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As filed with the Securities and Exchange Commission on March 23, 2021

Registration No. 333-253483

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

DigitalOcean Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

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

 

 

 

101 6th Avenue

New York, New York 10013

(646) 827-4366

  

(Address, including zip code, and telephone number, including

area code, of Registrant’s principal executive offices)

 

 

 

 

Yancey Spruill

Chief Executive Officer

DigitalOcean Holdings, Inc.

101 6th Avenue

New York, New York 10013

(646) 827-4366

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

 

 

 

  Copies to:   

Eric Jensen

Brandon Fenn
Cooley LLP
55 Hudson Yards
New York, New York 10001
(212) 479-6000

 

William Sorenson

Alan Shapiro

DigitalOcean Holdings, Inc.
101 6th Avenue
New York, New York 10013
(646) 827-4366

  

Michael Benjamin

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

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, 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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 pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered
  Amount to be
Registered(1)
 

Proposed

Maximum Offering

Price Per Share(2)

  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee(3)

Common stock, par value $0.000025 per share

  18,975,000   $47.00   $891,825,000   $97,299

 

 

 

(1)

Includes 2,475,000 additional shares that the underwriters have the option to purchase.

 

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares that the underwriters have the option to purchase, if any.

 

(3)

The Registrant previously paid this amount in connection with prior filings 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 will file a further amendment which specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated March 23, 2021.

16,500,000 Shares

 

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock of DigitalOcean Holdings, Inc.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price will be between $44.00 and $47.00 per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “DOCN.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.

 

 

See “Risk Factors” beginning on page 14 to read about factors you should consider before buying our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

      

Per Share

      

Total

 

Initial public offering price

       $                         $             

Underwriting discount (1)

       $                         $             

Proceeds, before expenses, to us

       $                         $             

 

(1)

See the section titled “Underwriting” for additional information regarding compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional 2,475,000 shares of common stock from us at the initial public offering price less the underwriting discount.

One or more funds affiliated with Tiger Global Management LLC and AI Droplet Subsidiary LLC, which is affiliated with one of our principal stockholders, have indicated an interest in purchasing an aggregate of up to a maximum of $175 million in shares of common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Tiger Global Management LLC and AI Droplet Subsidiary LLC could determine to purchase more, less or no shares of common stock in this offering, or the underwriters could determine to sell more, less or no shares to Tiger Global Management LLC and AI Droplet Subsidiary LLC. The underwriters will receive the same discount on any of our shares of common stock purchased by Tiger Global Management LLC and AI Droplet Subsidiary LLC as they will from any other shares sold to the public in this offering.

The underwriters expect to deliver the shares against payment in New York, New York on or about                 , 2021.

 

 

 

Morgan Stanley   Goldman Sachs & Co. LLC   J.P. Morgan
BofA Securities   Barclays   KeyBanc Capital Markets
Canaccord Genuity  

JMP Securities

 

Stifel

Prospectus dated                , 2021.


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Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by us or on our behalf to which we may have referred you in connection with this offering. Neither we nor the underwriters take responsibility for, or can provide assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our 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 common stock.

For investors outside the United States: Neither we 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 outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

Through and including                 , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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A LETTER FROM YANCEY SPRUILL, OUR CHIEF EXECUTIVE OFFICER

Introduction

Thank you for your interest in DigitalOcean and for considering an investment in our company. I wanted to share a few thoughts with you to provide a little more color on our company.

Our Start and Mission

Nine years ago, our founders had a vision that the cloud was the new way to build modern day web applications. They firmly believed that software developers, entrepreneurs and small and medium-sized businesses (SMBs) were being poorly served by the emerging cloud computing providers. As a result, millions and millions of innovators were not able to take full advantage of the many opportunities becoming available through innovative cloud infrastructure technologies.

DigitalOcean was founded with a focus on creating simple solutions that developers love. Our mission is to simplify cloud computing so developers and businesses can spend more time creating software that changes the world. We estimate there are approximately 100 million SMBs globally today and 14 million new businesses started each year across the globe. We believe DigitalOcean is the perfect place for them to start, get lift-off and build their businesses.

When start-ups and SMBs are building their applications or businesses, they need to maximize their energies on developing great products and building customer relationships. When they buy technology tools, they want them to be easy to use and they want help and support when they have issues deploying those tools.

DigitalOcean is purpose-built to enable developers, entrepreneurs, start-ups and SMBs in a way that wasn’t possible a decade ago. Our offerings provide on-demand infrastructure and platform tools for developers, start-ups and SMBs that are easy to leverage, broadly accessible, reliable and affordable.

We provide a range of capabilities to access our compute, network and storage infrastructure, as well as software-managed services that provide additional capabilities for managing more robust infrastructure needs - from testing code to building their customer serving applications.

We have removed the barriers to entry for early-stage businesses, helping them turn their ideas into an application, website or tool that is available globally in a matter of minutes - and, importantly, at a manageable and transparent price point.

Our founders started with four key principles that endure today. These four principles allow us to provide a highly differentiated experience for our customers all over the world:

 

  1.   Simplicity - We take infrastructure technology and make it simple across all aspects of the product experience.  

 

  2.   Customer Support - We provide live support to all customers, regardless of price point, and we provide free access on our site to tens of thousands of helpful documents.  

 

  3.   Community - We invest heavily in the community of developers and entrepreneurs by helping them in the early stages of idea generation, and by providing various resources to guide them in successfully pursuing their ventures.  

 

  4.   Open Source Software - Through open source software we enable faster, lower-cost innovation without locking customers into a proprietary software technology stack.  

 



 

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It has been only nine years since DigitalOcean was founded and we are incredibly proud of what we have already accomplished. We now serve more than 570,000 customers in over 185 countries. We’ve built a secure, efficient, reliable and global-scale infrastructure with a growing set of managed software services to support our customers. We’ve established ourselves as a top developer learning community with over 34,000 developer tutorials, technical guides and community-generated Q&As. We have also crossed $357 million in ARR and achieved 30% Adjusted EBITDA margin in 2020.

And we’re just getting started...

Our Strategy

Our strategy is focused on three key imperatives - Grow faster, Grow smarter and Grow together.

To Grow faster, we are focusing on optimizing our go-to-market execution - from how we attract customers to how we expand our customer relationships to what we offer our customers. We are committed to innovation in the products and services we offer and will always be laser-focused on serving our core customer set. We have a massive customer and revenue opportunity in front of us and this go-to-market innovation will drive our growth and long-term success.

To Grow smarter, we are focusing our team on building efficiency as we scale. We will continue to improve our customers’ experience on our platform, which will include building more robustness, security, reliability and scalability to allow them to grow with us. We will do so while also building operating efficiencies as we invest, so that we can improve operating margins and cash generation over time. Profitability is a choice, and we choose to self-fund our future. This provides our customers with the comfort to put their trust in us and to know we will be here to support their growth and aspirations over the long term. This also provides our investors with confidence that we will prioritize our investments on the highest growth and return-generating activities to create sustainable equity value.

To Grow together, we invest in everyone at DigitalOcean. Even as our business scales, it will continue to be an incredible place to work and to grow personally and professionally. We want this to be a memorable and defining experience for each of us in the broader arc of our careers. We want to support everyone across our company, so each of us is ready to perform at our best as we march together and build an enduring company that serves significantly more customers, is significantly larger in terms of revenue and is also more profitable.

We look forward to providing regular updates against these key imperatives as we make progress over time.

Our Values

Our values help us frame who we are. We strive to live them every day, in every decision and with every interaction. They are the fabric that binds us together and inspires us, and they are a powerful statement that it’s not just “what we do” but also “how we do it.”

 

   

Our community is bigger than just us



 

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Simplicity in all we DO

 

   

We speak up when we have something to say and listen when others DO

 

   

We are accountable to deliver on our commitments

 

   

Love is at our core

The global community of software developers and entrepreneurs have been the foundation and inspiration for everything we do. Simplicity is a core value to us because it is a reminder to keep our customers top of mind in everything we do. Doing so enables us to keep our solutions tailored to them and allows them to focus on building their applications.

We speak up when we have something to say and listen when others DO is about our transparency and inclusivity. We want DigitalOcean to be a place where you know where we stand and no matter your background or experiences, you can find your voice and your place here. Our customers, employees and investors place enormous trust in us, and we have to be accountable to deliver to all of you. Last, but certainly not least, love is at our core. The love for our customers and for what we do in our jobs makes DigitalOcean a special place – you hear it in the voices of our customers and our employees every time they talk about DigitalOcean.

Our Hub for Good Initiative

In the spring of 2020, we launched Hollie’s Hub for Good as a way to donate a portion of our infrastructure to organizations looking to make a difference in serving their communities during this extraordinary time. This program was originally designed to support COVID-19 relief efforts, but we have now expanded the scope and resources of this program to support efforts to make the world a better place beyond alleviating the strains of the pandemic. Since launch, we have sponsored over 1,000 projects, including apps created to enable musicians to collaborate remotely, to provide a way for local citizens to contribute to restaurants and their workers, to translate the torrent of information being put out on TV and news into a language the hearing impaired can understand, to identify local residents in need and match them to volunteers to get them the food and medicine they need, and so many more.

Upon completion of our IPO, we are looking to further expand our investment in Hollie’s Hub for Good to promote the entrepreneurial and developer communities’ use of cloud computing to innovate and make our world a better place. We are joining the Pledge 1% movement and will be allocating a dollar amount equal to 1% of our equity valuation at the pricing of our IPO to expand our Hollie’s Hub for Good program over the next 10 years. We’re proud to expand Hollie’s Hub for Good, and we are excited that our technology can be a force for good across our world and to demonstrate that the community is bigger than just us.

In Closing

We would be honored to have you join us as an investor on our post-IPO journey. We believe we have an incredible opportunity to serve aspiring software developers and entrepreneurs throughout the world as they test their ideas, build their businesses and realize their dreams.

 

LOGO

Yancey Spruill

Chief Executive Officer

 



 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “DigitalOcean,” the “company,” “we,” “our,” “us” or similar terms refer to DigitalOcean Holdings, Inc. and its consolidated subsidiaries.

Overview

Our mission is to simplify cloud computing so that developers and businesses can spend more time building software that changes the world.

DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for developers, start-ups and small and medium-sized businesses, or SMBs. We were founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and increase their productivity and agility. Over 570,000 individual and business customers currently use our platform to build, deploy and scale software applications. Our users include software engineers, researchers, data scientists, system administrators, students and hobbyists. Our customers use our platform across numerous industry verticals and for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. We believe that our focus on simplicity, community, open source and customer support are the four key differentiators of our business, driving a broad range of customers around the world to build their applications on our platform.

Cloud computing is revolutionizing how companies across the globe develop and deploy applications. The cloud offers lower upfront cost and superior flexibility, extensibility and scalability as compared to on-premise software development environments. These benefits are especially valuable for start-ups and SMBs, as they typically have more limited financial resources, operational expertise and IT personnel. As software and cloud-based technologies have become essential across industries and businesses of all sizes, the number of software developers and their strategic importance to organizations are both increasing significantly. According to SlashData, the number of developers globally was 19 million in 2019 and is expected to grow to 45 million by 2030.

Improving the developer experience and increasing developer productivity are core to our mission. Our developer cloud platform was designed with simplicity in mind to ensure that software developers can spend less time managing their infrastructure and more time turning their ideas into innovative applications to grow their businesses. Simplicity guides how we design and enhance our easy-to-use-interface, the core capabilities we offer our customers and our approach to predictable and transparent pricing for our solutions. We offer mission-critical infrastructure solutions across compute, storage and networking, and we also enable developers to extend the native capabilities of our cloud with fully managed application, container and database offerings. In just minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring and scale up and down as needed. Our pricing is consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments.

The global developer and open source communities are fundamental to our business, and a key source of ideas and innovations that support our sustained growth. Our developer-centric approach has helped us foster a



 

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large and loyal following. We attract approximately 5 million monthly unique visitors to our websites, host what we believe is the largest hackathon in the world, and offer a comprehensive library of high-quality technical tutorials and community-generated questions and answers. Developers and SMBs especially value open source technology as it allows them greater choice, affordability and flexibility, and our platform is designed to take advantage of open source technology to provide our customers with a much more efficient way to work. Our participation in and support of the open source community further enhance the attractiveness, depth and scalability of our offering.

Our customers depend on us for their critical business needs, and we are passionate about providing superior 24x7 customer support to all of our customers, regardless of size. We believe our customer support, coupled with our easy-to-use self-help resources and active developer community, has created tremendous brand loyalty amongst our growing customer base. Our customers become great advocates for DigitalOcean and are a common source of new customer referrals. We are proud of our Net Promoter Score, or NPS, which averaged 65 during 2020, comparable to some of the world’s most beloved brands.

We have a highly efficient self-service customer acquisition model, which we have recently complemented with a targeted inside sales force. Our sales and marketing expense as a percentage of revenue was approximately 14%, 12% and 11% in 2018, 2019 and 2020, respectively. The efficiency of our go-to-market model and our focus on the needs of the individual and SMB market have helped us build a global customer base that continues to grow. We had approximately 573,000 customers as of December 31, 2020, up from approximately 502,000 as of December 31, 2018. Our customers are spread across over 185 countries, and around two-thirds of our revenue has historically come from customers located outside the United States. We have a growing number of customers with higher spending levels, and our existing customers are continuing to expand their business with us. Our average revenue per customer (which we refer to as ARPU) has increased significantly, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for additional information.

We have experienced strong revenue growth and improving margins in recent periods. For the years ended December 31, 2018, 2019 and 2020, our revenue was $203.1 million, $254.8 million and $318.4 million, respectively, representing year-over-year growth of 25% in 2019 and 2020. Our net loss attributable to common stockholders was $36.0 million, $40.4 million and $43.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. Our adjusted EBITDA was $39.5 million, $55.2 million and $95.9 million for the years ended December 31, 2018, 2019 and 2020, respectively. Our net cash provided by operating activities was $38.0 million, $39.9 million and $58.1 million for the years ended December 31, 2018, 2019 and 2020, respectively. See the section titled “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for additional information regarding adjusted EBITDA, the limitations of this non-GAAP financial measure and a reconciliation of this measure to the most directly comparable financial measure stated in accordance with GAAP.

Industry Background

There are a number of key technology and industry trends driving our opportunity, including:

 

   

The Growing Need for Technological Innovation is Driving Cloud Computing Adoption. Technology is transforming how businesses of all sizes engage with customers, manage their operations and drive competitive advantages. The global phenomenon of technology-powered growth and innovation requires nearly every company to focus their efforts on harnessing the power of technology through cloud services. Cloud computing has become the new standard for IT infrastructure as organizations seek to benefit from the flexibility, scalability and reliability of the cloud. Cloud technologies enable businesses to better focus their efforts on customer applications rather than the physical infrastructure required to support their



 

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operations. Start-ups and SMBs are particularly focused on leveraging the cloud for capabilities that would otherwise be inaccessible due to the high cost and expertise needed to deploy these capabilities on-premise.

 

   

Proliferation of Cloud Native Start-Ups and SMBs. There are more than 32 million SMBs in the United States alone, according to the World Bank, and we estimate there are at least three times that number, or 100 million SMBs, globally. We expect this number will continue to grow, with more than 14 million net new SMBs created globally each year. In addition, the founding teams of these SMBs are no longer comprised only of technical individuals with advanced software development capabilities, but now include a far wider range of individuals. These individuals are able to leverage simple and reliable development tools and the widespread availability and significantly lower upfront cost of cloud computing to start companies. As such, a significant proportion of start-ups and SMBs are being built in the cloud to benefit from the faster, cheaper and easier way to deploy and manage their business solutions.

 

   

Software Developers Are Increasingly Influential Within Organizations. Companies increasingly rely on developers to quickly adapt to changing technological and business trends in order to compete. This trend has contributed to the shift to the cloud as cloud-based technologies increase the efficiency and flexibility of those developers. Developer productivity has become a top priority for companies around the world as they recognize the significant benefits derived from providing developers with the most powerful tools available. As a result, the global developer population, which according to SlashData will reach 45 million by 2030, has become increasingly influential on technology-related investment decisions.

 

   

Open Source Software Is Accelerating Innovation. Open source technologies are powering many of the world’s most innovative start-ups and SMBs. This trend is expansive and being driven primarily by developers who are increasingly empowered to use the most efficient tools to accelerate the pace of innovation. Open source software enables individuals and businesses to access and use low cost, proven software tools for their applications instead of investing the time and resources in recreating the same use cases in self-developed software. Businesses of all sizes benefit from the many advantages of open source including, lower costs, increased speed to market, application reliability and flexibility and improved security.

 

   

Organizations are Increasingly Using Multiple Clouds. Multi-cloud deployments have become increasingly common as individuals and businesses seek to match their applications with the best technology stacks and commercial models to run them while avoiding vendor lock-in akin to legacy IT infrastructure services. The future growth of the cloud-computing market across the globe will benefit significantly from this expanding trend of multi-cloud adoption.

Limitations of Existing Offerings on Developers, Start-Ups and SMBs

Existing offerings from large public cloud vendors are designed for complex, enterprise use cases such as migrating legacy workloads from on-premise to the cloud. The products and services offered by these vendors are not tailored for the needs of individual developers, start-ups or SMBs. The limitations of these enterprise-focused offerings include the following:

 

   

Difficult to Use. Enterprise-focused vendors frequently have complicated implementation processes, which require a significant amount of time to learn complex user interfaces and features rather than allowing developers to focus on building and deploying applications. These unintuitive or inconveniently packaged services have limited the ability of start-ups and SMBs, who typically do not have IT departments or large teams, to maximize the value of their cloud investments due to the amount of time and resources required to train on and manage underlying infrastructure.



 

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Uncurated Set of Offerings. Traditional public cloud vendors have built their platforms to serve global enterprises with large development teams. The thousands of ancillary products and services that are offered by these vendors create a significant amount of complexity that is difficult for developers, start-ups, and SMBs to manage.

 

   

Complex and Opaque Pricing. Existing cloud providers often have intricate and unpredictable pricing and billing practices. The lack of pricing transparency frequently leads to surprise charges and higher than expected costs, making budgeting and cost optimization very difficult. Companies frequently need dedicated employees, pricing analytics tools or even specialized consultants to understand how products are priced and how to manage their bills.

 

   

Lack of Customer Support. As traditional public cloud vendors target large enterprise customers, smaller buyers often do not get the necessary level of support required to manage their infrastructure. These smaller buyers, including start-ups and SMBs, are often those most in need of and reliant on support to help them manage their infrastructure effectively and efficiently.

