common stock as Class B common stock on April 9, 2018; (2) the automatic conversion of all outstanding shares of our convertible preferred stock outstanding as of January 31, 2018 into an aggregate of 68,479,732 shares of Class B common stock; (3) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, which conversion and reclassification will occur immediately prior to the completion of this offering, as if such conversion and reclassification had occurred on January 31, 2018; and (4) the filing and effectiveness of our amended and restated articles of incorporation; and
on a pro forma as adjusted basis, giving effect to (1) the pro forma adjustments set forth above and the sale of 10,000,000 shares of our Class A common stock offered by us in this offering, based on an assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, and (2) the automatic conversion of 1,632,950 shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling shareholders in this offering.
The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering. You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.
 
As of January 31, 2018
 
Actual
 
Pro Forma
 
Pro Forma As Adjusted
 
(in thousands, except share and per share data)
Cash and cash equivalents
$
58,158

 
$
58,158

 
$
157,458

Convertible preferred stock warrant liability
1,272

 

 

Convertible preferred stock, no par value; 67,756,647 shares authorized, 67,619,377 shares issued and outstanding, actual; no shares authorized, issue or outstanding, pro forma and pro forma as adjusted.
112,687

 

 

Shareholders’ equity (deficit):
 
 
 
 
 
Preferred stock, no par value; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

 

 

Common stock, no par value; 107,679,381 shares authorized, 20,280,741 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

 

 

Class A common stock, no par value; no shares authorized, issued and outstanding, actual; 500,000,000 shares authorized, no shares issued and outstanding, pro forma; 500,000,000 shares authorized, 11,632,950 shares issued and outstanding, pro forma as adjusted

 

 

Class B common stock, no par value; no shares authorized, issued and outstanding, actual; 500,000,000 shares authorized, 88,760,473 shares issued and outstanding, pro forma; 500,000,000 shares authorized, 87,261,156 shares issued and outstanding, pro forma as adjusted

 

 

Additional paid-in capital
25,892

 
139,851

 
239,151

Accumulated deficit
(106,633
)
 
(106,633
)
 
(106,633
)
Total shareholders’ equity (deficit)
(80,741
)
 
33,218

 
132,518

Total capitalization
$
33,218

 
$
33,218

 
$
132,518


48


If the underwriters exercise their option to purchase 1,744,942 additional shares to cover over-allotments in full, the pro forma as adjusted cash and cash equivalents, additional paid-in capital, and total shareholders’ equity (deficit) would increase by approximately $17.9 million, after deducting the estimated underwriting discounts and commissions, and we would have 13,377,892 shares of our Class A common stock and 87,261,156 shares of our Class B common stock issued and outstanding, pro forma as adjusted.
Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, whi ch is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, additional paid-in capital, and total shareholders’ equity (deficit) by app roximately $9.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of one million shares in the number of shares offered by us would increase or decrease, as applicable, our cash and cash equivalents, additional paid-in capital, and total shareholders’ equity (deficit) by approximately $10.2 million, assuming that the assumed initial public offering price of $11.00, which is the midpoint of the offering price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.
The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock and 88,760,473 shares of our Class B common stock outstanding as of January 31, 2018 (prior to the automatic conversion of 1,499,317 shares of our Class B common stock into an equivalent number of Class A common stock upon their sale by the selling shareholders in this offering), and excludes:
13,355,439 shares of our Class B common stock issuable upon the exercise of options outstanding as of January 31, 2018, with a weighted-average exercise price of $2.91 per share, of which 1,250,132 shares were issued upon the exercise of options between February 1, 2018 and April 9, 2018 ;
130,000 shares of our Class B common stock issuable upon the vesting of RSUs outstanding as of January 31, 2018;
137,270 shares of our Class B common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of January 31, 2018, with an exercise price of $0.29139 per share, in connection with which 133,633 shares of our Class B common stock will be issued upon its net exercise and automatically converted into an equivalent number of shares of Class A common stock upon their sale in this offering at the initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus; and
296,178 shares of our Class B common stock reserved for future issuance under our 2015 Equity Incentive Plan as of January 31, 2018 and 5,300,000 additional shares of our Class B common stock reserved for future issuance after January 31, 2018, of which:
3,580,420 shares of our Class B common stock issuable upon the exercise of options that were granted between February 1, 2018 and April 9, 2018, with an exercise price of $9.53 per share;
2,181,274 shares of our Class B common stock that were reserved for future issuance as of April 9, 2018 that will become available for future issuance under our 2018 Equity Incentive Plan upon the completion of this offering; and
8,740,000 shares of our Class A common stock reserved for future issuance under our share-based compensation plans, consisting of (1) 6,700,000 shares of our Class A common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus (which includes 536,500 shares of our Class A common stock issuable upon the exercise of options to be granted on the date of this prospectus with an exercise price of the initial public offering price per share); and (2) 2,040,000 shares of our Class A common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective on the date of this prospectus.