Our Solution

DigitalOcean was founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. We pioneered the developer cloud platform to simplify cloud computing, enabling developers and developer teams to quickly deploy and scale applications, collaborate efficiently and improve business performance. Empowered by an easy-to-use self-service model, intuitive control panel and highly predictable pricing, our customers are able to rapidly accelerate innovation and increase their productivity and agility.

 

   

Simple and Intuitive. Our platform is engineered to take a user from inquiry to deployment within minutes, without any specialized training or heavy implementation. We abstract away the complexity that is generally found across legacy cloud providers to provide a compelling, intuitive interface with click-and-go options. Our platform provides users with a deployment interface that is comparable to interfaces provided by consumer internet leaders and is designed to minimize the number of steps to deployment.

 

   

Designed by Developers for Developers. Our platform was built with a developer-first mentality and is designed for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. Our innovative cloud platform is designed to eliminate the complexity and obstacles associated with deploying in and managing the cloud.

 

   

Built to Help Businesses Scale. Our highly-curated set of solutions, including compute, storage and networking offerings, managed databases and developer and management tools, are all designed to address the needs of start-ups and SMBs as they scale their businesses and require more cloud capabilities.

 

   

Open Source. Our participation in and support of the open source software community enhances the attractiveness, depth and scalability of our offering. It increases the transparency of our technology and allows our customers to more efficiently write their own integrations. We give back to the community by sponsoring projects to create content and tools that help developers build great software and hosting events that are focused on driving the growth of open source, such as our Hacktoberfest, which we believe is the largest hackathon in the world.

 

   

Differentiated Customer Support. We offer expert 24x7 technical support and customer service, with support staff spanning various time zones to ensure our customers quickly achieve their objectives and



 

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overcome challenges. Developers and engineers are a key part of our customer support team, and our technical support is—and always has been—available free of charge to all customers. Customers cite our attentive support as a key driver of their decision to start and grow their businesses on our platform.

 

   

Broad-Based Community Ecosystem: We have built one of the world’s largest developer learning communities, with approximately 6,000 high-quality developer tutorials and over 28,000 community-generated questions & answers. The strength and continued growth of our community ecosystem, which is managed by our internal developer relations and editorial teams, is predicated on differentiated content on our community education website, which attracts approximately 3.5 million monthly unique visitors.

 

   

Transparent and Predictable Pricing. Our approach to billing and pricing is simple, intuitive and transparent. Our pricing is consumption-based and renewable monthly, making it easy for our customers to optimize their deployments. We provide detailed monthly invoices, irrespective of the customer’s size or number of products purchased, making it easy to track usage on an ongoing basis. We enable our customers to completely control their spending and ensure there are no hidden charges that appear at the end of the month.

 

   

Security and Data Protection. We invest significantly in securing the computing infrastructure foundation upon which our customers build and scale their projects. We remove the complexity of securing infrastructure for our customers and make it simple for them to build the security layers required for their use cases. We are also committed to customer data privacy and utilize best-in-class access, encryption and data protection technologies and processes.

 

   

Built for Collaboration. Our platform enables secure and efficient collaboration across developer teams to manage and scale infrastructure and applications. We support thousands of developer teams on our platform and provide them with easy-to-use tools to better manage their workflows.

Key Benefits to Our Customers

Our solution is designed to empower our target customers with best-in-class cloud technologies, while supporting them with superior customer service. This customer-centric focus underpins our mission of simplifying cloud computing so developers and businesses can spend more time building software that changes the world. Our NPS averaged 65 during 2020, which is comparable to some of the world’s most beloved brands. For our customers, the key benefits of our solution include:

 

   

Accelerating innovation by leveraging the full power of the cloud

 

   

Making it simple to build, deploy and scale applications

 

   

Achieving rapid time-to-value with a reliable, highly-performant and cost-effective platform

 

   

Spending less time managing infrastructure and more time on higher value tasks that drive the growth and success of their businesses

 

   

Superior customer support that is free to all customers

 

   

A highly-reliable, scalable and secure platform



 

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We have a highly diverse customer base that uses our platform for a variety of projects and applications. Recent customer success stories include:

 

   

RouteTrust, a telecommunications start-up, launched a Platform-as-a-Service (PaaS) offering that processes billions of voice calls each month using our Droplets and our Managed Kubernetes service.

 

   

Cloudways, a managed hosting company in Malta, provides web hosting services to over 250,000 websites using our Droplets.

 

   

Rockerbox, an advertising and analytics company, dramatically reduced their cloud costs by 80% by efficiently running their data collection and analysis using our Droplets and our Managed Kubernetes, Managed Databases, Load Balancers and Spaces services.

 

   

Jiji, an online marketplace platform in Nigeria, serves over 200 million buyers and sellers across five countries in Africa.

 

   

Parabol, a remote meeting platform for teams embracing agile practices, makes it easier to host planning sessions, scrums and meetings online using our Droplets and our Managed Database service.

 

   

Centra, a Software-as-a-Service (SaaS)-based e-commerce platform in Sweden, provides a powerful backend offering that allows brands to build custom-designed, online flagship stores.

 

   

An entrepreneur in the United Kingdom utilizes our Managed Kubernetes service and open source software to profitably scale his API-centric product helping online media companies automate their quality assurance testing.

Our Market Opportunity

The Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) markets are two of the largest and fastest growing markets across all industries. According to IDC, the worldwide IaaS and PaaS markets for individuals and companies with less than 500 employees are estimated to be approximately $44.4 billion in the aggregate in 2020. The 2020 IaaS market, which is comprised of compute and storage, was estimated to be $31.9 billion. The 2020 PaaS market, which includes database management systems, application platforms and other platform services, was estimated to be $12.5 billion. According to IDC, these combined IaaS and PaaS markets are expected to grow to $115.5 billion in 2024, representing a 27% compound annual growth rate.

We believe the individual developer, start-up and SMB markets are underserved, and we expect our massive addressable market to continue to grow rapidly beyond 2024. The key drivers of this growth come from the increasing technological innovation which drives cloud adoption combined with the growing number of developers and SMBs worldwide. According to SlashData, the global developer population is expected to more than double over the next 10 years to approximately 45 million by 2030. Furthermore, there are more than 32 million SMBs in the United States alone, according to the World Bank, and we estimate that there are at least three times that number, or 100 million SMBs, globally. We expect this number will continue to grow, with more than 14 million net new SMBs created globally each year.

Our Growth Strategies

We are driving significant growth by executing on the following key strategies:

 

   

Growing Our Customer Base. We believe there is a substantial opportunity to further expand our customer base. We have historically attracted customers by offering a low-friction, self-service cloud platform combined with a highly-efficient self-service marketing model.



 

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Increasing Usage by Our Existing Customers. Our customer base of more than 570,000 customers represents a significant opportunity for further sales expansion through increased usage of our platform and adoption of additional product offerings.

 

   

Investing in Our Platform and Product Offerings. We have a history of, and will continue to invest significantly in, delivering innovative products, features and functionality targeted at our core customer base. We have successfully attracted new customers to our platform and driven expansion with existing customers through new product launches, such as our Managed Kubernetes offering in late 2018, our Managed Database offering in 2019 and our App Platform service in October 2020.

 

   

Augmenting Our Platform through Opportunistic Strategic Acquisitions. We believe that strategic partnerships and acquisitions will allow us to accelerate our key platform, product and marketing initiatives. For example, our App Platform service originated from an acquisition and we have expanded our community tutorial content through two small acquisitions, and we believe that additional acquisition opportunities will supplement our organic growth strategy.

 

   

Growing and Engaging Our Community. More than 5 million unique visitors interact with our websites, including our developer community, each month to learn, share and educate others. We are committed to supporting and expanding this community of innovators and technologists through high-quality content and expanded developer-focused programs and events around the world.

Risk Factors Summary

Investing in our common stock involves a high degree of risk. The risks and uncertainties described in the section titled “Risk Factors” immediately following this summary may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. These risks and uncertainties include, among others:

 

   

Our recent growth may not be indicative of our future growth.

 

   

We have a history of operating losses and may not achieve or sustain profitability in the future.

 

   

We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.

 

   

If we are unable to attract new customers, including through our self-service customer acquisition model, retain existing customers and/or expand usage of our platform by such customers, we may not achieve the growth we expect, which would adversely affect our results of operations and financial condition.

 

   

If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our platform or our customers’ data, we may incur significant liabilities and our reputation and business may be harmed.

 

   

If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or customer needs, our platform and products may become less competitive.



 

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The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.

 

   

Our current operations are international in scope, and we plan further geographic expansion, creating a variety of operational challenges.

 

   

Activities of our customers or the content on their websites could subject us to liability.

 

   

The success of our business depends on our customers’ continued and unimpeded access to our platform on the internet and, as a result, also depends on internet providers and the related regulatory environment.

Corporate Information

We were incorporated in Delaware in 2012 under the name Digital Ocean, Inc. In 2016, as part of a restructuring, Digital Ocean, Inc. was converted into DigitalOcean, LLC, and DigitalOcean Holdings, Inc. was formed as the ultimate parent holding company. Our primary operations are performed globally through our wholly owned operating subsidiaries. Our principal executive offices are located at 101 6th Avenue, New York, New York 10013, and our telephone number is (646) 827-4366. Our website address is www.digitalocean.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

“DigitalOcean®”, “Droplet®” and our other registered and common law trade names, trademarks and service marks are the property of DigitalOcean. Other trade names, trademarks and service marks used in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.



 

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THE OFFERING

 

Common stock offered by us

  

16,500,000 shares

Common stock to be outstanding after this offering

  

105,303,340 shares

Option to purchase additional shares of common stock offered by us

  


2,475,000 shares

Use of proceeds

  

We estimate that our net proceeds from the sale of our common stock that we are offering will be approximately $700.1 million (or approximately $806.0 million if the underwriters’ option to purchase additional shares of our common stock from us is exercised in full), assuming an initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the capital markets and increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to (i) partially repay our outstanding indebtedness under the 2020 Credit Facility, under which $230.0 million ($63.2 million under the 2020 Revolving Credit Facility and $166.8 million under the 2020 Term Loan) was outstanding and had an interest rate of 3.1875% as of December 31, 2020, which will mature on February 13, 2025, and/or (ii) acquire complementary businesses, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time. See the section titled “Use of Proceeds” for additional information.

Risk factors

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


 

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Indication of Interest

   One or more funds affiliated with Tiger Global Management LLC and AI Droplet Subsidiary LLC, which is affiliated with one of our principal stockholders, have indicated an interest in purchasing an aggregate of up to a maximum of $175 million in shares of common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Tiger Global Management LLC and AI Droplet Subsidiary LLC could determine to purchase more, less or no shares of common stock in this offering, or the underwriters could determine to sell more, less or no shares to Tiger Global Management LLC and AI Droplet Subsidiary LLC. The underwriters will receive the same discount on any of our shares of common stock purchased by Tiger Global Management LLC and AI Droplet Subsidiary LLC as they will from any other shares sold to the public in this offering.

Proposed trading symbol

  

“DOCN”

The number of shares of common stock that will be outstanding after this offering is based on 88,803,340 shares of common stock outstanding as of December 31, 2020, and excludes:

 

   

16,933,494 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020 under the 2013 Stock Plan, or 2013 Plan, with a weighted-average exercise price of approximately $6.73 per share;

 

   

413,750 shares of common stock subject to restricted stock units, or RSUs, outstanding as of December 31, 2020 under the 2013 Plan;

 

   

308,632 shares of Series A-1 preferred stock issuable upon the exercise of warrants outstanding as of December 31, 2020, which will become warrants to purchase shares of common stock upon the completion of this offering, with a weighted-average exercise price of approximately $1.94 per share;

 

   

1,654,338 shares of common stock subject to RSUs granted after December 31, 2020 under the 2013 Plan;

 

   

30,930,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which represents the sum of (i) 12,000,000 new shares, (ii) the number of shares that remain available for grant of future awards under the 2013 Plan, which shares will be added to the shares reserved under our 2021 Plan and will cease to be available for issuance under the 2013 Plan at the time our 2021 Plan becomes effective, and (iii) any shares underlying outstanding stock awards granted under the 2013 Plan that expire, or are forfeited, cancelled, withheld, or reacquired, as well as any annual automatic increases in the number of shares of common stock reserved for future issuance under our 2021 Plan; and

 

   

2,200,000 shares of common stock reserved for issuance under our 2021 Employee Stock Purchase Plan, or the ESPP, as well as any future increases in the number of shares of common stock reserved for future issuance under our ESPP.



 

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In addition, unless we specifically state otherwise, the information in this prospectus assumes:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

   

the automatic conversion of all of our outstanding shares of preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering;

 

   

the automatic conversion of warrants to purchase 308,632 shares of Series A-1 preferred stock into warrants to purchase the same number of shares of common stock in connection with the completion of this offering;

 

   

no exercise of outstanding options or warrants, or the settlement of outstanding RSUs, subsequent to December 31, 2020; and

 

   

no exercise of the underwriters’ option to purchase additional shares of common stock from us in this offering.



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated statements of operations data for the years ended December 31, 2018, 2019 and 2020 and the summary consolidated balance sheet data as of December 31, 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for the full year or any other period in the future.

 

     Year Ended December 31,  
             2018                     2019                     2020          
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

      

Revenue

   $ 203,136     $ 254,823     $ 318,380  

Cost of revenue(1)

     97,042       122,259       145,532  
  

 

 

   

 

 

   

 

 

 

Gross profit

     106,094       132,564       172,848  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     44,934       59,973       74,970  

Sales and marketing(1)

     29,445       31,340       33,472  

General and administrative(1)

     59,009       71,156       80,197  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     133,388       162,469       188,639  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,294     (29,905     (15,791

Other (income) expense

     7,484       9,692       26,866  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (34,778     (39,597     (42,657

Income tax expense

     1,221       793       911  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (35,999   $ (40,390   $ (43,568
  

 

 

   

 

 

   

 

 

 

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

   $ (1.06   $ (1.06   $ (1.05
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share, basic and diluted(2)

     33,971       38,004       41,658  
  

 

 

   

 

 

   

 

 

 

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

       $ (0.50
      

 

 

 

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

         87,130  
      

 

 

 

 

(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
             2018                      2019                      2020          
     (in thousands)  

Cost of revenue

   $  42      $ 1,142      $ 545  

Research and development

     2,559        4,688        7,765  

Sales and marketing

     381        539        1,924  

General and administrative

     9,185        12,277        19,222  
  

 

 

    

 

 

    

 

 

 

Total

   $ 12,167      $ 18,646      $ 29,456  
  

 

 

    

 

 

    

 

 

 


 

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Stock-based compensation for the years ended December 31, 2018, 2019 and 2020 included compensation of $8.0 million, $12.1 million and $18.3 million, respectively, related to secondary sales of common stock by certain current and former employees, which is primarily included in General and administrative. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Years Ended December 31, 2019 and 2020—Operating Expenses” and “—Comparison of Years Ended December 31, 2018 and 2019—Operating Expenses.”

 

(2)

See Note 11 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used to compute the per share amounts.

(3)

The pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited) and the weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited) for the year ended December 31, 2020 give effect to the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering.

 

     December 31, 2020  
     Actual     Pro Forma(1)      Pro Forma
As Adjusted(2)(3(4)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $     100,311     $     100,311      $ 800,424  

Total assets

     430,252       430,252        1,130,365  

Total liabilities(5)

     329,272       314,809        314,809  

Convertible preferred stock

     173,074       —          —    

Total stockholders’ (deficit) equity(5)

   $ (72,094   $ 115,443      $     815,556  

 

(1)

The pro forma consolidated balance sheet data gives effect to (a) the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering; and (b) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, as if such conversion, issuance and reclassification had occurred on December 31, 2020.

(2)

The pro forma as adjusted consolidated balance sheet data reflects (a) the items described in footnote (1) above; and (b) our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at an assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase (decrease) in the assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, total assets and total stockholders’ equity by $15.5 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 underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of cash, total assets and total stockholders’ equity by $42.8 million, assuming the assumed initial public offering price of $45.50 per share of common stock remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(4)

Pro forma as adjusted cash and cash equivalents and total assets each does not give effect to $1.4 million of deferred offering costs that had been paid as of December 31, 2020.

(5)

Pro forma includes reclassification of $14.5 million for the conversion of the preferred stock warrant liability to warrants to purchase shares of common stock.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose some or all of your original investment.

Risk Factors Summary

Investing in our common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties, as more fully described below. These risks and uncertainties include, among others:

 

   

Our recent growth may not be indicative of our future growth.

 

   

We have a history of operating losses and may not achieve or sustain profitability in the future.

 

   

We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.

 

   

If we are unable to attract new customers, including through our self-service customer acquisition model, retain existing customers and/or expand usage of our platform by such customers, we may not achieve the growth we expect, which would adversely affect our results of operations and financial condition.

 

   

If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our platform or our customers’ data, we may incur significant liabilities and our reputation and business may be harmed.

 

   

If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or customer needs, our platform and products may become less competitive.

 

   

The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.

 

   

Our current operations are international in scope, and we plan further geographic expansion, creating a variety of operational challenges.

 

   

Activities of our customers or the content on their websites could subject us to liability.

 

   

The success of our business depends on our customers’ continued and unimpeded access to our platform on the internet and, as a result, also depends on internet providers and the related regulatory environment.

 

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Risks Related to Our Business and Industry

Our recent growth may not be indicative of our future growth.

Our revenue was $203.1 million, $254.8 million and $318.4 million for the years ended December 31, 2018, 2019 and 2020, respectively. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. Even if our revenue continues to increase, our revenue growth rate may decline in the future as a result of a variety of factors, including the maturation of our business. Overall growth of our revenue depends on a number of factors, including our ability to:

 

   

attract new customers and grow our customer base;

 

   

maintain and increase the rates at which existing customers use our platform, sell additional products and services to our existing customers, and reduce customer churn;

 

   

invest in our platform and product offerings;

 

   

augment our platform through opportunistic strategic acquisitions; and

 

   

grow and engage our community.

We may not successfully accomplish any of these objectives and, as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market, we may be unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our results or growth for any prior quarterly or annual periods as any indication of our future results or growth.

We have a history of operating losses and may not achieve or sustain profitability in the future.

We have incurred significant losses since inception. We generated net losses attributable to common stockholders of $36.0 million, $40.4 million and $43.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $167.0 million. While we have experienced significant revenue growth in recent periods, we are not certain whether or when we will obtain a high enough volume of sales to sustain or increase our growth or achieve or maintain profitability in the future. We also expect our costs and expenses will increase in future periods, which could negatively affect our future results of operations if our revenue does not increase. Our efforts to grow our business may be costlier than we expect, or the rate of our growth in revenue may be slower than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications or delays, and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.

In addition, we expect to continue to expend substantial financial and other resources on:

 

   

our technology infrastructure, including systems architecture, scalability, availability, performance, security, hardware, equipment and other capital expenditures, including expenses to increase or maintain data center capacity and to successfully optimize and operate data center facilities;

 

   

our sales and marketing organization to engage our existing and prospective customers, increase brand awareness and drive adoption of our products;

 

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product development, including investments in our product development team and the development of new products and new functionality for our platform as well as investments in both further optimizing our existing products and infrastructure and expanding our integrations and other add-ons to existing products and services;

 

   

acquisitions or strategic investments; and

 

   

general administration, including increased legal and accounting expenses associated with being a public company.

Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed, and we may not achieve or maintain profitability in the future.

We have a limited operating history, which makes it difficult to forecast our future results of operations.

We were founded in 2012 and, as a result of our limited operating history, our ability to accurately forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our products, increasing competition, changes to technology, a decrease in the growth of our overall market, our failure to attract more small and medium sized business customers, or our failure, for any reason, to continue to take advantage of growth opportunities. We have also encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, including the other risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.

We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.

Our results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance. In addition to the other risks described herein, factors that may affect our results of operations include the following:

 

   

fluctuations in demand for or pricing and usage of our platform and products;

 

   

our ability to attract new customers and retain existing customers;

 

   

customer expansion rates;

 

   

integration of new products;

 

   

timing and amount of our investments and capital expenditures related to successfully optimizing, utilizing and expanding our data center facilities;

 

   

the investment in and integration of new products and features relative to investments in our existing infrastructure and products;

 

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our ability to control costs, including our operating expenses, and the timing of payment for expenses;

 

   

the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;

 

   

the amount and timing of costs associated with recruiting, training and integrating new employees and retaining and motivating existing employees;

 

   

the effects of acquisitions and their integration;

 

   

general economic conditions, both domestically and internationally, and economic conditions specifically affecting industries in which our customers participate, including those related to the recent COVID-19 pandemic and responses thereto;

 

   

the impact of new accounting pronouncements;

 

   

changes in regulatory or legal environments that may cause us to, among other elements, be unable to continue operating in a particular market, remove certain customers from our platform, and/or incur expenses associated with compliance;

 

   

changes in the competitive dynamics of our market, including consolidation among competitors or customers or new entrants into our market;

 

   

our ability to control fraudulent registrations and usage of our platform, reduce bad debt and lessen capacity constraints on our data centers, servers and equipment; and

 

   

significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our products and platform capabilities.

Any of these and other factors, or the cumulative effect of some of these factors, may cause our results of operations to vary significantly. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.

If we are unable to attract new customers, including through our self-service customer acquisition model, retain existing customers and/or expand usage of our platform by such customers, we may not achieve the growth we expect, which would adversely affect our results of operations and financial condition.

In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. Our business is usage-based and it is important for our business and financial results that our paying customers maintain or increase their usage of our platform and purchase additional products from us. Historically, we have relied on our self-service customer acquisition model for a significant majority of our revenue. While we are expanding our direct sales efforts and personnel, we expect a significant majority of our revenue to come from our self-service customer acquisition model in the coming years. If our self-service customer acquisition model is not as effective as we anticipate, our future growth will be impacted.

In addition, we must persuade potential customers that our products offer significant advantages over those of our competitors. As our market matures, our products evolve, and competitors introduce lower cost or differentiated products that are perceived to compete with our platform and products, our ability to maintain or expand usage of our platform could be impaired. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove higher than anticipated, thereby

 

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impacting our profitability. For example, while we maintain an active user community that serves as a support resource for our customers, there is no guarantee that our customers will continue to contribute to or utilize the community as a self-support resource, and any failure to maintain such an active community could require us to expend more resources on customer acquisition and customer support, and impact our profitability.

Other factors, many of which are out of our control, may now or in the future impact our ability to add new customers in a cost-effective manner, include:

 

   

potential customers’ commitments to existing platforms or greater familiarity or comfort with other platforms or products;

 

   

our failure to expand, retain, and motivate our sales and marketing personnel;

 

   

our failure to obtain or maintain industry security certifications for our platform and products;

 

   

negative media, industry, or financial analyst commentary regarding our platform and the identities and activities of some of our customers;

 

   

the perceived risk, commencement, or outcome of litigation; and

 

   

deteriorating general economic conditions.

The vast majority of our contracts with our customers are based on our terms of service, which do not require our customers to commit to a specific contractual period, and which permit the customer to terminate their contracts or decrease usage of our products and services without advance notice. Our customers generally have no obligation to maintain their usage of our platform. This ease of termination could cause our results of operations to fluctuate significantly from quarter to quarter. Our customer retention may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with the security, performance, and reliability of our products, our prices and usage plans, our customers’ budgetary restrictions, the perception that competitive products provide better or less expensive options, negative public perception of us or our customers, and deteriorating general economic conditions. As a result, we may face high rates of customer churn if we are unable to meet our customer needs, requirements and preferences.

Our future financial performance also depends in part on our ability to expand our existing customers’ usage of our platform and sell additional products to our existing customers. Conversely, our paying customers may reduce their usage to lower-cost pricing tiers if they do not see the marginal value in maintaining their usage at a higher-cost pricing tier, thereby impacting our ability to increase revenue. In order to expand our commercial relationship with our customers, existing customers must decide that the incremental cost associated with such an increase in usage or subscription to additional products is justified by the additional functionality. Our customers’ decision whether to increase their usage or subscribe to additional products is driven by a number of factors, including customer satisfaction with the security, performance, and reliability of our platform and existing products, the functionality of any new products we may offer, general economic conditions, and customer reaction to our pricing model. If our efforts to expand our relationship with our existing customers are not successful, our financial condition and results of operations may materially suffer.

In addition, to encourage awareness, usage, familiarity and adoption of our platform and products, we may offer a credit to new customers who sign up for and use our platform. To the extent that we are unable to successfully retain customers after use of the initial credit, we will not realize the intended benefits of these marketing strategies and our ability to grow our revenue will be adversely affected.

The market for our platform and solutions may develop more slowly or differently than we expect.

It is difficult to predict customer adoption rates and demand for our products and services, the entry of competitive products or services or the future growth rate and size of the Infrastructure-as-a-Service (IaaS) and

 

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Platform-as-a-Service (PaaS) markets. The expansion of these markets depends on a number of factors, including the cost, performance, and perceived value associated with cloud computing platforms as an alternative to more established and legacy systems, the ability of cloud computing platform providers to address heightened data security and privacy concerns, and the cost and effort associated with converting or transition from current systems to cloud-based systems. If we or other cloud computing platform providers experience security incidents, loss of customer data, disruptions or other similar problems, the market for these applications as a whole, including our platform and products, may be negatively affected. If there is a reduction in demand caused by a lack of customer acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending or otherwise, either now or in the future, the market for our platform and products might not continue to develop or might develop more slowly than we expect, which would adversely affect our business, financial condition and results of operations.

Our core customer base consists of individual developers, early stage start-ups and small-to-medium size businesses. As these individuals and organizations grow, if we are unable to meet their evolving needs, we may not be able to retain them as customers. Our business will also suffer if the markets for our solutions proves less lucrative than projected or if we fail to effectively acquire and service such users.

Our core customer base consists of individual developers, early stage start-ups and small-to-medium size businesses, many of which plan for high growth. We expect that our path to growth will, in part, rely on scaling our platform to meet the needs of such customers as they increase usage of our platform. Accordingly, if such customers fail to grow as expected, then our path to growth may be adversely affected. In addition, our inability to offer both suitable services to support their businesses at scale and suitable and appropriately priced services for the initial state of their business, and could adversely affect our business, financial condition and results of operations.

We believe that the individual developer, early stage start-ups and small-to-medium size business markets are underserved, and we intend to continue to devote substantial resources to such markets. However, these customers and potential customers frequently have limited budgets and may choose to allocate resources to items other than our solutions, especially in times of economic uncertainty or recessions. If the individual developer, early stage start-ups and small-to-medium size business markets fail to be as lucrative as we project or we are unable to market and sell our services to such customers effectively, our ability to grow our revenues quickly and achieve or maintain profitability will be harmed.

As we expand our product offerings, we may also attract larger customers outside of our core customer base. Sales to larger customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities.

Sales to larger customers outside of our core customer base involve risks that may not be present or that are present to a lesser extent with sales to individual developers, early stage start-ups and small-to-medium size businesses, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, larger customers may require considerable time to evaluate and test our solutions and those of our competitors prior to making a decision on whether to subscribe to our platform. Moreover, larger customers often begin to deploy our products on a limited basis, but nevertheless demand configuration, integration services and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment.

 

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If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or customer needs, our platform and products may become less competitive.

Our ability to attract new users and customers, expand our customer base, and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing platform and products, increase adoption and usage of our platform and products, and introduce new products and capabilities. The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards, and changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis, anticipate and respond to customer demands and preferences, address business model shifts, optimize our go-to-market execution by improving our cost structure, align sales coverage with strategic goals, improve channel execution and strengthen our services and capabilities in our areas of strategic focus. If we were unable to enhance our products and platform capabilities to keep pace with rapid technological and regulatory change, or if new technologies emerge that are able to deliver competitive products at lower prices, more efficiently, more conveniently, or more securely than our products, our business, financial condition and results of operations could be adversely affected.

We expect that the number of integrations and developer tools we will need to support will continue to expand as developers adopt new technologies, and we will have to develop new or upgraded versions of our platform and products to work with those new platforms. This development effort may require significant engineering, sales and marketing resources, all of which would adversely affect our business. Any failure of our platform or products to operate effectively with future technologies and developer tools could reduce the demand for our platform and products. If we are unable to respond to these changes in a cost-effective manner, our platform may become less marketable and less competitive or obsolete, and our business, financial condition and results of operations could be adversely affected.

Our policies regarding user privacy could cause us to experience adverse business and reputational consequences with customers, employees, suppliers, government entities, users, and other third parties.

From time to time, government entities and law enforcement bodies may seek our assistance with obtaining information about our customers or users. Although we protect the privacy of our customers to the extent possible, we may be required from time to time to provide information about our customers to government entities and law enforcement bodies. In light of our privacy commitments, we may legally challenge law enforcement requests to provide access to our systems, customer Droplets, or other user content but may face complaints that we have provided information improperly to law enforcement or in response to third party abuse complaints. We may experience adverse political, business, and reputational consequences, to the extent that we (a) do not provide assistance to or comply with requests from government entities or challenge those requests publicly or in court or (b) provide, or are perceived as providing, assistance to government entities that exceeds our legal obligations. Any such disclosure could significantly and adversely impact our business and reputation.

We publish a transparency report on an annual basis to provide details of law enforcement and government requests we receive. Our transparency report also includes a list of certain actions we have taken in response to law enforcement requests, including disclosure of information in response to law enforcement requests, as well as our standard policies and procedures regarding any such requests. Both the publishing of our transparency report and, conversely, the actions we take or challenge in response to law enforcement requests could damage our business and reputation.

 

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We rely on third-party data center providers to ensure the functionality of our platform and products. If our data center providers fail to meet the requirement of our business, or if our data center facilities experience damage, interruption or a security breach, our ability to provide access to our platform and maintain the performance of our network could be negatively impacted.

We operate fourteen data centers through leases with third-party data center providers located in the United States, India, Germany, the United Kingdom, Canada, the Netherlands and Singapore. Our business is reliant on these data center facilities. Given that we lease this data center space, we do not control the operation of these third-party facilities. Consequently, we may be subject to service disruptions as well as failures to provide adequate support for reasons that are outside of our direct control. All of our data center facilities and network infrastructure are vulnerable to damage or interruption from a variety of sources including earthquakes, floods, fires, power loss, system failures, computer viruses, physical or electronic break-ins, human error, malfeasance or interference, including by employees, former employees, or contractors, terrorism and other catastrophic events. We and our data centers have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes and capacity constraints, due to an overwhelming number of customers accessing our platform simultaneously. Data center facilities housing our network infrastructure may also be subject to local administrative actions, changes to legal or permitting requirements, labor disputes, litigation to stop, limit, or delay operations, and other legal challenges, including local government agencies seeking to gain access to customer accounts for law enforcement or other reasons. In addition, while we have entered into various agreements for the lease of data center space, equipment, maintenance and other services, the third party could fail to live up to the contractual obligations under those agreements.

Other factors, many of which are beyond our control, that can affect the delivery, performance, and availability of our platform and products include:

 

   

the development, maintenance, and functioning of the infrastructure of the internet as a whole;

 

   

the performance and availability of third-party telecommunications services with the necessary speed, data capacity, and security for providing reliable internet access and services;

 

   

the failure of our redundancy systems, in the event of a service disruption at one of the facilities hosting our network infrastructure, to redistribute load to other components of our network;

 

   

the failure of our disaster recovery and business continuity plans; and

 

   

decisions by the owners and operators of the co-location and ISP-partner facilities where our network infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy, breach their contracts with us, or prioritize the traffic of other parties.

The occurrence of any of these factors, or our inability to efficiently and cost-effectively fix such errors or other problems that may be identified, could damage our reputation, negatively impact our relationship with our customers, or otherwise materially harm our business, results of operations, and financial condition.

The components of our global network are interrelated, such that disruptions or outages affecting one or more of our network data center facilities may increase the strain on other components of our network. In addition, the failure of any of our data center facilities for any significant period of time could place a significant strain upon the ongoing operation of our business, as we have only limited redundant functionality for these facilities, and there may be concentration issues regarding the storing and backup of customer data. Such a failure of a core data center facility could degrade and slow down our network, reduce the functionality of our products for our customers, impact our ability to bill our customers, and otherwise materially and adversely impact our business, reputation, and results of operations.

 

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In addition, if we do not optimize and operate these data center facilities efficiently, or if we fail to expand our data centers to meet increased customer demand, it could result in either lack of available capacity (resulting in poor service performance or technical issues) or excess data center capacity (resulting in increased unnecessary costs), both of which could result in the dissatisfaction or loss of customers and cause our business, results of operations and financial condition to suffer. As we continue to add product and service capabilities, our data center networks become increasingly complex and operating them becomes more challenging.

The terms of our existing data center agreements and leases vary in length and expire on various dates. Upon the expiration or termination of our data center facility leases, we may not be able to renew these leases on terms acceptable to us, if at all. Even if we are able to renew the leases on our existing data centers, rental rates, which will be determined based on then-prevailing market rates with respect to the renewal option periods and which will be determined by negotiation with the landlord after the renewal option periods, may increase from the rates we currently pay under our existing lease agreements. Migrations to new facilities could also be expensive and present technical challenges that may result in downtime for our affected customers. There can also be no assurances that our plans to mitigate customer downtime for affected customers will be successful.

If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our platform or our customers’ data, we may incur significant liabilities and our reputation and business may be harmed.

Our platform and products involve the storage and transmission of data, including personally identifiable information, and security breaches or unauthorized access to our platform and products could result in the loss of our or our customers’ or users’ data, litigation, indemnity obligations, fines, penalties, disputes, investigations and other liabilities. We have been in the past and may continue to be in the future the target of cyber-attacks by third parties seeking unauthorized access to our or our customers’ or users’ data or to disrupt our ability to provide our services. While we have taken steps to protect the confidential and personal information that we have access to, our security measures or those of our third-party service providers that store or otherwise process certain of our and our customers’ or users’ data on our behalf could be breached or we could suffer a loss of our or our customers’ or users’ data. Our ability to monitor our third-party service providers’ data security is limited. Cyber-attacks, computer malware, viruses, social engineering (including spear phishing and ransomware attacks), and general hacking have become more prevalent in our industry, particularly against cloud services. In addition, errors due to the action or inaction of our employees, contractors, or others with authorized access to our network could lead to a variety of security incidents. Further, we do not directly control content that our customers or users store, use, or access in our products. If our customers or users use our products for the transmission or storage of personally identifiable information and our security measures are or are believed to have been breached as a result of third party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability. In addition, our remediation efforts may not be successful.

We also process, store and transmit our own data as part of our business and operations. This data may include personally identifiable, confidential or proprietary information. There can be no assurance that any security measures that we or our third party service providers have implemented will be effective against current or future security threats. While we have developed systems and processes to protect the integrity, confidentiality and security of our and our customers’ or users’ data, our security measures or those of our third party service providers could fail and result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data.

Because there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate attempted security breaches, react in a timely manner or implement adequate preventative measures. Third parties may also conduct attacks designed to temporarily deny customers or users access to our cloud services. Any security breach or other security incident, or the perception that one has occurred, could result in a loss of customer confidence in the security of our platform and damage to our brand,

 

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reduce the demand for our products, disrupt normal business operations, require us to spend material resources to investigate or correct the breach and to prevent future security breaches and incidents, expose us to legal liabilities, including litigation, regulatory enforcement, and indemnity obligations, and adversely affect our business, financial condition and results of operations. These risks are likely to increase as we continue to grow and process, store, and transmit increasingly large amounts of data.

Additionally, although we maintain cybersecurity insurance coverage, we cannot be certain that such coverage will be adequate for data security liabilities actually incurred, will cover any indemnification claims against us relating to any incident, will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large 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 adversely affect our reputation, business, financial condition and results of operations.

In addition, our customers require and expect that we and/or our service providers maintain industry-related compliance certifications, such as SOC 1, SOC 2, SOC 3, PCI-DSS, NIST 800-53, and others. There are significant costs associated with maintaining existing and implementing any newly-adopted industry-related compliance certifications, including costs associated with retroactively building security controls into services which may involve re-engineering technology, processes and staffing. The inability to maintain applicable compliance certifications could result in monetary fines, disruptive participation in forensic audits due to a breach, security-related control failures, customer contract breaches, customer churn and brand and reputational harm.

We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition and results of operations could be harmed.

The growth and expansion of our business will continue to require additional management, operational and financial resources. As usage of our platform grows, we will need to devote additional resources to improving and maintaining our infrastructure and integrating with third-party applications. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support, to serve our growing customer base, and to improve our information technology and financial infrastructure, operating and administrative systems and our ability to effectively manage headcount, capital and processes, including by reducing costs and inefficiencies. Any failure of or delay in these efforts could result in impaired system performance and reduced customer satisfaction, which would negatively impact our revenue growth and our reputation. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.

In addition, we must also continue to effectively manage our capital expenditures by maintaining and expanding our data center capacity, servers and equipment, grow in geographies where we currently have a small presence and ensure that the performance, features and reliability of our service offerings and our customer service remain competitive in a rapidly changing technological environment. If we fail to manage our growth, the quality of our platform and products may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers and employees.