49


On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Equity Incentive Plan will become reserved for future issuance as Class A common stock under our 2018 Equity Incentive Plan, and we will cease granting awards under our 2015 Equity Incentive Plan. Our 2018 Equity Incentive Plan and 2018 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.


50


DILUTION
If you invest in our Class A common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by investors purchasing shares of our Class A common stock in this offering and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after completion of this offering.
Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our pro forma net tangible book value as of January 31, 2018 was $14.5 million, or $0.16 per share, based on the total number of shares of our common stock outstanding as of January 31, 2018 , after giving effect to (1) the redesignation of our outstanding common stock as Class B common stock on April 9, 2018; (2) the automatic conversion of all outstanding shares of our convertible preferred stock as of January 31, 2018 into an aggregate of 68,479,732 shares of our Class B common stock; (3) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, which conversion and reclassification will occur immediately prior to the completion of this offering; and (4) the filing and effectiveness of our amended and restated articles of incorporation.
After giving effect to the sale by us of 10,000,000 shares of our Class A common stock in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of January 31, 2018 would have been $113.8 million, or $1.15 per share. This represents an immediate increase in pro forma net tangible book value of $0.99 per share to our existing shareholders and an immediate dilution of $9.85 per share to investors purchasing shares of our Class A common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis to new investors:
The following table illustrates this dilution on a per share basis to new investors:
Assumed initial public offering price per share
 
 
$
11.00

Pro forma net tangible book value per share as of January 31, 2018
$
0.16

 
 
Increase in pro forma net tangible book value per share attributable to new investors in this offering
0.99

 
 
Pro forma as adjusted net tangible book value per share immediately after this offering
 
 
1.15

Dilution in pro forma net tangible book value per share to new investors in this offering
 
 
$
9.85

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $9.3 million, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.91, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of one million shares in the number of shares offered by us would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.09, assuming that the assumed initial public offering price of $11.00, which is the midpoint of the offering price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.
If the underwriters exercise their option to purchase 1,744,942 additional shares to cover over-allotments in full, the pro forma as adjusted net tangible book value per share immediately after this offering would be $1.31 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $9.69 per share.

51


The following table presents, on a pro forma as adjusted basis as described above, as of January 31, 2018 , the differences between our existing shareholders and new investors purchasing shares of our Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us (which includes net proceeds received by us from the issuance of common stock and convertible preferred stock, and cash received from the exercise of stock options), and the average price per share paid or to be paid to us at an assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses:
 
Shares Purchased
 
Total Consideration
 
Average Price
Per
Share
 
Number
 
Percent
 
Amount
 
Percent
 
Existing shareholders
88,760,473

 
89.9
%
 
$
117,240,000

 
51.6
%
 
$
1.32

New investors
10,000,000

 
10.1
%
 
110,000,000

 
48.4
%
 
$
11.00

Totals
98,760,473

 
100.0
%
 
$
227,240,000

 
100.0
%
 
 
Sales of shares of Class A common stock by the selling shareholders in this offering will reduce the number of shares of common stock held by existing shareholders to 87,261,156, or approximately 88.2% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 11,632,950, or approximately 11.8% of the total shares of common stock outstanding after this offering.
Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all shareholders by approximately $10.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same . In addition, to the extent any outstanding stock options are exercised, new investors will experience further dilution.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase 1,744,942 additional shares to cover over-allotments. After giving effect to sales of shares in this offering by us and the selling shareholders, and assuming the underwriters exercise their option to purchase additional shares to cover over-allotments in full, our existing shareholders would own 86.7% and our new investors would own 13.3% of the total number of shares of our common stock outstanding upon the completion of this offering.
The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock and 88,760,473 shares of our Class B common stock outstanding as of January 31, 2018 (prior to the automatic conversion of 1,499,317 shares of our Class B common stock into an equivalent number of Class A common stock upon their sale by the selling shareholders in this offering), and excludes:
13,355,439 shares of our Class B common stock issuable upon the exercise of options outstanding as of January 31, 2018, with a weighted-average exercise price of $2.91 per share, of which 1,250,132 shares were issued upon the exercise of options between February 1, 2018 and April 9, 2018 ;
130,000 shares of our Class B common stock issuable upon the vesting of RSUs outstanding as of January 31, 2018;
137,270 shares of our Class B common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of January 31, 2018, with an exercise price of $0.29139 per share, in connection with which 133,633 shares of our Class B common stock will be issued upon its net exercise and automatically converted into an equivalent number of shares of Class A common stock upon their sale in this offering at the initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus; and
296,178 shares of our Class B common stock reserved for future issuance under our 2015 Equity Incentive