If we underestimate or overestimate our data center capacity requirements and our capital expenditures on data centers, servers and equipment, our results of operations could be adversely affected.

The costs of building out, leasing and maintaining our data centers constitute a significant portion of our capital and operating expenses. To manage our capacity while minimizing unnecessary excess capacity costs, we continuously evaluate our short and long-term data center capacity requirements in order to effectively manage our capital expenditures. We may be unable to project accurately the rate or timing of increases in volume of

 

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usage on our platform or to successfully allocate resources to address such increases, and may underestimate the data center capacity needed to address such increases, and in response, we may be unable to increase our data capacity, and increase our capital expenditures on servers and other equipment, in an expedient and cost-effective manner to address such increases. If we underestimate our data center capacity requirements and capital expenditure requirements, we may not be able to provide our platform and products to current customers or service the expanding needs of our existing customers and may be required to limit new customer acquisition or enter into leases or other agreements for data centers, servers and other equipment that are not optimal, all of which may materially and adversely impair our results of operations.

In addition, many of our data center sites are subject to multi-year leases. If our capacity needs are reduced, or if we decide to close a data center, we may nonetheless be committed to perform our obligations under the applicable leases including, among other things, paying the base rent for the balance of the lease term and continuing to pay for any servers or other equipment. If we overestimate our data center capacity requirements and capital expenditures, and therefore secure excess data center capacity and servers or other equipment, our operating margins could be materially reduced.

We rely on a limited number of suppliers for certain components of the equipment we use to operate our network and any disruption in the availability of these components could delay our ability to expand or increase the capacity of our platform or replace defective equipment.

We do not manufacture the products or components we use to build our platform and the related infrastructure. We rely on a limited number of suppliers for several components of the equipment we use to operate our platform and provide products to our customers. Our reliance on these suppliers exposes us to risks, including:

 

   

reduced control over production costs and constraints based on the then current availability, terms, and pricing of these components;

 

   

limited ability to control the quality, quantity and cost of our products or of their components;

 

   

the potential for binding price or purchase commitments with our suppliers at higher than market rates;

 

   

limited ability to adjust production volumes in response to our customers’ demand fluctuations;

 

   

labor and political unrest at facilities we do not operate or own;

 

   

geopolitical disputes disrupting our supply chain;

 

   

business, legal compliance, litigation and financial concerns affecting our suppliers or their ability to manufacture and ship our products in the quantities, quality and manner we require;

 

   

impacts on our supply chain from adverse public health developments, including outbreaks of contagious diseases such as the ongoing COVID-19 pandemic; and

 

   

disruptions due to floods, earthquakes, storms and other natural disasters, particularly in countries with limited infrastructure and disaster recovery resources.

In addition, we are continually working to expand and enhance our platform features, technology and network infrastructure and other technologies to accommodate substantial increases in the volume of usage on our platform, the amount of content we host and our overall total customers. We may be unable to project accurately the rate or timing of these increases or to successfully allocate resources to address such increases, and may underestimate the data center capacity needed to address such increases, and our limited number of suppliers

 

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may not be able to quickly respond to our needs, which could have a negative impact on customer experience and our financial results. In the future, we may be required to allocate additional resources, including spending substantial amounts, to build, purchase or lease data centers and equipment and upgrade our technology and network infrastructure in order to handle increased customer usage, and our suppliers may not be able to satisfy such requirements. In addition, our network or our suppliers’ networks might be unable to achieve or maintain data transmission capacity high enough to process orders or download data effectively or in a timely manner. Our failure, or our suppliers’ failure, to achieve or maintain high data transmission capacity could significantly reduce consumer demand for our products. Such reduced demand and resulting loss of traffic, cost increases, or failure to accommodate new technologies could harm our business, revenue and financial condition.

If we do not or cannot maintain the compatibility of our platform with third-party applications that our customers use in their businesses, our business will be harmed.

Because our customers choose to integrate our products with certain capabilities provided by third-party providers, the functionality and popularity of our platform depends, in part, on our ability to integrate our platform and applications with developer tools and other third-party applications. These third parties may change the features of their technologies, restrict our access to their applications, or alter the terms governing use of their applications in a manner that is adverse to our business. Such changes could functionally limit or prevent our ability to use these third-party technologies in conjunction with our platform, which would negatively affect adoption of our platform and harm our business. If we fail to integrate our platform with new third-party applications that our customers use, we may not be able to offer the functionality that our customers need, which would harm our business.

We rely heavily on the reliability, security and performance of our internally developed systems and operations. Any difficulties in maintaining these systems may result in damage to our brand, service interruptions, decreased customer service or increased expenditures.

The reliability and continuous availability of the software, hardware and workflow processes underlying our internal systems, networks and infrastructure and the ability to deliver our products are critical to our business. Any interruptions resulting in our inability to timely deliver our products, or materially impacting the efficiency or cost with which we provide our products, would harm our brand, profitability and ability to conduct business. If third-party vendors increase their prices and we are unable to successfully pass those costs on to our customers, it could have a substantial effect on our results of operations.

We rely on third-party software for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.

We rely on third-party software to provide many essential financial and operational services to support our business, including, without limitation, encryption and authentication technology, infrastructure operations, employee email, content delivery to customers, back-office support, credit card processing and other functions. Many of these vendors are less established and have shorter operating histories than traditional software vendors. Moreover, these vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. As a result, we depend upon these vendors to provide us with services that are always available and are free of errors or defects that could cause disruptions in our business processes. Any failure by these vendors to do so, or any disruption in our ability to access the internet, would materially and adversely affect our ability to manage our operations. In addition, although we have developed systems and processes that are designed to protect customer and user data and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party service provider, such measures cannot provide absolute security.

 

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Performance problems or defects associated with our platform may adversely affect our business, financial condition and results of operations.

It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times and as our customer base grows and our platform becomes more complex. If our platform is unavailable or if our customers are unable to access our platform within a reasonable amount of time or at all, we may experience a loss of customers, lost or delayed market acceptance of our platform, delays in payment to us by customers, injury to our reputation and brand, legal claims against us, significant cost of remedying these problems and the diversion of our resources. In addition, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition and results of operations, as well as our reputation, may be adversely affected.

Further, the software technology underlying our platform is inherently complex and may contain material defects or errors, particularly when new products are first introduced or when new features or capabilities are released. We have from time to time found defects or errors in our platform, and new defects or errors in our existing platform or new products may be detected in the future by us or our users. We cannot assure you that our existing platform and new products will not contain defects. Any real or perceived errors, failures, vulnerabilities, or bugs in our platform could result in negative publicity or lead to data security, access, retention or other performance issues, all of which could harm our business. The costs incurred in correcting such defects or errors may be substantial and could harm our business. Moreover, the harm to our reputation and legal liability related to such defects or errors may be substantial and could similarly harm our business.

The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.

The markets that we serve are highly competitive and rapidly evolving. With the introduction of new technologies and innovations, we expect the competitive environment to remain intense. We compete primarily with large, diversified technology companies that focus on large enterprise customers and provide cloud computing as just a portion of the services and products that they offer. The primary vendors in this category include Amazon (AWS), Microsoft (Azure), Google (GCP), IBM and Oracle. We also compete with smaller, niche cloud service providers that typically target individuals and smaller businesses, simple use cases or narrower geographic markets. Some examples in this category include OVH, Vultr, Heroku, and Linode.

Our competitors vary in size and in the breadth and scope of the products offered. Many of our competitors and potential competitors, particularly our larger competitors, have substantial competitive advantages as compared to us, including greater name recognition and longer operating histories, larger sales and marketing and customer support budgets and resources, the ability to bundle products together, larger and more mature intellectual property portfolios, greater resources to make acquisitions and greater resources for technical assistance and customer support. Further, other potential competitors not currently offering competitive solutions may expand their product or service offerings to compete with our products and platform capabilities, or our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and product offerings in our addressable market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, and customer requirements. An existing competitor or new entrant could introduce new technology that reduces demand for our products and platform capabilities.

In addition, some of our actual and potential competitors have been acquired by other larger enterprises and have made or may make acquisitions or may enter into partnerships or other strategic relationships that may provide more comprehensive offerings than they individually had offered or achieve greater economies of scale than us. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships.

 

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For all of these reasons, we may not be able to compete successfully against our current or future competitors, and this competition could result in the failure of our platform to continue to achieve or maintain market acceptance, any of which would harm our business, results of operations, and financial condition.

We do not have sufficient history with our pricing model to accurately predict the optimal pricing necessary to attract new customers and retain existing customers. Our pricing model subjects us to various challenges that could make it difficult for us to derive sufficient value from our customers.

We have limited experience determining the optimal prices for our products and, as a result, we have in the past and expect that we will need to change our pricing model from time to time in the future. As the market for our products matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers using the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our customers and negatively impact our overall revenue. Moreover, certain customers may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.

We generally charge our customers for their usage of our platform, and the add-on features and functionality they choose to enable. We do not know whether our current or potential customers or the market in general will continue to accept this pricing model going forward and, if it fails to gain acceptance, our business could be harmed.

If we fail to retain and motivate members of our management team or other key employees, or fail to attract additional qualified personnel to support our operations, our business and future growth prospects would be harmed.

Our success and future growth depend largely upon the continued services of our executive officers, particularly Yancey Spruill, our Chief Executive Officer. From time to time, there may be changes in our executive management team or other key employees resulting from the hiring or departure of these personnel. For example, a number of our executive officers have only recently joined us. If we do not successfully manage executive officer transitions, it could be viewed negatively by our customers, employees or investors and could have an adverse impact on our business. Our executive officers and other key employees are employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. The loss of one or more of our executive officers, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business.

In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers experienced in cloud computing and infrastructure solutions. From time to time, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. 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 or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, experiences significant volatility, or increases such that prospective employees believe there is limited upside to the value of our equity awards, it may adversely affect our ability to recruit and retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects would be harmed.

 

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Our corporate culture has contributed to our success and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business.

We believe our corporate culture of rapid innovation, teamwork, and attention to customer support has been a key contributor to our success to date. We expect to continue to hire aggressively as we expand, and if we do not continue to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth. Our substantial anticipated headcount growth may result in a change to our corporate culture, which could harm our business.

If we fail to maintain and enhance our brand, our ability to expand our customer base will be impaired and our business, financial condition and results of operations may suffer.

We believe that maintaining and enhancing the DigitalOcean brand is important to support the marketing and sale of our existing and future products to new customers and expand sales of our platform and products to existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successfully maintaining and enhancing our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide reliable products that continue to meet the needs of our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new functionality and use cases, and our ability to successfully differentiate our products and platform capabilities from competitive products. Our brand promotion activities may not generate customer awareness or yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, our business, financial condition and results of operations may suffer.

Our ability to maintain customer satisfaction depends in part on the quality of our customer support. Failure to maintain high-quality customer support could have an adverse effect on our business, results of operation, and financial condition.

We believe that the successful use of our platform and products requires a high level of support and engagement for many of our customers, particularly our business customers. In order to deliver appropriate customer support and engagement, we must successfully assist our customers in deploying and continuing to use our platform and products, resolving performance issues, addressing interoperability challenges with the customers’ existing IT infrastructure, and responding to security threats and cyber-attacks and performance and reliability problems that may arise from time to time. Because our platform and products are designed to be highly configurable and to rapidly implement customers’ reconfigurations, customer errors in configuring our platform and products can result in significant disruption to our customers. Our support organization faces additional challenges associated with our international operations, including those associated with delivering support, training, and documentation in languages other than English. Increased demand for customer support, without corresponding increases in revenue, could increase our costs and adversely affect our business, results of operations, and financial condition.

In addition, we rely on our user community to serve as a resource for questions on any part of our platform. Members of our user community are not obligated to participate in discussions with other users, and to the extent they do not, our customers’ ability to find answers to questions about our platform of services may suffer. If we are unable to develop self-service support resources that are easy to use and that our customers utilize to resolve their technical issues, or if our customers choose not to take advantage of these self-service support services, our customers’ experience with our platform may be negatively impacted.

There can be no assurance that we will be able to hire sufficient support personnel as and when needed, particularly if our sales exceed our internal forecasts. To the extent that we are unsuccessful in hiring, training, and retaining adequate support resources, our ability to provide high-quality and timely support to our customers

 

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will be negatively impacted, and our customers’ satisfaction and their usage of our platform could be adversely affected.

Unfavorable conditions in our industry or the global economy, or reductions in information technology spending, could limit our ability to grow our business and negatively affect our results of operations.

Our results of operations may vary based on the impact of unfavorable changes in our industry or the global economy on us or our customers and potential customers. Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth in the United States or abroad, financial and credit market fluctuations, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious diseases (such as the recent COVID-19 pandemic), warfare and terrorist attacks on the United States, Europe or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry events, and negatively affect the growth of our business and our results of operations. For example, any reductions in information technology spending may fall disproportionately on outsourced and cloud-based solutions like ours. In addition, impacts of the COVID-19 pandemic may be exacerbated by the disproportionate impact it is having on the individual developers, early stage start-ups and small-to-medium size businesses that make a large portion of our customer base, many of which may be forced to shut down or limit operations for an indefinite period of time. Economic weakness, customer financial difficulties and constrained spending on information technology operations could adversely affect our customers’ ability or willingness to subscribe to our service offerings, delay purchasing decisions and lengthen our sales cycles, reduce the usage of our products and services, or increase churn, all of which could have an adverse effect on our sales and operating results. In addition, our competitors, many of whom are larger and have greater financial resources than we do, may respond to challenging market conditions by lowering prices in an attempt to attract our customers and may be less dependent on key industry events to generate sales for their products. Further, the increased pace of consolidation in certain industries may result in reduced overall spending on our products and solutions. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or how any such event may impact our business.

Our current operations are international in scope, and we plan further geographic expansion, creating a variety of operational challenges.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. We are continuing to adapt to and develop strategies to address international markets, but there is no guarantee that such efforts will have the desired effect. For example, we anticipate that we will need to establish relationships with new partners in order to expand into certain countries, and if we fail to identify, establish and maintain such relationships, we may be unable to execute on our expansion plans. We expect that our international activities will continue to grow for the foreseeable future as we continue to pursue opportunities in existing and new international markets, which will require significant dedication of management attention and financial resources.

Our current and future international business and operations involve a variety of risks, including:

 

   

slower than anticipated availability and adoption of cloud-based infrastructures and platforms by international businesses;

 

   

the need to adapt and localize our products for specific countries;

 

   

greater difficulty collecting accounts receivable and longer payment cycles;

 

   

potential changes in trade relations, regulations, or laws;

 

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more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal information, particularly in Europe;

 

   

challenges inherent in efficiently managing, and the increased costs associated with, an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs that are specific to each jurisdiction;

 

   

payment issues and other foreign currency risks, including fluctuations in exchange rates;

 

   

laws and business practices favoring local competitors or general market preferences for local vendors;

 

   

political instability or terrorist activities;

 

   

any legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union;

 

   

an outbreak of a contagious disease, including COVID-19, which may cause us or our third-party providers and/or customers to temporarily suspend our or their respective operations in the affected city or country; and

 

   

adverse tax burdens and foreign exchange restrictions that could make it difficult to repatriate earnings and cash.

If we invest substantial time and resources to further expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer.

We are exposed to fluctuations in currency exchange rates and interest rates, which could negatively affect our results of operations and our ability to invest and hold our cash.

Our sales are denominated in U.S. dollars, and therefore, our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our platform to our customers outside of the United States, which could adversely affect our results of operations. Our operating expenses incurred outside the United States are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our results of operations could be adversely affected. In addition, we are exposed to fluctuations in interest rates, which has resulted in a negative interest rate environment, in which interest rates drop below zero. In this zero interest rate environment, any cash that we may hold with financial institutions, including cash proceeds received from this offering, will continue to yield a storage charge instead of earning interest income, and encourages us to spend our cash or make high-risk investments, all of which could adversely affect our financial position, results of operations, and cash flows.

Our international operations may subject us to potential adverse tax consequences.

We are expanding our international operations to better support our growth into international markets. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies, and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

 

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Our tax provision could also be impacted by changes in accounting principles, changes in U.S. federal, state, or international tax laws applicable to corporate multinationals such as legislation enacted in the United States, other fundamental law changes currently being considered by many countries, and changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions. For example, on December 22, 2017, tax reform legislation referred to as the Tax Cuts and Jobs Act, or the Tax Act, was enacted in the United States The Tax Act makes broad and complex changes to the U.S. tax code including, among other things, changes to U.S. federal tax rates, additional limitations on the deductibility of interest, both positive and negative changes to the utilization of future net operating loss, or NOL, carryforwards, allowing the expensing of certain capital expenditures, and the migration from a “worldwide” system of taxation to a territorial system. We are unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock.

We could be required to collect additional taxes or be subject to other tax liabilities that may increase the costs our clients would have to pay for our products and adversely affect our results of operations.

An increasing number of states have considered or adopted laws that attempt to impose tax collection obligations on out-of-state companies. Additionally, the Supreme Court of the United States recently ruled in South Dakota v. Wayfair, Inc. et al, or Wayfair, that online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by state governments or local governments of tax collection obligations on out-of-state sellers could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors, and decrease our future sales, which could have a material adverse effect on our business and results of operations.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we had NOL carryforwards for federal and state income tax purposes of approximately $103.2 million and $128.1 million, respectively, which may be available to offset taxable income in the future, and which expire in various years beginning in 2032 for federal purposes and 2021 for state purposes if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. Under the Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, federal net operating losses incurred in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in tax years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change (including, potentially, in connection with this offering) under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or 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 reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our operating results and financial condition.

 

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Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

Our effective tax rate could increase due to several factors, including:

 

   

changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;

 

   

changes in tax laws, tax treaties, and regulations or the interpretation of them, including the Tax Act;

 

   

changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business;

 

   

the outcome of current and future tax audits, examinations, or administrative appeals; and

 

   

limitations or adverse findings regarding our ability to do business in some jurisdictions.

Any of these developments could adversely affect our results of operations.

Our leverage could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry, divert our cash flow from operations for debt payments and prevent us from meeting our debt obligations.

As of December 31, 2020, our total indebtedness was approximately $263.7 million. Our leverage could have a material adverse effect on our business and financial condition, including:

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and pursue future business opportunities;

 

   

exposing us to increased interest expense, as our degree of leverage may cause the interest rates of any future indebtedness, whether fixed or floating rate interest, to be higher than they would be otherwise;

 

   

making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants, could result in an event of default that accelerates our obligation to repay indebtedness;

 

   

restricting us from making strategic acquisitions;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, satisfaction of debt service requirements, acquisitions and general corporate or other purposes;

 

   

increasing our vulnerability to adverse economic, industry or competitive developments; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities that our leverage prevents us from exploiting.

A substantial majority of our indebtedness consists of indebtedness under our credit facility with KeyBank National Association, as administrative agent, and the other lenders party thereto, which matures in 2025. We may not be able to refinance our existing indebtedness because of our amount of debt, debt incurrence

 

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restrictions under our debt agreements or adverse conditions in credit markets generally. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would result in an adverse effect on our financial condition and results of operations.

In addition, a portion of our capital expenditures, including expenditures on data centers, equipment and servers, is purchased through financing arrangements with third parties and other forms of indebtedness. If we are unable to meet our obligations under such financing arrangements, such vendors may seek recourse against us, including seizure of the financed equipment or severs.

Furthermore, we may incur significant additional indebtedness in the future. Although the credit agreement that governs substantially all of our indebtedness contains restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables. To the extent we incur additional indebtedness, the significant leverage risks described above would be exacerbated.

Our credit agreement imposes significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The credit agreement that governs our credit facility imposes significant operating and financial restrictions on us. These restrictions limit the ability of our subsidiaries, and effectively limit our ability to, among other things:

 

   

incur or guarantee additional debt or issue disqualified equity interests;

 

   

pay dividends and make other distributions on, or redeem or repurchase, capital stock;

 

   

make certain investments;

 

   

incur certain liens;

 

   

enter into transactions with affiliates;

 

   

merge or consolidate;

 

   

enter into agreements that restrict the ability of restricted subsidiaries to make certain intercompany dividends, distributions, payments or transfers; and

 

   

transfer or sell assets.

As a result of the restrictions described above, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as other terms of our indebtedness or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our results of operations and financial condition could be adversely affected.

 

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Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

U.S. generally accepted accounting principles, or GAAP, 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 results of operations and could affect the reporting of transactions already completed before the announcement of a change.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates, judgments, and assumptions used in our financial statements include, but are not limited to, those related to revenue recognition, accounts receivable and related reserves, useful lives and realizability of long lived assets, capitalized internal-use software development costs, assumptions used in the valuation of warrants, accounting for stock-based compensation, and valuation allowances against deferred tax assets. These estimates are periodically reviewed for any changes in circumstances, facts, and experience. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.

We have funded our operations since inception primarily through equity and debt financings and sales of our products. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to support our business, which may require us to engage in equity or debt financings to secure additional funds. Additional financing may not be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, operating results, and financial condition. If we incur additional debt, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests. Our inability to obtain adequate financing on terms satisfactory to us, when we require it, could significantly limit our ability to continue to support our business growth, respond to business challenges, expand our operations or otherwise capitalize on our business opportunities due to lack of sufficient capital. Even if we are able to raise such capital, we cannot assure you that it will enable us to achieve better operating results or grow our business.

 

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Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition and results of operations.

We have in the past and may in the future seek to acquire or invest in businesses, joint ventures, products and platform capabilities, or technologies that we believe could complement or expand our services and platform capabilities, enhance our technical capabilities, or otherwise offer growth opportunities. Further, our anticipated proceeds from this offering increase the likelihood that we will devote resources to exploring larger and more complex acquisitions and investments than we have previously attempted. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products and platform capabilities, personnel or operations of any acquired companies, particularly if the key personnel of an acquired company choose not to work for us, their infrastructure is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise.

We could also face risks related to liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities, and litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties, and our efforts to limit such liabilities could be unsuccessful. These transactions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Any such transactions that we are able to complete may not result in any synergies or other benefits we had expected to achieve, which could result in impairment charges that could be substantial. In addition, we may not be able to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner. These transactions could also result in dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the impairment of goodwill, any of which could adversely affect our results of operations.

The recent COVID-19 pandemic and any related economic downturn could negatively impact our business, financial condition and results of operations.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments. COVID-19 could adversely affect workforces, economies and financial markets globally, potentially leading to an economic downturn and a reduction in customer spending on our solutions or an inability for our customers, partners, suppliers or vendors or other parties with whom we do business to meet their contractual obligations. While it is not possible at this time to predict the duration and extent of the impact that COVID-19 could have on worldwide economic activity and our business in particular, the continued spread of COVID-19 and the measures taken by governments, businesses and other organizations in response to COVID-19 could adversely impact our business, financial condition and results of operations. For example, impacts of the COVID-19 pandemic may be exacerbated by the disproportionate impact it is having on the individual developers, early stage start-ups and small-to-medium size businesses that make a large portion of our customer base, many of which may be forced to shut down or limit operations for an indefinite period of time. Economic weakness, customer financial difficulties and constrained spending on IT operations could adversely affect our customers’ ability or willingness to subscribe to our service offerings, delay purchasing decisions and lengthen our sales cycles, reduce the value of their contracts, or increase churn, all of which could have an adverse effect on our sales and operating results.

Moreover, to the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this “Risk

 

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Factors” section, including but not limited to, those related to our ability expand within our existing customer base, acquire new customers, develop and expand our sales and marketing capabilities and expand internationally.

Our business could be disrupted by catastrophic occurrences and similar events.

Our platform and the public cloud infrastructure on which our platform relies are vulnerable to damage or interruption from catastrophic occurrences, such as earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, criminal acts, sabotage, other intentional acts of vandalism and misconduct, geopolitical events, disease, such as the COVID-19 pandemic, and similar events. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our facilities or the facilities of our public cloud providers could result in disruptions, outages, and other performance and quality problems. If we are unable to develop adequate plans to ensure that our business functions continue to operate during and after a disaster and to execute successfully on those plans in the event of a disaster or emergency, our business would be seriously harmed.

Our business could be negatively impacted by changes in the United States political environment.

The 2020 presidential, congressional and state elections in the United States have resulted in significant uncertainty with respect to, and have and could further result in changes in, legislation, regulation, and government policy at the federal, state, and local levels. Any such changes could significantly impact our business as well as the markets in which we compete. Specific legislative and regulatory proposals discussed during election campaigns and more recently that might materially impact us include, but are not limited to, changes to trade agreements, immigration policy, import and export regulations, tariffs and customs duties, income tax regulations and the federal tax code, public company reporting requirements, and antitrust enforcement. Further, an extended federal government shutdown resulting from failing to pass budget appropriations, adopt continuing funding resolutions, or raise the debt ceiling, and other budgetary decisions limiting or delaying deferral government spending, may negatively impact U.S. or global economic conditions, including corporate and consumer spending, and liquidity of capital markets. To the extent changes in the political environment have a negative impact on us or on our markets, our business, results of operation and financial condition could be materially and adversely affected in the future.

Risks Related to Our Regulatory Environment

Activities of our customers or the content on their websites could subject us to liability.

We provide products and services that enable our customers and users to exchange information and engage in various online activities, and our products and services include substantial user-generated content. For instance, customers and users include content on their Droplets, post or generate content on our website’s community section, and offer applications and integrations through our marketplace. Customer or user content or activity may be infringing, illegal, hostile, offensive, unethical, or inappropriate, may violate our terms of service or a customer’s own policies, or may be intended to, or inadvertently, circumvent or threaten the confidentiality, integrity, security or availability of information or network services of other products, services, or systems, including, for example, by launching various attacks. We are not currently subject to lawsuits arising from the conduct of our customers or users, or subject to other regulatory enforcement actions relating to their content or actions, but we may be subject to such suits or measures in the future. Even if claims against us are ultimately unsuccessful, defending against such claims will increase our legal expenses and divert management’s attention from the operation of our business, which could adversely impact our business and results of operations, and our brand, reputation, and financial results may be harmed.

We (like other intermediary online service providers) rely primarily on two sets of laws in the U.S. to shield us from legal liability with respect to user activity. The Digital Millennium Copyright Act, or DMCA, provides service

 

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providers a safe harbor from monetary damages for copyright infringement claims, provided that service providers comply with various requirements designed to stop or discourage infringement on their platforms by their users. Section 230 of the Communications Decency Act, or CDA, protects providers of an interactive computer service from liability with respect to most types of content provided over their service by others, including users. Both the DMCA safe harbor and Section 230 of the CDA face regular and current, calls for revision. In particular, a recent executive order by President Trump required, among other things, that the Federal Communications Commission, or FCC, consider whether to conduct a rulemaking proceeding that might reinterpret and narrow the protections of Section 230 of the CDA. The FCC announced in October 2020 that it is commencing that rulemaking proceeding. In addition, a variety of bills have recently been introduced in the U.S. Congress that would seek to make changes to the scope of Section 230 of the CDA, including legislation in the U.S. Congress that, if enacted, would narrow the protections of Section 230 of the CDA. Enactment of this legislation or an unfavorable outcome of the FCC rulemaking could limit our ability to rely on the protections of Section 230 of the CDA. Furthermore, recent litigation has created uncertainty with respect to the applicability of DMCA protections to companies that host substantial amounts of user content. For these reasons and others, now or in the future, the DMCA, CDA, and similar provisions may be interpreted as not applying to us or may provide us with incomplete or insufficient protection from claims.

We do not typically monitor the content, activities, or Droplets of our customers or users, so inappropriate content may be posted or activities executed before we are able to take protective action, which could subject us to legal liability. Even if we comply with legal obligations to remove or disable content, we may continue to allow use of our products or services by individuals or entities who others find hostile, offensive, or inappropriate. The activities or content of our customers or users may lead us to experience adverse political, business and reputational consequences, especially if such use is high profile. Conversely, actions we take in response to the activities of our customers or users, up to and including banning them from using our products, services, or websites, may harm our brand and reputation.

In addition to liability based on our activities in the U.S., we may also be deemed subject to laws in other countries that may not have the same protections or that may impose more onerous obligations on us, which may impose additional liability or expense on us, including additional theories of intermediary liability. For example, in 2019, the EU approved a copyright directive that will impose additional obligations on online platforms, and failure to comply could give rise to significant liability. Other recent laws in Germany (extremist content), Australia (violent content), India (intermediary liability) and Singapore (online falsehoods), as well as other new similar laws, may also expose cloud-computing companies like us to significant liability. We may incur additional costs to comply with these new laws, which may have an adverse effect on our business, results of operations, and financial condition. Potential litigation could expose us to claims for damages and affect our business, financial condition and results of operations.

Our business could be affected by the enactment of new governmental regulations regarding the internet or the application of additional or different existing governmental regulation to our business, products, or services.

The legal and regulatory environment pertaining to the internet and products and services such as ours, both in the U.S. and internationally, is uncertain and may change. New laws may be passed, existing but previously inapplicable or unenforced laws may be deemed to apply, legal safe harbors may be narrowed, and courts may issue decisions affecting existing regulations or leading to new ones. Furthermore, legal and regulatory authorities, both in the U.S. and internationally, may characterize or recharacterize us and our business, products, or services in ways that would apply additional or different regulations to us. These changes could affect, among other things, areas related to our business such as the following:

 

   

the liability of online service providers for actions by customers or users, including fraud, illegal content, spam, phishing, libel and defamation, hate speech, infringement of third-party intellectual property and other abusive conduct;

 

   

other claims based on the nature and content of internet materials;

 

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user data privacy and security issues;

 

   

consumer protection risks;

 

   

digital marketing aspects;

 

   

characteristics and quality of services, including changes to networking relationships and anti-circumvention technologies;

 

   

the contractual terms within our terms of service and other agreements with customers;

 

   

cross-border e-commerce issues; and

 

   

ease of access by our users to our platform.

New laws or regulations, or new applications or interpretations of existing laws or regulations, could hinder growth and decrease acceptance, both of the internet and online services, or of our specific products or services, both generally or with respect to certain uses or industries. Such legal changes could increase our costs of doing business, subject our business to increased liability for non-compliance, or prevent us from marketing or delivering our services over the internet or in specific jurisdictions, thereby materially harming our business and results of operations.

The success of our business depends on our customers’ continued and unimpeded access to our platform on the internet and, as a result, also depends on internet providers and the related regulatory environment.

Our customers must have internet access in order to use our platform. Some internet providers may take measures that affect their customers’ ability to use our platform, such as degrading the quality of the content we transmit over their lines, giving that content lower priority, giving other content higher priority than ours, blocking our content entirely, or attempting to charge their customers more for using our platform.

In December 2010, the FCC adopted net neutrality rules barring internet providers from blocking or slowing down access to online content, thereby protecting services like ours from such interference. The FCC has repealed the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To the extent network operators attempt to interfere with our platform, extract fees from us to deliver our platform or from customers for the use of our platform, or otherwise engage in discriminatory practices, our business could be adversely impacted. Within such a regulatory environment, we could experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to incur additional expense, or otherwise harm our business. The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the internet, could impact our customers’ continued and unimpeded access to our platform on the internet.

We are subject to stringent and changing privacy laws, regulations and standards, information security policies and contractual obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could harm our business.

We have legal obligations regarding protection and appropriate use of personally identifiable and other proprietary information. We are subject to a variety of enacted and proposed federal, state, local and international laws, directives and regulations relating to the collection, use, security, transfer and other processing of personally identifiable information. The regulatory framework for privacy and security issues worldwide is rapidly evolving and as a result implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. We publicly post information about our privacy practices but we may be alleged to have failed to do so, which could subject us to potential regulatory or private party actions if they are

 

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found to be noncompliant, deceptive, unfair, or misrepresentative. In the United States, these include enforcement actions by federal agencies and state attorneys general. In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards with which we must legally comply or that contractually apply to us. If we fail to follow these security standards even if no customer or user information is compromised, we may incur significant fines or experience a significant increase in costs or reputational harm.

Laws in all states require businesses to provide notice to customers and users whose personally identifiable information has been disclosed as a result of a data breach and compliance can be costly. Further, California enacted the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and adversely affect our business. Further, California voters approved a new privacy law, the California Privacy Rights Act, or CPRA, in the November 3, 2020 election. Effective starting on January 1, 2023, the CPRA will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. New legislation proposed or enacted in various other states will continue to shape the data privacy environment nationally. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts.

Most jurisdictions in which we operate have established legal frameworks for privacy and security with which we or our customers must comply, including the European Union, or EU. The EU has adopted the General Data Protection Regulation, or GDPR, which contains more robust obligations on data processors and heavier documentation requirements for data protection compliance programs by companies. The GDPR also introduced greater control for data subjects (including, for example, the “right to be forgotten”), increased data portability for EU consumers, data breach notification requirements and increased fines of up to 20 million euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater. Such penalties are in addition to any civil litigation claims by customers and data subjects. In addition to the foregoing, a breach of the GDPR could result in regulatory investigations, reputational damage, orders to cease/ change our processing of our data, enforcement notices, and/ or assessment notices (for a compulsory audit).

We will also be subject to evolving European Union laws on data export, where data is transferred outside the European Union to us or third parties only when a suitable data transfer solution exists to safeguard personal data. On July 16, 2020, the Court of Justice of the European Union, or the CJEU, issued a decision called Schrems II that (a) calls into question certain data transfer mechanisms (such as the Standard Contractual Clauses) and (b) invalidates the EU-U.S. Privacy Shield on which many companies had relied as an acceptable mechanism for transferring such data from the EU to the U.S. Use of the Standard Contractual Clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country. We continue to investigate and implement contractual, organizational, and technical changes in response to Schrems II, but we cannot guarantee that any such changes will be sufficient under applicable laws and regulations or by our customers, governments, or the public. To the extent that we transfer personal data outside the European Union, there is risk that any of our data transfers will be halted, limited, or challenged by third parties.

Further, the United Kingdom’s decision to leave the European Union, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. Since January 1, 2021, the United Kingdom has been a “third country” under the GDPR. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example whether (and when) an Adequacy Decision may be granted by the European Commission enabling data transfers from EU

 

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member states to the United Kingdom and the role of the UK Information Commissioner’s Office following the end of the transitional period. These changes will lead to additional costs and increase our overall risk exposure.

Where we transfer personal data outside the European Economic Area, or the EEA, or the United Kingdom to third parties, we do so in compliance with relevant data export requirements. There is no assurance that these contractual measures and our own privacy and security-related safeguards will protect us from the risks associated with the third-party processing, storage and transmission of such information. Any violation of data or security laws by our third-party processors could have a material adverse effect on our business and result in the fines and penalties outlined below.

In addition to the GDPR, the European Commission has another draft regulation, known as the Regulation on Privacy and Electronic Communications, or ePrivacy Regulation, that would replace the current ePrivacy Directive. New rules related to the ePrivacy Regulation are likely to include enhanced consent requirements in order to use communications content and metadata, which may negatively impact our platform and products and our relationships with our customers.

Complying with the GDPR and the ePrivacy Regulation, if and when the latter becomes effective, may cause us to incur substantial operational costs or require us to change our business practices. We may not be successful in our efforts to achieve compliance and may also experience difficulty retaining or obtaining new European or multi-national customers or significantly increased liability with respect to these customers pursuant to the terms set forth in our engagements with them. While we utilize data centers in the EEA to maintain certain customer and user data (which may include personal data) originating from the EU in the EEA, we may find it necessary to establish additional systems and processes to maintain such data in the EEA, which may involve substantial expense and distraction from other aspects of our business. Additionally, data localization requirements in other jurisdictions may cause us to incur potentially significant costs for establishing and maintaining facilities for storing and processing such data.

Privacy and data protection laws and industry standards around the world may be interpreted and applied in a manner that is inconsistent with our existing practices or product and platform capabilities. If so, in addition to the possibility of fines, lawsuits, regulatory actions and penalties, costs for remediation, and damage to our reputation, we could be required to fundamentally change our practices or modify our products and platform capabilities, any of which could have an adverse effect on our business. Furthermore, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and foreign countries, including, for example, India, where new legislation is expected in the near term.

We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal or civil liability and harm our business, financial condition and results of operations.

We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, U.S. domestic bribery laws, the UK Bribery Act, and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees and their third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international sales and business, we may engage with business partners and third party intermediaries to market our products and to obtain necessary permits, licenses, and other regulatory approvals, and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.

 

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We cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.

Detecting, investigating, and resolving actual or alleged violations of anti-corruption laws, and responding to any action, can require a significant diversion of time, resources, and attention from senior management and significant defense costs and other professional fees. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, various penalties or debarment from contracting with certain persons, and other collateral consequences. If any subpoenas or investigations are launched, or sanctions are imposed, or if we do not prevail in any possible proceeding, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources.

We are subject to governmental export and import controls and economic sanctions laws that could impair our ability to compete in international markets or subject us to liability if we are not in full compliance with applicable laws.

Our business activities are subject to various restrictions under United States export and similar laws and regulations, including the United States Department of Commerce’s Export Administration Regulations and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets Controls. The United States export control laws and United States economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to United States embargoed or sanctioned countries, governments, persons and entities. In addition, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide our customers access to our platform or could limit our customers’ ability to access or use our platform in those countries.