52


Plan as of January 31, 2018 and 5,300,000 additional shares of our Class B common stock reserved for future issuance after January 31, 2018, of which:
3,580,420 shares of our Class B common stock issuable upon the exercise of options that were granted between February 1, 2018 and April 9, 2018, with an exercise price of $9.53 per share;
2,181,274 shares of our Class B common stock that were reserved for future issuance as of April 9, 2018 that will become available for future issuance under our 2018 Equity Incentive Plan upon the completion of this offering; and
8,740,000 shares of our Class A common stock reserved for future issuance under our share-based compensation plans, consisting of (1) 6,700,000 shares of our Class A common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus (which includes 536,500 shares of our Class A common stock issuable upon the exercise of options to be granted on the date of this prospectus with an exercise price of the initial public offering price per share); and (2) 2,040,000 shares of our Class A common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective on the date of this prospectus.
On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Equity Incentive Plan will become reserved for future issuance as Class A common stock under our 2018 Equity Incentive Plan, and we will cease granting awards under our 2015 Equity Incentive Plan. Our 2018 Equity Incentive Plan and 2018 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

53


SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables summarize our financial and other data. We derived our selected consolidated statements of operations data for the fiscal years ended January 31, 2016, 2017, and 2018 and our selected consolidated balance sheet data as of January 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any future period. You should read the following selected consolidated financial and other data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes and other financial information included elsewhere in this prospectus. Our fiscal year end is January 31 and references throughout this prospectus to a given fiscal year are to the 12 months ended on that date.
 
Year Ended January 31,
 
2016
 
2017
 
2018
 
(in thousands, except per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue
 
 
 
 
 
Subscription
$
39,568

 
$
62,416

 
$
100,368

Professional services
1,183

 
4,548

 
10,885

Total revenue
40,751

 
66,964

 
111,253

Cost of revenue
 
 
 
 
 
Subscription(1)
6,961

 
10,117

 
13,008

Professional services(1)
1,636

 
4,016

 
8,674

Total cost of revenue
8,597

 
14,133

 
21,682

Gross profit
32,154

 
52,831

 
89,571

Operating expenses
 
 
 
 
 
Research and development(1)
12,900

 
19,640

 
37,590

Sales and marketing(1)
28,440

 
40,071

 
72,925

General and administrative(1)
5,163

 
8,275

 
28,034

Total operating expenses
46,503

 
67,986

 
138,549

Loss from operations
(14,349
)
 
(15,155
)
 
(48,978
)
Interest expense and other, net

 
(29
)
 
(435
)
Net loss before provision (benefit) for income taxes
(14,349
)
 
(15,184
)
 
(49,413
)
Provision (benefit) for income taxes

 

 
(307
)
Net loss
(14,349
)
 
(15,184
)
 
(49,106
)
Deemed dividend(2)

 

 
(4,558
)
Net loss attributable to common shareholders
$
(14,349
)
 
$
(15,184
)
 
$
(53,664
)
Net loss per share attributable to common shareholders, basic and diluted(3)
$
(1.03
)
 
$
(1.00
)
 
$
(2.94
)
Weighted-average shares outstanding used to compute net loss per share attributable to common shareholders, basic and diluted(3)
13,877

 
15,241

 
18,273

Pro forma net loss per share attributable to common shareholders, basic and diluted(3)
 
 
 
 
$
(0.62
)
Weighted-average shares used to compute pro forma net loss per share attributable to common shareholders, basic and diluted(3) 
 
 
 
 
84,868


54


 
(1) Amounts include share-based compensation expense other than related to the 2017 Tender Offer (see footnote 2) as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
 
(in thousands)
Cost of subscription revenue
$
23

 
$
35

 
$
43

Cost of professional services revenue
4

 
26

 
58

Research and development
235

 
452

 
905

Sales and marketing
1,348

 
428

 
1,124

General and administrative
69

 
193

 
864

Total share-based compensation expense
$
1,679

 
$
1,134

 
$
2,994


Amounts also include share-based compensation expense related to the 2017 Tender Offer (see footnote 2) as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
(in thousands)
Cost of subscription revenue
$

 
$

 
$
53

Cost of professional services revenue

 

 
9

Research and development

 

 
5,124

Sales and marketing

 

 
583

General and administrative

 

 
9,701

Total share-based compensation expense
$

 
$

 
$
15,470


(2)
See the section titled “Certain Relationships and Related-Party Transactions—2017 Tender Offer” for further information.
(3)
Please refer to Note 5 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common shareholders, basic and diluted, and pro forma net loss per share attributable to common shareholders, basic and diluted.
 