Furthermore, we incorporate encryption technology into certain of our products. U.S. export control laws require authorization for the export of encryption items. In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products and services or could limit our customers’ ability to implement our products and services in those countries. Obtaining the necessary authorizations, including any required license, for a particular transaction may be time-consuming, is not guaranteed, and may result in the delay or loss of sales opportunities.

Although we take precautions to prevent our platform from being provided in violation of such laws, our platform may have in the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to civil or criminal penalties, including the possible loss of export privileges and fines. We may also be adversely affected through penalties, reputational harm, loss of access to certain markets, or otherwise. In addition, various countries regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our platform or could limit our users’ ability to access our platform in those countries.

Changes in our platform, or future changes in export and import regulations may prevent our users with international operations from utilizing our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, 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 subscriptions to our platform to, existing or potential users with international operations. Any decreased use of our platform or limitation on our ability to export or sell our platform would likely adversely affect our business, results of operations, and financial results.

 

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Risks Related to Our Intellectual Property

Any failure to obtain, maintain, protect or enforce our intellectual property and proprietary rights could impair our ability to protect our proprietary technology and brand.

Our success depends to a significant degree on our ability to obtain, maintain, protect and enforce our intellectual property rights. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights, contractual restrictions, and confidentiality procedures to establish and protect our intellectual and proprietary rights, including in our technology, know-how, and brand. Legal standards relating to intellectual property rights are uncertain, in both the United States and other jurisdictions in which we operate, and protecting, monitoring, and defending our intellectual property rights might entail significant expense. Intellectual property rights that we have or may obtain may be challenged, circumvented, invalidated or held unenforceable. Furthermore, even though we attempt to enter into contractual provisions with third parties to control access to, or the distribution, use, misuse, misappropriation, reverse engineering or disclosure of, our intellectual property or technology, no assurance can be given that these agreements will be sufficient or effective in protecting our intellectual property rights.

Moreover, intellectual property laws, standards, and enforcement mechanisms in foreign countries may be uncertain, may not be as protective of intellectual property rights as those in the United States, or may not be available to us. As we expand our international activities, our exposure to unauthorized copying and use of our products, services, and other intellectual property will likely increase.

Despite our efforts, we may be unable to adequately obtain, maintain, protect, and enforce our intellectual property rights or prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights. If we fail to protect our intellectual property rights adequately, our competitors may gain access to, or be able to replicate, our proprietary technology, products, or services, and our business, financial condition, results of operations or prospects may be harmed. Our attempt to enforce our intellectual property rights, even if successful, could result in costly litigation or diversion of our management’s attention and resources, and, as a result, delay sales or the implementation or introduction of our products and platform capabilities, or injure our reputation.

We may become subject to intellectual property claims from third parties, which may subject us to significant liability, increased costs, and impede our ability to operate our business.

Our success depends, in part, on our ability to develop and commercialize our products and services without infringing, misappropriating or otherwise violating the intellectual property rights of third parties. However, we may not be aware that our products, services, or intellectual property are infringing, misappropriating, or violating third party intellectual property rights. Additionally, the technology industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets, and other intellectual and proprietary rights. Companies in the industry are often required to defend against litigation claims based on allegations of infringement, misappropriation or other violations of intellectual property rights, and third parties may bring such claims against us. In addition, we may become subject to intellectual property disputes or otherwise subjected to liability for customer content on our platform. In the past, we have been involved in intellectual property disputes regarding our customer’s alleged infringement of third party intellectual property. We expect that the occurrence of infringement claims is likely to grow as the market for our platform and products grows.

Lawsuits are time-consuming and expensive to resolve, and they divert management’s time and attention, and our technologies or intellectual property may not be able to withstand third party claims against their use. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

   

cease selling or using products or services that incorporate the intellectual property rights that we allegedly infringe, misappropriate or violate;

 

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make substantial payments for legal fees, settlement payments or other costs or damages;

 

   

obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or

 

   

redesign the allegedly infringing products to avoid infringement, misappropriation or violation, which could be costly, time-consuming or impossible.

We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition or results of operations. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. Moreover, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and, if securities analysts or investors perceive these results to be negative, it could have an adverse effect on the price of our common stock.

We use open source software in our products, which could negatively affect our ability to sell our services or subject us to litigation or other actions.

We use open source software in connection with developing, operating, and offering our products, services, and technology, and we expect to continue to incorporate open source software in our products, services, and technology in the future.

Some open source projects have known vulnerabilities and architectural instabilities and are provided on an “as-is” basis which, if not properly addressed, could negatively affect the performance of our product. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. For example, some open source licenses may, depending on the nature of our use and the terms of the applicable license, include terms requiring us to offer certain of our solutions for no cost, make our source code available, or license our modifications or derivative works under the terms of applicable open source licenses. From time to time, there have also been claims challenging the ownership rights in open source software against companies that incorporate it into their products, and the licensors of such open source software provide no warranties or indemnities with respect to such claims.

Moreover, we cannot ensure that we have incorporated open source software in our products, services, and technology in a manner that is consistent with the terms of the applicable license or our current policies and procedures. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we or our customers could be subject to lawsuits, and we could incur significant legal expenses defending against such allegations, be subject to significant damages resulting from the suits, enjoined from the sale of our products that contained the open source software, and required to comply with onerous conditions or restrictions on these products, which could disrupt the distribution and sale of these products. Such litigation could be costly for us to defend, have a negative effect on our business, financial condition and results of operations, or require us to devote additional research and development resources to change or reengineer our products or take other remedial actions.

Indemnity provisions in various agreements to which we are party potentially expose us to substantial liability for infringement or misappropriation of intellectual property rights, failure to comply with data protection requirements and other losses.

Our agreements with our customers and other third parties may include indemnification provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred, including as a result

 

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of intellectual property infringement or misappropriation claims or for failure to comply with data protection requirements. Large indemnity payments could harm our business, financial condition and results of operations. Although we attempt to contractually limit our liability with respect to such indemnity obligations, we are not always successful and may still incur substantial liability related to them, and we may be required to cease use of certain functions of our platform or products as a result of any such claims. Any dispute with a customer or other third party with respect to such obligations could have adverse effects on our relationship with such customer or other third party and other existing or prospective customers, reduce demand for our products and services and adversely affect our business, financial conditions and results of operations. In addition, although we carry general liability insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed or otherwise protect us from liabilities or damages with respect to claims alleging compromises of customer data, and any such coverage may not continue to be available to us on acceptable terms or at all.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition or results of operations;

 

   

variance in our financial performance from expectations of securities analysts;

 

   

changes in the pricing of our products and platform;

 

   

changes in our projected operating and financial results;

 

   

changes in laws or regulations applicable to our platform and products;

 

   

announcements by us or our competitors of significant business developments, acquisitions, or new offerings;

 

   

significant data breaches, disruptions to or other incidents involving our software;

 

   

our involvement in litigation;

 

   

future sales of our common stock by us or our stockholders, as well as the anticipation of lock-up releases;

 

   

changes in senior management or key personnel;

 

   

the trading volume of our common stock;

 

   

changes in the anticipated future size and growth rate of our market; and

 

   

general economic and market conditions.

Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions including those related to the recent COVID-19 pandemic, may also negatively impact the market price of our common stock. The full impact of the COVID-19 pandemic is unknown at this time, but could result in material adverse changes in our results of operations for an unknown period of time as the virus and its related political, social and economic impacts spread. In addition, technology stocks have historically experienced high

 

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levels of volatility. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial expenses and divert our management’s attention.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our common stock currently exists. An active public trading market for our common stock may not develop following the completion of this offering or, if developed, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds to us 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, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. Pending 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 for our stockholders. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

Our directors, executive officers and principal stockholders exercise significant control over our company, which will limit your ability to influence corporate matters.

Our executive officers, directors and principal stockholders beneficially own approximately 67.7% of our common stock. As a result, these stockholders, if they act together, will be able to control our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some future transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not coincide with our interests or the interests of other stockholders.

In addition, one or more funds affiliated with Tiger Global Management LLC and AI Droplet Subsidiary LLC, which is affiliated with one of our principal stockholders, have indicated an interest in purchasing an aggregate of up to a maximum of $175 million in shares of common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Tiger Global Management LLC and AI Droplet Subsidiary LLC could determine to purchase more, less or no shares of common stock in this offering or the underwriters could determine to sell more, less or no shares to Tiger Global Management LLC and AI Droplet Subsidiary LLC. If one or more funds affiliated with AI Droplet Subsidiary LLC are allocated and purchase all or a portion of such shares, such purchases may increase the percentage of shares owned by our principal stockholders.

Future sales of our common stock in the public market could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our common

 

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stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equityholders have substantial unrecognized gains on the value of the equity they hold based upon the price of this offering, and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our common stock.

All of our directors and officers and the holders of substantially all of our capital stock and securities convertible into our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock until the opening of trading on the third trading day immediately following our release of earnings for the quarter ended June 30, 2021, subject to certain exceptions; provided that:

 

   

up to 20% of the shares, equaling an estimated 2,544,228 shares of common stock (calculating by including shares issuable upon exercise of vested and unvested options or RSUs and common stock), held by current employees and consultants immediately prior to this offering (but excluding current executive officers and directors) may be sold beginning at the commencement of trading on the later of (x) the first trading day following the 60th day after the date of this prospectus and (y) the third trading day immediately following our release of earnings for the quarter ended March 31, 2021; and

 

   

up to 20% of the shares, equaling an estimated 19,042,501 shares of common stock (calculating by including shares issuable upon exercise of vested and unvested options or RSUs and common stock), held by any other stockholders immediately prior to this offering may be sold if, at any time beginning at the commencement of trading on the later of (x) the first trading day following the 60th day after the date of this prospectus and (y) the third trading day immediately following our release of earnings for the quarter ended March 31, 2021, the last reported closing price of our common stock is at least 33% greater than the initial public offering price of our common stock for 5 out of any 10 consecutive trading days, ending on or after the 60th day after the date of this prospectus.

Morgan Stanley & Co. LLC and either of Goldman Sachs & Co. LLC or J.P. Morgan Securities LLC may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements, subject to applicable notice requirements. If not earlier released, all of the shares of common stock subject to the lock-up agreements will become eligible for sale upon the opening of trading on the third trading day immediately following our release of earnings for the quarter ended June 30, 2021, subject to certain exceptions for any shares held by our affiliates as defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

In addition, after this offering, up to 17,347,244 shares of our common stock may be issued upon exercise of outstanding stock options or upon settlement of outstanding RSUs as of December 31, 2020, and 15,782,756 shares of our common stock are available for future issuance under our 2021 Plan and our ESPP, and will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, exercise limitations, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

We intend to register all of the shares of common stock subject to Restricted Stock Unit Awards and shares of common stock issuable upon exercise of outstanding options or other equity incentives we may grant in the future, for public resale under the Securities Act. The shares of common stock will become eligible for sale in the public market to the extent such shares of common stock subject to Restricted Stock Unit Awards are issued or such options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.

Further, based on shares outstanding as of December 31, 2020, holders of 71,334,137 shares, or approximately 67.7% of our capital stock after the completion of this offering, will have rights, subject to some

 

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conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.

We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline.

The market price and trading volume of our common stock following the completion of this offering will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will suffer immediate dilution of $38.11 per share, or $37.30 per share if the underwriters exercise their over-allotment option in full, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of common stock in this offering and the initial public offering price of $45.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. See the section titled “Dilution.”

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, you may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, reduced disclosure obligations regarding executive compensation in our periodic

 

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reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of June 30 of such fiscal year.

We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company, which we expect to further increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the New York Stock Exchange, and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.

If we are unable to maintain proper and effective internal controls over financial reporting, investor confidence in our company and, as a result, the value of our common stock may be adversely impacted. We previously identified and remediated a material weakness in our internal controls over financial reporting.

Neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal controls over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. We will be required, pursuant to Section 404 to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for the fiscal year ending December 31, 2022. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” We have recently commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion once initiated. Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

 

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During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to certify that our internal controls over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In the course of preparing our audited consolidated financial statements for the year ended December 31, 2019, we identified a material weakness in our internal controls over financial reporting related to secondary sales transactions by current and former employees. Specifically, we did not design and maintain effective controls to evaluate and assess secondary sales transactions in our common stock to determine, in a timely manner, whether additional compensation expense was incurred based on the nature of the transaction. We have remediated this material weakness, which we believe has addressed the underlying cause of this issue. We have implemented measures designed to improve our internal controls over financial reporting, including monitoring and review procedures related to secondary sales transactions to ensure accounting personnel are timely informed of the transactions and can evaluate and record any additional compensation expense deemed necessary.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will prevent or avoid potential future material weaknesses in our internal controls over financial reporting in the future. Any failure to maintain internal controls over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal controls over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal controls over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal controls over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

   

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer;

 

   

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

   

establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;

 

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prohibit cumulative voting in the election of directors;

 

   

provide that our directors may be removed for cause only upon the vote of at least 66 2/3% of our outstanding shares of voting stock;

 

   

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

   

require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of voting stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America as the exclusive forums for substantially all disputes between us and our stockholders, which will restrict our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: any derivative action or proceeding brought on our behalf; any action asserting a breach of a fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act. In addition, our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision.

These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. For example, the Court of Chancery of the State of Delaware recently determined that the exclusive forum provision of federal district courts of the United States of America for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision may be reviewed and ultimately overturned by the Delaware Supreme Court. If this ultimate adjudication were to occur, we would enforce the federal district court exclusive forum provision in our amended and restated certificate of incorporation.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our expectations regarding our revenue, expenses and other operating results;

 

   

our ability to achieve profitability on an annual basis and then sustain such profitability;

 

   

future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;

 

   

our ability to acquire new customers and successfully engage and expand usage of our existing customers;

 

   

the costs and success of our marketing efforts, and our ability to promote our brand;

 

   

our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;

 

   

our ability to effectively manage our growth;

 

   

our ability to compete effectively with existing competitors and new market entrants; and

 

   

the growth rates of the markets in which we compete.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains statistical data, estimates and forecasts, including related to our market opportunity, that are based on independent industry publications and other publicly available information, as well as other information based on our internal sources. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. Further, while we believe our internal research is reliable, such research has not been verified by any third party. 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 section titled “Risk Factors,” that could cause results to differ materially from those expressed in these publications and other publicly available information.

Certain information in the text of this prospectus is contained in independent industry publications. None of the industry publications referred to in this prospectus were prepared on our or on our affiliates’ behalf or at our expense. The source of these independent industry publications is provided below:

 

   

IDC: Open Source Software Use and Engagement Survey (Dec. 2019)

   

IDC: Public Cloud Services Spending Guide (Jun. 2020)

   

IDC: Cloud Pulse Q120 (Jun. 2020)

   

SlashData: Developer Economics - The State of Cloud-Native Development (May 2020)

Information contained in the reports referenced above is not a part of this prospectus and the inclusion of these sources in this prospectus are for reference only.

 

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of the common stock that we are offering of approximately $700.1 million (or approximately $806.0 million if the underwriters exercise their option to purchase additional shares of our common stock from us in full) based on an assumed initial public offering price of $45.50 per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $45.50 per share of common stock would increase (decrease) the net proceeds to us from this offering by approximately $15.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $42.8 million, assuming the assumed initial public offering price of $45.50 per share of common stock remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the capital markets and increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to (i) partially repay our outstanding indebtedness under the 2020 Credit Facility, under which $230.0 million ($63.2 million under the 2020 Revolving Credit Facility and $166.8 million under the 2020 Term Loan) was outstanding and had an interest rate of 3.1875% as of December 31, 2020, which will mature on February 13, 2025, and/or (ii) acquire complementary businesses, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information.

We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds to us from the offering that are not used as described above in investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering; and (2) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, as if such conversion, issuance and reclassification had occurred on December 31, 2020; and

 

   

on a pro forma as adjusted basis, giving effect to (1) the pro forma adjustments set forth above; and (2) our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at an assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2020  
     Actual     Pro Forma     Pro Forma
As Adjusted(1)
 
     (in thousands except share and per share
amounts)
 

Cash and cash equivalents

   $ 100,311     $ 100,311     $ 800,424  
  

 

 

   

 

 

   

 

 

 

Total liabilities(2)

     329,272       314,809       314,809  
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.000025 par value; 45,780,861 shares authorized, 45,472,229 shares issued and outstanding, actual; and no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     173,074       —         —    

Stockholders’ deficit:

      

Common stock, $0.000025 par value; 111,400,000 authorized, 43,331,111 shares outstanding, actual; 750,000,000 shares authorized, pro forma and pro forma as adjusted; 88,803,340 shares outstanding, pro forma; and 105,303,340 shares outstanding, pro forma as adjusted

     1       2       2  

Preferred stock, $0.000025 par value; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

           —         —    

Treasury stock, at cost (1,968,228 shares at December 31, 2020)

     (4,598     (4,598     (4,598

Additional paid-in capital(2)

     99,783       287,319       987,432  

Accumulated other comprehensive loss

     (245     (245     (245

Accumulated deficit

     (167,035     (167,035     (167,035
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity(2)

     (72,094     115,443       815,556  
  

 

 

   

 

 

   

 

 

 

Total capitalization

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

 

 

   

 

 

   

 

 

 

 

(1)

Pro forma as adjusted cash and cash equivalents and total assets each does not give effect to $1.4 million of deferred offering costs that had been paid as of December 31, 2020.

 

(2)

Pro forma includes reclassification of $14.5 million for the conversion of the preferred stock warrant liability to warrants to purchase shares of common stock.

 

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Each $1.00 increase (decrease) in the assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, total assets and total stockholders’ equity by $15.5 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 underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of cash, total assets and total stockholders’ equity by $42.8 million, assuming the assumed initial public offering price of $45.50 per share of common stock remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock that will be outstanding after this offering is based on 88,803,340 shares of common stock outstanding as of December 31, 2020, and excludes:

 

   

16,933,494 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020 under the 2013 Plan with a weighted-average exercise price of approximately $6.73 per share;

 

   

413,750 shares of common stock subject to RSUs outstanding as of December 31, 2020 under the 2013 Plan;

 

   

308,632 shares of Series A-1 preferred stock issuable upon the exercise of warrants outstanding as of December 31, 2020, which will become warrants to purchase shares of common stock upon the completion of this offering, with a weighted-average exercise price of approximately $1.94 per share;

 

   

1,654,338 shares of common stock subject to RSUs granted after December 31, 2020 under the 2013 Plan;

 

   

30,930,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which represents the sum of (i) 12,000,000 new shares, (ii) the number of shares that remain available for grant of future awards under the 2013 Plan, which shares will be added to the shares reserved under our 2021 Plan and will cease to be available for issuance under the 2013 Plan at the time our 2021 Plan becomes effective, and (iii) any shares underlying outstanding stock awards granted under the 2013 Plan that expire, or are forfeited, cancelled, withheld, or reacquired, as well as any annual automatic increases in the number of shares of common stock reserved for future issuance under our 2021 Plan; and

 

   

2,200,000 shares of common stock reserved for issuance under our ESPP, as well as any future increases in the number of shares of common stock reserved for future issuance under our ESPP.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share immediately after this offering.

Our historical net tangible book value (deficit) as of December 31, 2020 was $(109.4) million, or $(2.52) per share. Our pro forma net tangible book value as of December 31, 2020 was $78.1 million, or $0.88 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our shares of common stock outstanding as of December 31, 2020, after giving effect to: (1) the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering; and (2) the reclassification of the convertible preferred stock warrant liability to additional paid-in capital, as if such conversion, issuance and reclassification had occurred on December 31, 2020.

After giving effect to the sale by us of 16,500,000 shares of common stock in this offering at an assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been $778.2 million, or $7.39 per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $6.51 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $38.11 per share to new investors purchasing shares of common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

     $ 45.50  

Historical net tangible book value (deficit) per share as of December 31, 2020

   $ (2.52  

Increase per share attributable to the pro forma adjustments described above

     3.40    
  

 

 

   

Pro forma net tangible book value per share as of December 31, 2020

     0.88    

Increase per share attributable to new investors purchasing shares in this offering

     6.51    
  

 

 

   

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

       7.39  
    

 

 

 

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

    

$

38.11

 

    

 

 

 

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. Each $1.00 increase (decrease) in the assumed initial public offering price of $45.50 per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.15 per share and increase (decrease) the dilution to new investors by $0.85 per share, in each case assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $0.33 per share and decrease (increase) the dilution to new investors by approximately $0.33 per share, in each case assuming the assumed initial public offering price of $45.50 per share of common stock remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book value per share, as adjusted to give effect to this offering, would be $8.20 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $37.30 per share.

The following table summarizes, as of December 31, 2020, on a pro forma as adjusted basis as described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by existing stockholders, and (2) to be paid by new investors acquiring our common stock in this offering at an assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total
Consideration
    Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     88,803,340        84   $ 272,857,488        27   $ 3.07  

New investors

     16,500,000        16     750,750,000        73   $ 45.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

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

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $45.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $15.5 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions.

If the underwriters exercise their option to purchase an additional 2,475,000 shares in full, our existing stockholders would own 82% and investors in this offering would own 18% of the total number of shares of common stock outstanding upon the closing of this offering.

The number of shares of common stock that will be outstanding after this offering is based on 88,803,340 shares of common stock outstanding as of December 31, 2020, and excludes:

 

   

16,933,494 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020 under the 2013 Plan with a weighted-average exercise price of approximately $6.73 per share;

 

   

413,750 shares of common stock subject to RSUs outstanding as of December 31, 2020 under the 2013 Plan;

 

   

308,632 shares of Series A-1 preferred stock issuable upon the exercise of warrants outstanding as of December 31, 2020, which will become warrants to purchase shares of common stock upon the completion of this offering, with a weighted-average exercise price of approximately $1.94 per share;

 

   

1,654,338 shares of common stock subject to RSUs granted after December 31, 2020 under the 2013 Plan;

 

   

30,930,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which represents the sum of (i) 12,000,000 new shares, (ii) the number of shares that remain available for grant of future awards under the 2013 Plan, which shares will be added to the shares reserved under our 2021 Plan and will cease to be available for issuance under the 2013 Plan at the time our 2021 Plan becomes effective, and (iii) any shares underlying outstanding stock awards granted under the 2013 Plan that expire, or are forfeited, cancelled, withheld, or reacquired, as well as any annual automatic increases in the number of shares of common stock reserved for future issuance under our 2021 Plan; and

 

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2,200,000 shares of common stock reserved for issuance under our ESPP, as well as any future increases in the number of shares of common stock reserved for future issuance under our ESPP.

To the extent that any outstanding options are exercised or new options are issued under our stock-based compensation plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended December 31, 2018, 2019 and 2020 and the selected consolidated balance sheet data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for the full year or any other period in the future.

 

     Year Ended December 31,  
     2018     2019     2020  
     (in thousands, except per share
data)
 

Consolidated Statements of Operations Data:

      

Revenue

   $ 203,136   $ 254,823   $ 318,380  

Cost of revenue(1)

     97,042     122,259       145,532  
  

 

 

   

 

 

   

 

 

 

Gross profit

     106,094     132,564       172,848  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     44,934     59,973       74,970  

Sales and marketing(1)

     29,445     31,340       33,472  

General and administrative(1)

     59,009     71,156       80,197  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     133,388     162,469       188,639  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,294     (29,905     (15,791

Other (income) expense

     7,484     9,692       26,866  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (34,778     (39,597     (42,657

Income tax expense

     1,221     793       911  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (35,999   $ (40,390   $ (43,568
  

 

 

   

 

 

   

 

 

 

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

   $ (1.06   $ (1.06   $ (1.05
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share, basic and diluted(2)

     33,971     38,004       41,658  
  

 

 

   

 

 

   

 

 

 

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

       $ (0.50
      

 

 

 

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

         87,130  
      

 

 

 

 

(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
           2018                  2019                  2020        
     (in thousands)  

Cost of revenue

   $  42      $  1,142      $ 545  

Research and development

     2,559        4,688        7,765  

Sales and marketing

     381        539        1,924  

General and administrative

     9,185        12,277        19,222  
  

 

 

    

 

 

    

 

 

 

Total

   $  12,167      $  18,646      $ 29,456  
  

 

 

    

 

 

    

 

 

 

Stock-based compensation for the years ended December 31, 2018, 2019 and 2020 included compensation of $8.0 million, $12.1 million and $18.3 million, respectively, related to secondary sales of common stock by certain current and former employees, which is primarily included in General and administrative. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Years Ended December 31, 2019 and 2020—Operating Expenses” and “—Comparison of Years Ended December 31, 2018 and 2019—Operating Expenses.”

 

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(2)

See Note 11 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used to compute the per share amounts.

(3)

The pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited) and the weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited) for the year ended December 31, 2020 give effect to the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 45,472,229 shares of common stock in connection with the completion of this offering.

 

     December 31,  
     2019     2020  
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $  32,906     $ 100,311  

Total assets

     302,485       430,252  

Total liabilities

     251,501       329,272  

Convertible preferred stock

     123,264       173,074  

Total stockholders’ deficit

     (72,280     (72,094

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including: (i) adjusted gross profit and adjusted gross margin; and (ii) adjusted EBITDA. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Our calculations of each of these measures may differ from the calculations of measures with the same or similar titles by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below.

Adjusted Gross Profit and Adjusted Gross Margin

We believe adjusted gross profit and adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful for the preparation of our annual operating budget and quarterly forecasts.

We define adjusted gross profit as gross profit exclusive of stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment included within Cost of revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation and amortization, which primarily relates to our investments in our data center servers that are long lived assets with an economic life of five years, because it may not reflect our current or future cash spending levels to support our business. While the Company intends to spend a significant amount on capital expenditures on an absolute basis in the coming years, the Company’s capital expenditures as a percentage of revenue has declined significantly and will continue to decline. We define adjusted gross margin as a percentage of adjusted gross profit to revenue.

 

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The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit, for each of the periods presented:

 

     Year Ended December 31,  
           2018                 2019               2020      
     (dollars in thousands)  

Gross profit

   $ 106,094     $ 132,564     $ 172,848  

Adjustments:

      

Stock-based compensation(1)

     42       1,142       545  

Depreciation and amortization(1)

     48,906       58,975       69,547  
  

 

 

   

 

 

   

 

 

 

Adjusted gross profit

   $ 155,042     $ 192,681     $ 242,940  
  

 

 

   

 

 

   

 

 

 

Gross margin

     52     52     54

Adjusted gross margin

     76     76     76

 

(1)

Includes stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment, in each case, included within Cost of revenue.

Adjusted EBITDA

We define adjusted EBITDA as net loss attributable to common stockholders, adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, income tax expense, loss on extinguishment of debt, restructuring and severance expense, asset impairment, revaluation of warrants and other charges. We believe that adjusted EBITDA, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation, evaluating our operating performance, and for internal planning and forecasting purposes.

Our calculation of adjusted EBITDA may differ from the calculations of adjusted EBITDA by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss attributable to common stockholders and other GAAP results. The following table presents a reconciliation of net loss attributable to common stockholders, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:

 

     Year Ended December 31,  
           2018                 2019               2020      
     (in thousands)  

Net loss attributable to common stockholders

   $ (35,999   $ (40,390   $ (43,568

Adjustments:

      

Depreciation and amortization

     52,415       63,081       75,574  

Stock-based compensation(1)

     12,167       18,646       29,456  

Interest expense

     6,312       9,356       13,610  

Income tax expense

     1,221       793       911  

Loss on extinguishment of debt

     550             259  

Restructuring and severance expense(2)

     938       1,340       4,213  

Asset impairment(3)

     881       546       1,222  

Revaluation of warrants

     478       411       12,825  

Other(4)

     490       1,461       1,392  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 39,453     $ 55,244     $ 95,894  
  

 

 

   

 

 

   

 

 

 

 

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(1)

Consists of stock-based compensation for the years ended December 31, 2018, 2019 and 2020 and includes compensation of $8.0 million, $12.1 million and $18.3 million, respectively, related to secondary sales of common stock by certain of our current and former employees.

(2)

Consists primarily of expenses related to changes in our senior leadership, sales and infrastructure teams.

(3)

Consists of internal-use software impairment charges related to software that is no longer being used.

(4)

Consists primarily of third-party consulting costs to enhance our finance function for the years ended December 31, 2018, 2019 and 2020 of $0.5 million, $1.4 million and $1.4 million, respectively, and legal and accounting costs incurred to acquire Nanobox, Inc. for the year ended December 31, 2019 of $0.1 million. For more information related to our acquisition of Nanobox, Inc., see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties, including statements related to our plans, objectives, expectations, intentions and beliefs. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for developers, start-ups and small and medium-sized businesses, or SMBs. We were founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and increase their productivity and agility. Over 570,000 individual and business customers currently use our platform to build, deploy and scale software applications. Our users include software engineers, researchers, data scientists, system administrators, students and hobbyists. Our customers use our platform across numerous industry verticals and for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. We believe that our focus on simplicity, community, open source and customer support are the four key differentiators of our business, driving a broad range of customers around the world to build their applications on our platform.

Improving the developer experience and increasing developer productivity are core to our mission. Our developer cloud platform was designed with simplicity in mind to ensure that software developers can spend less time managing their infrastructure and more time turning their ideas into innovative applications to grow their businesses. Simplicity guides how we design and enhance our easy-to-use-interface, the core capabilities we offer our customers and our approach to predictable and transparent pricing for our solutions. We offer mission-critical infrastructure solutions across compute, storage and networking, and we also enable developers to extend the native capabilities of our cloud with fully managed application, container and database offerings. In just minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring and scale up and down as needed.

We generate revenue from the usage of our cloud computing platform by our customers, including but not limited to compute, storage and networking services. We recognize revenue based on the customer utilization of these resources. Our pricing is consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments. The pricing for each of our products is available on our website. For example, the standard price for a Droplet is $5.00 per month, and our Managed Database product is available starting at $15.00 per month.

We have historically generated almost all of our revenue from our efficient self-service marketing model, which enables customers to get started on our platform very quickly and without the need for assistance. We focus heavily on enabling a self-service, low-friction model that makes it easy for users to try, adopt and use our products. For the years ended December 31, 2018, 2019 and 2020, our sales and marketing expense was approximately 14%, 12% and 11% of our revenue, respectively. The efficiency of our go-to-market model and our focus on the needs of the individual and SMB markets have enabled us to drive organic growth and establish a truly global customer base across a broad range of industries.

 

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We had approximately 573,000 customers as of December 31, 2020, up from approximately 502,000 as of December 31, 2018. Our customers are spread across over 185 countries, and around two-thirds of our revenue has historically come from customers located outside the United States. In 2020, 38% of our revenue was generated from North America, 30% from Europe, 22% from Asia and 10% from the rest of the world. We have a growing number of customers with higher spending levels, and our existing customers are continuing to expand their business with us. Our average revenue per customer (which we refer to as ARPU) has increased significantly, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020. We have no material customer concentration as our top 25 customers made up 11%, 10% and 9% of our revenue in 2018, 2019 and 2020, respectively.

We have experienced strong and predictable growth in recent periods. The following graph shows our increasing quarterly revenue since 2014 and our annual run-rate revenue, or ARR, as of December 31, 2020. ARR as of the end of each month represents total revenue for that month multiplied by 12. Our ARR increased 25%, from $285 million as of December 31, 2019 to $357 million as of December 31, 2020.

 

 

LOGO

 

Impact of the COVID-19 Pandemic

To date, the COVID-19 pandemic has not had a significant impact on our operations or financial performance. However, the extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and employee work locations, and conducting our marketing and sales activities virtually. We actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. The extent to which the COVID-19 pandemic may impact our results of operations and financial condition remains uncertain.

 

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Key Factors Affecting Our Performance

Increasing Importance of Cloud Computing and Developers

Our future success depends in large part on the continuing adoption of cloud computing, proliferation of cloud-native start-ups and SMBs and the increasing importance of developers, all of which are driving the adoption of our developer cloud platform. We believe our market opportunity is large and that these factors will continue to drive our growth. We plan to continue to invest significantly in scaling across many organizational functions in order to grow our operations both domestically and internationally to capitalize on these trends.

Growing our Customer Base

We believe there is a substantial opportunity to further expand our customer base, and our future growth depends, in large part, on our ability to increase the number of customers using our cloud computing platform. We have historically attracted customers by offering a low-friction, self-service cloud platform combined with a highly-efficient self-service marketing model. Over the three-year period from 2018 to 2020, we have added an average of over 50,000 customers per year. We are investing in strategies that we believe will continue to drive new customer adoption, especially among SMB customers, such as implementing new marketing initiatives that further optimize our self-service revenue funnel and expanding our go-to market teams in select international locations. Our ability to attract new customers will depend on a number of factors, including our success in recruiting and expanding our sales and marketing organization and competitive dynamics in our target markets.

Increasing Usage by Our Existing Customers

Our customer base of more than 570,000 customers represents a significant opportunity for further consumption of our services. There are substantial opportunities to expand revenue within our large customer base through increased usage of our platform as our customers grow their businesses, adoption of additional product offerings and targeted sales initiatives focused on our larger customers. Our consumption-based pricing model makes it frictionless for customers to increase their usage of our platform as they require more compute and storage as they grow and scale. We have also expanded the breadth of our platform offerings and will continue to do so as we have experienced strong adoption of recently developed products. To accelerate this growth across our larger customers, we have recently complemented our self-service marketing model with internal go-to-market teams that are specifically focused on expanding our business with our larger customers. Our ability to increase the usage of our platform by existing customers will depend on a number of factors, including our customers’ satisfaction with our platform and product offerings, competition, pricing and overall changes in our customers’ spending levels.

Enhancing Our Platform and Product Offerings

We believe the market opportunity for serving developers, start-ups and SMBs is very large and goes far beyond providing the core IaaS services of compute, storage and networking. We have a history of, and will continue to invest significantly in, developing and delivering innovative products, features and functionality targeted at our core customer base. For example, our Managed Kubernetes and Managed Database offerings, which were launched in late 2018 and 2019, respectively, contributed approximately $4.8 million and $19.8 million of revenue in 2019 and 2020, respectively, and we expect revenue from these offerings to continue to grow. In addition, while we have not been focused on acquisition opportunities to drive our growth, we may pursue both strategic partnerships and acquisitions that we believe will be complementary to our business, accelerate customer acquisition, increase usage of our platform and/or expand our product offerings in our core markets. Our results of operations may fluctuate as we make these investments to drive usage and take advantage of our expansive market opportunity.

Key Business Metrics

We utilize the key metrics set forth below to help us evaluate our business and growth, identify trends, formulate financial projections and make strategic decisions. We are not aware of any uniform standards for

 

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calculating these key metrics, and other companies may not calculate similarly titled metrics in a consistent manner, which may hinder comparability.

 

     Year Ended December 31,  
     2018      2019      2020  

Customers

     501,649        542,708        572,960  

ARPU

   $ 35.97      $ 40.16      $ 47.78  

ARR (in millions)

   $ 226      $ 285      $ 357  

Net dollar retention rate

     101%        100%        103%  

Capital expenditures as a percentage of revenue

     57%        37%        38%  

Customers

We believe that the number of customers is an important indicator of the growth of our business and future revenue opportunity. We define a customer at the end of any period as a person or entity who has incurred usage in the period and, as a result, has generated an invoice of greater than $0 for that period. We treat each customer that generates an invoice as a unique customer, and a single organization with multiple divisions, segments or subsidiaries may be counted as multiple customers if they separately signed up on our platform. During 2019 and 2020, our number of customers increased by approximately 41,000 and 30,000, respectively, with approximately 573,000 customers as of December 31, 2020.

ARPU

We believe that our average revenue per customer, which we refer to as ARPU, is a strong indication of our ability to land new customers with higher spending levels and expand usage of our platform by our existing customers. We calculate ARPU on a monthly basis as our total revenue in that period divided by the number of customers determined as of the last day of that period. For a quarterly or annual period, ARPU is determined as the weighted average monthly ARPU over such three or 12-month period. Our ARPU has increased significantly, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020.

ARR

Given the renewable nature of our business, we view annual run-rate revenue as an important indicator of our current progress towards meeting our revenue targets and projected growth rate going forward. We calculate ARR at a point in time by multiplying the latest monthly period’s revenue by 12. ARR grew by 26% from December 31, 2018 to December 31, 2019 and 25% from December 31, 2019 to December 31, 2020.