As of January 31,
 
2017
 
2018
 
 
Consolidated Balance Sheet Data:
 
 
 
Cash, cash equivalents, and short-term investments
$
32,235

 
$
58,158

Working capital
(4,246
)
 
(1,234
)
Total assets
56,253

 
116,604

Deferred revenue, current and non-current
32,712

 
57,281

Convertible preferred stock warrant liability
477

 
1,272

Convertible preferred stock
60,260

 
112,687

Total shareholders’ deficit
(52,743
)
 
(80,741
)
Key Business Metrics
We monitor the following key business metrics to help us measure our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

55


Domain-based customers, defined as customers with a unique email domain name such as @cisco and @aramark, and average annualized contract values, or ACVs, as of the periods presented were as follows:
 
As of January 31,
 
2016
 
2017
 
2018
Domain-based customers at period end
53,920

 
66,645

 
74,116

Average ACV per domain-based customer
$
841

 
$
1,106

 
$
1,640

Our dollar-based net retention rates for all customers for the trailing 12 month periods presented were as follows:
 
Trailing 12 Months Ended
January 31,
 
2016
 
2017
 
2018
Dollar-based net retention rate for all customers
113
%
 
122
%
 
130
%
For additional information about our key business metrics, please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics.”

56


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial and Other Data” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. Our fiscal year end is January 31 and references throughout this prospectus to a given fiscal year are to the 12 months ended on that date.
Overview
In 2005, our founders set out to build a universal application for work management. They realized that the “killer app” for team work management, tracking, project management, team collaboration, and flexible reporting did not exist. In the decade prior to Smartsheet, our founders had observed their customers across large and small businesses overwhelmingly using email and spreadsheets to manage their work. This combination fell short so regularly that many companies were launched each year to attempt to address the needs of people intent on graduating to something better. Our founders observed that these companies either focused on niche segments or applied rules and structure that did not fit how most people really worked, and were often abandoned. Our founders developed Smartsheet to be the universal answer to which all email and spreadsheet users could graduate because of its spreadsheet-like user interface and email-integrated design.
Since our founding, we have extended our platform to address the needs of our customers. Our additions and improvements to our platform have allowed us to address the needs of customers while driving revenue growth. We have built Smartsheet efficiently, having raised only approximately $112.7 million of external capital, with $58.2 million in cash and cash equivalents on our consolidated balance sheet as of January 31, 2018. We have no outstanding lines of credit.
Over the past 12 years, we have achieved several key milestones:
2005: Founded company.
2006: Launched platform.
2007: Raised first outside funding.
2010: Launched on Google Apps Marketplace.
2011: Launched Salesforce integration.
2012: Surpassed 10,000 total customers.
2013: Released public API and surpassed 30,000 total customers.
2014: Launched App Gallery to showcase integrations with leading cloud-based solutions.
2015: Surpassed 50,000 total customers, launched Smartdashboards and Connectors, won first place for “Best Microsoft 365 App,” and named Google’s Marketplace App of the Year.
2016: Launched Control Center, surpassed 75,000 total customers, introduced the “Business” subscription plan, and released Card View and Atlassian Jira integration.
2017: Opened Boston office, surpassed 90,000 total customers, launched Smartautomations, held first customer conference, ENGAGE, completed first business acquisition, and named Best Workplace in Washington by the Puget Sound Business Journal.

57


Our customers represent both domain-based accounts associated with a business or public sector organization, and a much smaller number of Internet service provider-based accounts, or ISP-based accounts. We define domain-based customers as organizations with a unique email domain name such as @cisco and @aramark. An ISP customer is typically a small team or an individual that registers for our services with an email address hosted on a widely used domain such as @gmail, @outlook, or @yahoo. As of January 31, 2018, we had more than 92,000 total customers, of which more than 74,000 were domain-based. No single customer represented more than 3% of our total revenue for any of the years ended January 31, 2016, 2017, and 2018, and our 10 largest customers comprised less than 10% of our total revenue for those periods.
We generate revenue primarily from the sale of subscriptions to our cloud-based platform. For subscriptions, customers select the plan that meets their needs and can begin using Smartsheet within minutes. We offer four subscription levels: Individual, Team, Business, and Enterprise, the pricing for which varies by the capabilities provided. Over half of our annualized contract value, or ACV, comes from our Business and Enterprise packages. Customers can also purchase Connectors, which provide data integration and automation to third-party applications from Salesforce, Atlassian, and ServiceNow. Revenue is generated on a per-Connector basis, annually. We also offer Control Center, which enables customers to implement solutions for a specific use case for large scale projects or initiatives. Professional services are offered to help customers create and administer solutions for specific use cases.
Customers can begin using our platform by purchasing a subscription directly from our website or through our sales force, starting a free trial, or working as a collaborator on a project. The majority of our revenue comes from our inside sales team and self-service sales through our website. Our inside sales team utilizes an internally developed lead scoring engine which enables them to identify trial users and collaborators with the highest probability of conversion. Our field sales team focuses on larger businesses where we already have a deployment and have identified significant expansion opportunities. We also use resellers to sell in international markets where we have limited or no sales presence as well as in the United States to sell to customers who prefer to buy through a partner.
We offer a free 30-day trial, which gives users access to all of the features of an Individual account, as well as additional features available to a Business account. In each of the last 12 months, we have generated over 100,000 new trials. Our user base includes paid users, as well as collaborators who are invited to work on our platform by a paid user and can be inside or outside a user’s organization. Collaborators can continue to use our platform with limited functionality. Over time, many of our collaborators have become paid users. Although we do not track or monitor these metrics on a regular basis when engaging in business planning or otherwise evaluating the performance of our business, we believe they illustrate that we are still in the early stages of penetrating our addressable market of an estimated 865 million knowledge workers.
The majority of our subscriptions are sold on an annual basis, with some online purchases sold as monthly subscriptions, and very few multi-year or quarterly subscriptions. The majority of our customers pay annually in advance, and we expect that to continue, providing us with revenue visibility through our short-term deferred revenue balance.
Our customers can begin using our platform immediately upon purchase and for most use cases do not require professional services for implementation. Our customers sometimes elect to engage consulting or training in order to optimize the way in which they use our platform. Our customers buy training services primarily to familiarize themselves with various features of our platform and to learn about different use cases to which Smartsheet can be applied.
We have achieved significant growth in recent periods. For the years ended January 31, 2016, 2017, and 2018, our total revenue was $40.8 million, $67.0 million, and $111.3 million, respectively, representing period-over-period total revenue growth of 64% and 66%, respectively. For the years ended January 31, 2016, 2017, and 2018, our net loss was $14.3 million, $15.2 million, and $49.1 million, respectively. For the years ended January 31, 2016, 2017, and 2018, cash provided by (used in) operations was $(4.7) million, $0.1 million, and $(13.6) million, respectively.

58


Key Factors Affecting Our Performance
Acquiring new customers
We are focused on continuing to grow our customer base. As of January 31, 2018, we had over 74,000 domain-based customers in over 190 countries, which spanned across organizations of a broad range of sizes and industries, compared to over 66,000 domain-based customers as of January 31, 2017. We also have more than 18,000 ISP-based customers as of January 31, 2018. Our operating results and growth prospects will depend in part on our ability to acquire, and expand within, new domain-based customers.
Expansion of Smartsheet across existing customers
We employ a “land-and-expand” business model that focuses on efficiently acquiring new customers and expanding relationships with existing customers over time. Our domain-based customers typically begin by purchasing a small number of subscriptions and then expand over time, increasing the number of paying users, use cases, and premium solutions such as our Connectors and Control Center.
Our dollar-based net retention rate for all customers, including domain-based and ISP-based customers, has increased in recent quarters as shown in the chart below:
Dollar-Based Net Retention Rate
chart-6f33ab4126bfc6fd119.jpg
As of January 31, 2018, we had over 74,000 domain-based customers, including 90 companies in the Fortune 100, and two-thirds of the companies in the Fortune 500. We believe that there is a large opportunity for growth at many of our existing domain-based customers. As of January 31, 2018, our Fortune 100 and Fortune 500 customers have ACVs ranging from $99 to $2.3 million per customer, and approximately half of these customers have ACVs lower than $5,000 per year. We believe that the viral nature of our offering within and outside our current customers combined with development of new capabilities and our focused sales and marketing efforts will lead to continued expansions at those customers. Our operating results and prospects will continue to depend on the effectiveness of our “land-and-expand” strategy.
Continued investment in growth
We plan to continue to invest in our business so that we can capitalize on our market opportunity. We plan to grow our field sales teams in order to target expansion within our largest enterprise customers and modestly grow our inside sales team to target new customers and expansion opportunities. Our investment in research and development efforts will also continue to increase in absolute dollars as we enhance functionality of our platform.

59


We will continue to invest in software development talent at our Bellevue, Boston, and Edinburgh (U.K.) offices. As our customers scale, we will make incremental investments in our co-location data centers and may expand our use of public cloud infrastructure.
International expansion
Revenue generated from non-U.S. customers during the year ended January 31, 2018 was 27% of our total revenue. To date, substantially all of our revenue from international customers has been generated without establishing a presence outside the United States. Historically, we have sold to international customers primarily through our website or through resellers. We believe that there is significant opportunity to grow our international business. This year, we have started to cover some international sales territories with sales representatives based in the United States and we plan to add local sales support in select international markets over time. We believe global demand for our platform and offerings will continue to increase as international market awareness of Smartsheet grows.
Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Number of customers
We believe that the number of customers, particularly our domain-based customers, using our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and its broad range of capabilities, coupled with the mainstream adoption of cloud-based technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. As of January 31, 2018, we had 92,501 total customers and 74,116 domain-based customers. Over time, larger customers have constituted a greater share of our total revenue. As of January 31, 2018, domain-based customers represented approximately 95% of our ACV as described below. The number of our customers who contribute $5,000 or more in ACV grew from 1,201 as of January 31, 2016, to 2,088 as of January 31, 2017, and 3,790 as of January 31, 2018. The number of our customers who contribute $50,000 or more in ACV grew from 29 as of January 31, 2016, to 76 as of January 31, 2017, and 189 as of January 31, 2018.
 
As of
 
Apr. 30, 2016
 
Jul. 31, 2016
 
Oct. 31, 2016
 
Jan. 31, 2017
 
Apr. 30, 2017
 
Jul. 31, 2017
 
Oct. 31, 2017
 
Jan. 31, 2018
Domain-based customers at period end
57,844

 
61,210

 
64,776

 
66,645

 
69,039

 
71,021

 
72,529

 
74,116

Our customer count may fluctuate as a result of a number of factors, including our ability to generate new customers, satisfaction with our platform at new and existing customers, price changes, our ability to continue to innovate and build on our platform, and the other risk factors included in this prospectus.
Average ACV per domain-based customer
We use average ACV per domain-based customer to measure customer commitment to our platform and sales force productivity. We define average ACV per domain-based customer as total outstanding ACV for domain-based subscriptions as of the end of the reporting period divided by the number of domain-based customers as of the same date.

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We have a wide range of ACV per domain-based customer, with our largest customer having an ACV of more than $2 million per year. Our ACV for the cohort of all customers with $5,000 or more in annual contract value as of January 31, 2016 was $13,171, and grew to $19,809 and $29,694 as of January 31, 2017 and 2018, respectively. We expect our ACV per domain-based customer to increase over time as more licensed users within a domain subscribe to our platform and purchase additional subscription services.
 
As of
 
Apr. 30, 2016
 
Jul. 31, 2016
 
Oct. 31, 2016
 
Jan. 31, 2017
 
Apr. 30, 2017
 
Jul. 31, 2017
 
Oct. 31, 2017
 
Jan. 31, 2018
Average ACV per domain-based customer
$
897

 
$
955

 
$
1,016

 
$
1,106

 
$
1,230

 
$
1,346

 
$
1,491

 
$
1,640

Our average ACV per domain-based customer may fluctuate as a result of a number of factors, including our customers’ satisfaction with our platform, the continuation of increasing dollar-based net retention rate, economic environment surrounding our existing and new customers, and the other risk factors included in this prospectus.
Dollar-based net retention rate
The dollar-based net retention rate is used by us to evaluate the long-term value of our customer relationships and is driven by our ability to retain and expand the subscription revenue generated from our existing customers. Our dollar-based net retention rate compares our subscription revenue from the same set of customers across comparable periods.
 
Trailing 12 Months Ended
 
Apr. 30, 2016
 
Jul. 31, 2016
 
Oct. 31, 2016
 
Jan. 31, 2017
 
Apr. 30, 2017
 
Jul. 31, 2017
 
Oct. 31, 2017
 
Jan. 31, 2018
Dollar-based net retention rate for all customers
116
%
 
118
%
 
119
%
 
122
%
 
124
%
 
126
%
 
129
%
 
130
%
Our dollar-based net retention rate for customers with ACV of $5,000 or more was 149% for the trailing 12 months ended January 31, 2018. This cohort represented approximately 54% of our total ACV as of January 31, 2018.
We calculate dollar-based net retention rate as of a period end by starting with the ACV from the cohort of all customers as of the 12 months prior to such period end, or Prior Period ACV. We then calculate the ACV from these same customers as of the current period end, or Current Period ACV. Current Period ACV includes any upsells and is net of contraction or attrition over the trailing 12 months, but excludes subscription revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at the dollar-based net retention rate.
Our dollar-based net retention rate may fluctuate as a result of a number of factors, including the level of our customers’ satisfaction with our platform and the level of penetration within our customer base.
Components of Results of Operations
Revenue
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to our cloud-based platform. Subscription revenue is driven primarily by the number of domain-based customers and changes in their subscription levels, and, to a lesser extent, subscriptions to cloud-based premium solutions. We recognize subscription revenue ratably over the term of the subscription period beginning on the date access to our platform is provided as no implementation work is required, assuming all other revenue recognition criteria have been met.

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Professional services revenue
Professional services revenue includes primarily fees for consulting and training services. Our consulting services consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, with some smaller engagements being provided for a fixed fee. We recognize revenue for our consulting services as those services are delivered. Our training services are delivered either remotely or at the customer site. Training services are charged for on a fixed-fee basis and we recognize revenue after the training program is delivered. Our consulting and training services are generally considered to be distinct, for accounting purposes, and we recognize revenue as services are performed or upon completion of work. We expect that professional services revenue will continue to grow in absolute dollars and may grow as a percentage of total revenue in the near term as we add headcount to satisfy customer demand for consulting and training services.
Cost of revenue and gross margin
Cost of subscription revenue
Cost of subscription revenue primarily consists of employee-related costs such as salaries, wages, and related benefits; expenses related to hosting our services and providing support, including third-party hosting fees; payment processing fees; costs of Connectors between Smartsheet and third-party applications; software and maintenance costs; and allocated overhead.
We intend to continue to invest in our platform infrastructure and our support organization. We currently utilize third-party co-location data centers and public cloud service providers. As our platform scales, we may require additional investments in infrastructure to host our platform and support our customers, which may negatively impact our subscription gross margin.
Cost of professional services revenue
Cost of professional services revenue consists primarily of employee-related costs for our consulting and training teams, travel-related costs, costs of outside services associated with supplementing our internal staff, and allocated overhead.
Gross margin
Gross margin is calculated as gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue mix fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued building of application support and professional services teams, increased share-based compensation expense, as well as the relative proportions of total revenue provided by subscriptions or professional and other services in a given time period. As we continue to expand our professional services offerings in the future, we expect our total gross margin percentage to gradually decline.
Operating expenses
Research and development
Research and development expenses consist primarily of employee-related costs, costs of outside services used to supplement our internal staff, hardware- and software-related costs, recruiting expenses, and overhead allocations. We consider continued investment in our development talent and our platform to be important for our growth. We expect our research and development expenses to increase in absolute dollars as our business grows and to gradually decrease over the long term as a percentage of total revenue due to economies of scale.
Sales and marketing
Sales and marketing expenses consist primarily of employee-related costs, costs of general marketing and promotional activities, third-party software related expenses, travel-related expenses, recruiting expenses, costs to host ENGAGE, and allocated overhead. Commissions earned by our sales force that are incremental to each customer contract, along with related fringe benefits and taxes, are capitalized and amortized over an estimated

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useful life of three years. We expect our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts, although we will continue to maintain a prudent expense philosophy. We also expect that sales and marketing expenses will increase as we continue to invest in marketing, and as we expect more of our future revenue to come from our inside and direct sales model and resellers rather than through unassisted self-service sales.
General and administrative
General and administrative expenses consist primarily of employee-related costs for finance, accounting, legal, IT, and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, hardware and software costs, certain tax, license and insurance related expenses, and allocated overhead.
Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. We expect our general and administrative expenses to increase in absolute dollars as our business grows, and to gradually decrease over the long term as a percentage of total revenue due to economies of scale.
Other income (expense), net
Other income (expense), net consists of interest income from our investment holdings, interest expense associated with our capital leases, foreign exchange gains and losses, and expenses resulting from the revaluation of our convertible preferred stock warrant liability. Our convertible preferred stock warrant liability will be converted to additional paid-in capital upon the completion of this offering.
Provision for income taxes
Our provision for income taxes has not been historically significant to our business as we have incurred operating losses to date. We maintain a full valuation allowance on our U.S. federal, state and foreign deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be realized.
2017 Tender Offer
During the three months ended July 31, 2017, we facilitated a tender offer, or the 2017 Tender Offer, in which our current and former employees and directors were able to sell a portion of their vested shares of common stock to certain existing investors. We recorded share-based compensation expense for the amount paid to current and former employees and directors in excess of the estimated fair value of our common stock. That total amount resulted in $15.5 million incremental expense for the three months ended July 31, 2017 and year ended January 31, 2018, of which $0.1 million was recorded to cost of revenue, $5.1 million was recorded to research and development expense, $0.6 million was recorded to sales and marketing expense, and $9.7 million was recorded to general and administrative expense. In addition, the excess over the estimated fair value of the sale price of the common and convertible preferred stock sold by non-employees, totaling $4.6 million, was recorded as a deemed dividend within additional paid-in capital. Our quarterly trends in total operating expenses, operating loss, and net loss, were significantly impacted by this transaction which took place and was completed during the three months ended July 31, 2017.

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Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods:
 
Year Ended January 31,
2016
 
2017
 
2018
Revenue
 
 
(in thousands)

 
 
Subscription
$
39,568

 
$
62,416

 
$
100,368

Professional services
1,183

 
4,548

 
10,885

Total revenue
40,751

 
66,964

 
111,253

Cost of revenue
 
 
 
 
 
Subscription(1)
6,961

 
10,117

 
13,008

Professional services(1)
1,636

 
4,016

 
8,674

Total cost of revenue
8,597

 
14,133

 
21,682

Gross profit
32,154

 
52,831

 
89,571

Operating expenses
 
 
 
 
 
Research and development(1)
12,900

 
19,640

 
37,590

Sales and marketing(1)
28,440

 
40,071

 
72,925

General and administrative(1)
5,163

 
8,275

 
28,034

Total operating expenses
46,503

 
67,986

 
138,549

Loss from operations
(14,349
)
 
(15,155
)
 
(48,978
)
Interest expense and other, net

 
(29
)
 
(435
)
Net loss before provision (benefit) for income taxes
(14,349
)
 
(15,184
)
 
(49,413
)
Provision (benefit) for income taxes

 

 
(307
)
Net loss
$
(14,349
)
 
$
(15,184
)
 
$
(49,106
)
 
(1)
Amounts include share-based compensation expense other than related to the 2017 Tender Offer as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
 
 
 
(in thousands)
 
 
Cost of subscription revenue
$
23

 
$
35

 
$
43

Cost of professional services revenue
4

 
26

 
58

Research and development
235

 
452

 
905

Sales and marketing
1,348

 
428

 
1,124

General and administrative
69

 
193

 
864

Total share-based compensation expense
$
1,679

 
$
1,134

 
$
2,994


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Amounts also include share-based compensation expense related to the 2017 Tender Offer as follows:
 
Year Ended January 31,
2016
 
2017
 
2018
 
 
 
(in thousands)
 
 
Cost of subscription revenue
$

 
$

 
$
53

Cost of professional services revenue

 

 
9

Research and development

 

 
5,124

Sales and marketing

 

 
583

General and administrative

 

 
9,701

Total share-based compensation expense
$

 
$

 
$
15,470

The following table sets forth the components of our statements of operations data, for each of the periods presented, as a percentage of total revenue.
 
Year Ended January 31,
2016
 
2017
 
2018
 
(as a percentage of total revenue)
Revenue
 
 
 
 
 
Subscription
97
 %
 
93
 %
 
90
 %
Professional services
3

 
7

 
10

Total revenue
100

 
100

 
100

Cost of revenue
 
 
 
 
 
Subscription
17

 
15

 
12

Professional services
4

 
6

 
8

Total cost of revenue
21

 
21

 
19

Gross profit
79

 
79

 
81

Operating expenses
 
 
 
 
 
Research and development
32

 
29

 
34

Sales and marketing
70

 
60

 
66

General and administrative
13

 
12

 
25

Total operating expenses
115

 
101

 
125

Loss from operations
(36
)
 
(22
)
 
(44
)
Interest expense and other, net

 

 

Net loss before provision (benefit) for income taxes
(36
)
 
(22
)
 
(44
)
Provision (benefit) for income taxes

 

 

Net loss
(36
)%
 
(22
)%
 
(44
)%

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Comparison of the years ended January 31, 2017 and 2018
Revenue
 
Year Ended January 31,
 
Change
2017
 
2018
 
Amount
 
%
 
(dollars in thousands)
Revenue
 
 
 
 
 
 
 
Subscription
$
62,416

 
$
100,368

 
$
37,952

 
61
%
Professional services
4,548