Net Dollar Retention Rate

Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue from our existing customers. We have a history of retaining customers for multiple years and in many cases increasing their spend with us over time. To help us measure our performance in this area, we monitor our net dollar retention rate. We calculate net dollar retention rate monthly by starting with the revenue from the cohort of all customers during the corresponding month 12 months prior, or the Prior Period Revenue. We then calculate the revenue from these same customers as of the current month, or the Current Period Revenue, including any expansion and net of any contraction or attrition from these customers over the last 12 months. The calculation also includes revenue from customers that generated revenue before, but not in, the corresponding month 12 months prior, but subsequently generated revenue in the current month and are therefore reflected in the Current Period Revenue. We include this group of re-engaged customers in this calculation because our customers frequently use our platform for projects that stop and start over time. We then divide the total Current Period Revenue by the total Prior Period Revenue to arrive at the net dollar retention rate for the relevant month. For a quarterly or annual period, the net dollar retention rate is determined as the average monthly net dollar retention rates over such three or 12-month period. Our net dollar retention rate for 2018, 2019 and 2020 was 101%, 100% and 103%, respectively, which includes approximately 3% from re-engaged customers in each of 2018, 2019 and 2020.

 

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In addition to net dollar retention rate, we monitor gross dollar retention rate as a measure of the churn of existing customers. We calculate gross dollar retention rate in the same manner we calculate net dollar retention rate, but without including the impact of expansion and contraction from the relevant customers (i.e., our gross dollar retention rate reflects only customer losses and does not reflect customer expansion or contraction). Our gross dollar retention rate for each of 2018, 2019 and 2020 was 86%, demonstrating the low churn of our customer base.

Capital Expenditures as a Percentage of Revenue

We consider capital expenditures as a percentage of revenue to be an important indicator of our efficiency of capital spend. We calculate capital expenditures as a percentage of revenue by dividing total capital expenditures during the period, including purchases of intangible assets, seller financed equipment purchases and acquisition of property and equipment from capital leases, by revenue. For 2018, 2019 and 2020, capital expenditures as a percentage of revenue was 57%, 37% and 38%, respectively. We expect our capital expenditures as a percentage of revenue to continue to decline over the next several years.

Components of Results of Operations

Revenue

We provide cloud computing services, including but not limited to compute, storage and networking, to our customers. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and do not include any minimum guaranteed quantities or fees. Fees are billed monthly, and payment is typically due upon invoicing. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

We may offer sales incentives in the form of promotional and referral credits and grant credits to encourage customers to use our services. These types of promotional and referral credits typically expire in two months or less if not used. For credits earned with a purchase, they are recorded as contract liabilities when earned and recognized at the earlier of redemption or expiration. The majority of credits are redeemed in the month they are earned.

Cost of Revenue

Cost of revenue consists primarily of fees related to operating in third-party co-location facilities, personnel expenses for those directly supporting our data centers and non-personnel costs, including amortization of capitalized internal-use software development costs and depreciation of our data center equipment. Third-party co-location facility costs include data center rental fees, power costs, maintenance fees, and network and bandwidth expenses. Personnel expenses include salaries, bonuses, benefits, and stock-based compensation.

We intend to continue to invest additional resources in our infrastructure to support our product portfolio and scalability of our customer base. The level, timing and relative investment in our infrastructure could affect our cost of revenue in the future.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of personnel costs including salaries, bonuses, benefits and stock-based compensation. Research and development expenses also include amortization of capitalized internal-use software development costs for research and development activities, which are amortized over three years, and professional services, as well as costs related to our efforts to add new features to our existing offerings, develop new offerings, and ensure the security, performance, and reliability of our global cloud platform. We expect research and development expenses to increase in absolute dollars as we continue to invest in our platform and product offerings.

 

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Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel costs of our sales, marketing and customer support employees including salaries, bonuses, benefits and stock-based compensation. Sales and marketing expenses also include costs for marketing programs, advertising, and professional service fees. We expect sales and marketing expenses to continue to increase in absolute dollars as we enhance our product offerings and implement new marketing strategies.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs of our human resources, legal, finance, and other administrative functions including salaries, bonuses, benefits and stock-based compensation. General and administrative expenses also include bad debt expense, software, payment processing fees, depreciation and amortization expenses, rent and facilities costs, and other administrative costs. We expect to incur significant additional legal, accounting and other expenses to support our transition to and operations as a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. We also expect general and administrative expenses to increase in absolute dollars as we continue to grow our business.

Other (Income) Expense

Other (income) expense consists primarily of interest expense on our credit facility and third-party equipment financing, loss on extinguishment of debt, and gains or losses on foreign currency exchange.

Income Tax Expense

Income tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be realized.

Results of Operations

The following table sets forth our results of operations for the periods presented:

 

     Year Ended December 31,  
     2018     2019     2020  
    

(in thousands)

 

Revenue

   $ 203,136   $ 254,823   $ 318,380  

Cost of revenue(1)

     97,042     122,259     145,532  
  

 

 

   

 

 

   

 

 

 

Gross profit

     106,094     132,564     172,848  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     44,934     59,973     74,970  

Sales and marketing(1)

     29,445     31,340     33,472  

General and administrative(1)

     59,009     71,156     80,197  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     133,388     162,469     188,639  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,294     (29,905     (15,791

Other (income) expense

     7,484     9,692     26,866  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (34,778     (39,597     (42,657

Income tax expense

     1,221     793     911  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (35,999   $ (40,390   $ (43,568
  

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
           2018                  2019                  2020        
    

(in thousands)

 

Cost of revenue

   $ 42    $ 1,142    $ 545  

Research and development

     2,559      4,688      7,765  

Sales and marketing

     381      539      1,924  

General and administrative

     9,185      12,277      19,222  
  

 

 

    

 

 

    

 

 

 

Total

   $ 12,167    $ 18,646    $ 29,456  
  

 

 

    

 

 

    

 

 

 

Stock-based compensation for the years ended December 31, 2018, 2019 and 2020 included compensation of $8.0 million, $12.1 million and $18.3 million, respectively, related to secondary sales of common stock by certain current and former employees, which is primarily included in General and administrative. See “Comparison of Years Ended December 31, 2019 and 2020—Operating Expenses” and “Comparison of Years Ended December 31, 2018 and 2019—Operating Expenses” below.

The following table sets forth our results of operations as a percentage of revenue for the periods presented:

 

     Year Ended December 31,  
     2018     2019     2020  

Revenue

     100     100     100

Cost of revenue

     48       48       46  
  

 

 

   

 

 

   

 

 

 

Gross profit

     52       52       54  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     22       24       24  

Sales and marketing

     14       12       11  

General and administrative

     29       28       25  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     65       64       60  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (13     (12     (6

Other (income) expense

     4       4       8  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (17     (16     (14

Income tax expense

     1       *       *  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (18 )%      (16 )%      (14 )% 
  

 

 

   

 

 

   

 

 

 

 

*

Less than 1% of revenue

Comparison of Years Ended December 31, 2019 and 2020

Revenue

 

     Year Ended December 31,                
           2019                  2020            $ Change      % Change  
     (in thousands)         

Revenue

   $ 254,823    $ 318,380    $ 63,557      25

Revenue increased $63.6 million, or 25%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a 19% increase in ARPU to $47.78 from $40.16 and an increase of approximately 30,000 customers to approximately 573,000. The increase in ARPU was primarily driven by a $15.0 million increase in revenue from new products, and the increase in customers was driven by continued strong customer acquisition and retention.

 

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Cost of Revenue

 

     Year Ended December 31,                
           2019                  2020            $ Change      % Change  
     (in thousands)         

Cost of revenue

   $ 122,259    $ 145,532    $ 23,273      19

Cost of revenue increased $23.3 million, or 19%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to higher co-location costs, bandwidth expenses and depreciation of our network equipment to support the growth in our business, as well as additional ancillary data center equipment needs.

Operating Expenses

 

     Year Ended December 31,                
           2019                  2020            $ Change      % Change  
     (in thousands)         

Research and development

   $ 59,973    $ 74,970    $ 14,997      25

Sales and marketing

     31,340      33,472        2,132        7

General and administrative

     71,156      80,197        9,041        13
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 162,469    $ 188,639    $ 26,170      16
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses increased $15.0 million, or 25%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in personnel costs to support our growing operations, as well as stock-based compensation including secondary sales of our common stock.

Sales and marketing expenses increased $2.1 million, or 7%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in personnel costs to support our growing operations, partially offset by a decrease in advertising and other promotional costs.

General and administrative expenses increased $9.0 million, or 13%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to stock-based compensation including secondary sales of our common stock, an increase in personnel costs to support our growing operations and an increase in software expenses, partially offset by a decrease in travel and entertainment as a result of the COVID-19 pandemic.

Other (Income) Expense

 

     Year Ended December 31,                
           2019                  2020            $ Change      % Change  
     (in thousands)         

Other (income) expense

   $ 9,692    $ 26,866    $ 17,174      177

Other (income) expense increased $17.2 million, or 177%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in interest expense as a result of increased borrowings under our existing credit facility and a $12.8 million unrealized loss on the revaluation of warrants.

Income Tax Expense

 

     Year Ended December 31,                
           2019                  2020            $ Change      % Change  
     (in thousands)         

Income tax expense

   $ 793    $ 911    $ 118      15

 

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Income tax expense increased $0.1 million, or 15%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to unrecognized tax positions. As of December 31, 2020, we had federal net operating loss carryforwards and state net operating loss carryforwards of $103.2 million and $128.1 million, respectively.

Comparison of Years Ended December 31, 2018 and 2019

Revenue

 

     Year Ended December 31,                
           2018                  2019            $ Change      % Change  
    

(in thousands)

        

Revenue

   $ 203,136    $ 254,823    $ 51,687      25

Revenue increased $51.7 million, or 25%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 12% increase in ARPU to $40.16 from $35.97 and an increase of approximately 41,000 customers to approximately 543,000. The increase in ARPU was primarily driven by a $4.8 million increase in revenue from new products, and the increase in customers was driven by continued strong customer acquisition and retention.

Cost of Revenue

 

     Year Ended December 31,                
           2018                  2019            $ Change      % Change  
    

(in thousands)

        

Cost of revenue

   $ 97,042    $ 122,259    $ 25,217      26

Cost of revenue increased $25.2 million, or 26%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to higher co-location costs, bandwidth expenses and depreciation of our network equipment to support the growth in our business, as well as additional ancillary data center equipment needs.

Operating Expenses

 

     Year Ended December 31,                
           2018                  2019            $ Change      % Change  
    

(in thousands)

        

Research and development

   $ 44,934    $ 59,973    $ 15,039      33

Sales and marketing

     29,445      31,340      1,895      6

General and administrative

     59,009      71,156      12,147      21
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 133,388    $ 162,469    $ 29,081      22
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses increased $15.0 million, or 33%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to an increase in personnel costs to support our growing operations, as well as stock-based compensation including secondary sales of our common stock.

Sales and marketing expenses increased $1.9 million, or 6%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to an increase in personnel costs to support our growing operations, partially offset by a decrease in advertising and other promotional costs.

General and administrative expenses increased $12.1 million, or 21%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to an increase in personnel costs to support our growing operations, stock-based compensation including secondary sales of our common stock and an increase in software expenses and project-based professional service fees.

 

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Other (Income) Expense

 

     Year Ended December 31,                
           2018                  2019            $ Change      % Change  
    

(in thousands)

        

Other (income) expense

   $ 7,484    $ 9,692    $ 2,208      30

Other (income) expense increased $2.2 million, or 30%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to an increase in interest expense as a result of increased borrowings under our existing credit facility and increased capital expenditure financing.

Income Tax Expense

 

     Year Ended December 31,               
           2018                  2019            $ Change     % Change  
    

(in thousands)

       

Income tax expense

   $ 1,221    $ 793    $ (428     (35 )% 

Income tax expense decreased $0.4 million, or 35%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to unrecognized tax positions. As of December 31, 2019, we had federal net operating loss carryforwards and state net operating loss carryforwards of $91.8 million and $92.8 million, respectively.

Quarterly Results of Operations

The following tables summarize our selected unaudited quarterly consolidated statements of operations data for each of the eight fiscal quarters in the period ended December 31, 2020, as well as the percentage of revenues that each line item represents for each quarter. The information for each of these quarters has been prepared in accordance with GAAP on the same basis as our audited annual consolidated financial statements included elsewhere in this prospectus and reflects, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
    (in thousands)  

Revenue

  $ 58,294   $ 61,931   $ 65,299   $ 69,299   $ 72,792   $ 76,911   $ 81,160   $ 87,517

Cost of revenue(1)

    28,462     29,860     30,900     33,037     34,683     35,205     37,063     38,581
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    29,832     32,071     34,399     36,262     38,109     41,706     44,097     48,936  

Operating expenses:

               

Research and development(1)

    13,515     14,566     16,633     15,259     19,477     15,130     19,706     20,657  

Sales and marketing(1)

    7,110     7,861     7,566     8,803     9,454     6,957     7,700     9,361  

General and administrative(1)

    18,810     16,031     17,860     18,455     21,665     17,841     23,411     17,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    39,435     38,458     42,059     42,517     50,596     39,928     50,817     47,298  

(Loss) income from operations

    (9,603     (6,387     (7,660     (6,255     (12,487     1,778     (6,720     1,638  

Other (income) expense

    1,801     2,146     2,738     3,007     3,698     4,097     3,628     15,443  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (11,404     (8,533     (10,398     (9,262     (16,185     (2,319     (10,348     (13,805

Income tax expense (benefit)

    134     127     162     370     748     251     (134     46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (11,538   $ (8,660   $ (10,560   $ (9,632   $ (16,933   $ (2,570   $ (10,214   $ (13,851
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation as follows:

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
    (in thousands)  

Cost of revenue

  $ 15   $ 14   $ 594   $ 519   $ 24   $ 68   $ 302   $ 151

Research and development

    750     754     2,336     848     2,221     812     2,950     1,782  

Sales and marketing

    97     202     137     103     226     453     470     775  

General and administrative

    5,577     1,196     2,788     2,716     6,911     1,424     9,004     1,883  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,439   $ 2,166   $ 5,855   $ 4,186   $ 9,382   $ 2,757   $ 12,726   $ 4,591
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation included compensation related to secondary sales of common stock by certain current and former employees as follows:

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
    (in thousands)  

Secondary sales

  $ 5,144   $ 643   $ 4,021   $ 2,248   $ 7,611   $ 529   $ 10,203   $   –

Percentage of Revenue Data

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 

Revenue

    100     100     100     100     100     100     100     100

Cost of revenue

    49     48     47     48     48     46     46     44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    51     52     53     52     52     54     54     56

Operating expenses:

               

Research and development

    23     24     25     22     27     20     24     24  

Sales and marketing

    12     13     12     13     13     9     9     11

General and administrative

    32     26     27     27     30     23     29     20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    67       63       64     62     70     52     62       55

(Loss) income from operations

    (16     (11     (11     (10     (18     2     (8     1  

Other (income) expense

    3     3     4     4     5     5     4     18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (19     (14     (15     (14     (23     (3     (12     (17

Income tax expense (benefit)

    *       *       *       *       *       *       *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

    (19 )%      (14 )%      (15 )%      (14 )%      (23 )%      (3 )%      (12 )%      (17 )% 

 

*

Less than 1% of revenue

Key Business Metrics(1)

 

    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 

Customers

    519,079       531,272       536,809       542,708       546,453       554,236       559,310       572,960  

ARPU

  $ 37.87     $ 39.26     $ 40.56     $ 42.83     $ 44.68     $ 46.44     $ 48.58     $ 51.25  

ARR (in millions)

  $ 237     $ 252     $ 265     $ 285     $ 299     $ 313     $ 335     $ 357  

Net dollar retention rate

    100     101     100     100     101     102     104     105

Capital expenditures as a percentage of revenue

    32     49     29     39     44     40     32     35

 

(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for our definitions of these metrics.

 

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Quarterly Trends

Our quarterly revenue increased in each of the quarters presented primarily due to increases in sales to new and existing customers as well as a steady increase in ARPU. Cost of revenue increased in each of the quarters presented due to an increase in our number of customers and related costs to support our growing data center operations at our co-location facilities, network and bandwidth costs, and other related overhead costs for operating our global platform. Operating expenses increased during 2019 and 2020 primarily due to increases in headcount and other related expenses to support our growing customer base and operations. Quarterly fluctuations in our Operating expenses, especially in General and administrative, were primarily due to stock-based compensation related to the timing of secondary sales of common stock by certain current and former employees, which is shown above and also described in Note 14 to our consolidated financial statements included elsewhere in this prospectus.

Our quarterly growth in number of customers, ARPU and ARR for each of the quarters presented reflects the overall progress with our go-to-market programs, our ability to attract customers with higher spending levels and our existing customers continuing to expand their business with us. The increase in our net dollar retention rate during 2020 highlights the success we are having with new initiatives to retain existing customers and expand sales with such customers, including through increased adoption of our new products.

Capital expenditures as a percentage of revenue declined from 57% in 2018 to 37% in 2019 and 38% in 2020 as we reduced the acquisition cost of hardware and increased the efficiency of those assets. Capital expenditures as a percentage of revenue remained relatively flat on an annual basis between 2019 and 2020 as we accelerated the acquisition of certain hardware originally scheduled for purchase in 2021 into 2020. We experience quarterly fluctuations in this metric, which ranged from 29% to 49% in 2019 and 2020, because it is dependent on the specific timing of our purchases. These quarterly fluctuations have not impacted the overall annual trend line, which is our primary management focus. We anticipate a continued reduction in capital expenditures as a percentage of revenue, as measured on an annual basis, over the next several years.

Liquidity and Capital Resources

We have funded our operations since inception primarily with cash flow generated by operations, private offerings of our securities, borrowings under our credit facilities and capital expenditure financings. As of December 31, 2020, we had $100.3 million of cash and cash equivalents. In May 2020, we completed our Series C preferred stock offering, resulting in net proceeds of $49.8 million. We believe our existing cash and cash equivalents, cash flow from operations and availability under our 2020 Credit Facility (as described below) will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

In February and March 2020, we entered into and subsequently amended a second amended and restated credit agreement, or our 2020 Credit Facility, with KeyBank National Association as administrative agent. Our 2020 Credit Facility has total draw down capacity of $320 million, with a $150 million revolver, or the Revolving Credit Facility, and a $170 million term loan. Our 2020 Credit Facility will mature on February 13, 2025. The borrowings from the 2020 Credit Facility were used to repay our amended and restated credit agreement entered into with KeyBank National Association as administrative agent in April 2018, or our 2018 Credit Facility, in its entirety. We drew down $63.2 million under the Revolving Credit Facility, $8.2 million of which was used to repay the 2018 revolving credit facility with the remainder used for working capital purposes as well as to strengthen our cash position and maintain flexibility given the uncertainty in the global economy as a result of the COVID-19 pandemic. As of December 31, 2020, our total available borrowing capacity under our Revolving Credit Facility was $86.8 million.

Our 2020 Credit Facility is secured by a first-priority security interest in substantially all of our assets. Our 2020 Credit Facility contains certain financial and operational covenants, including a maximum ratio of consolidated total debt to consolidated EBITDA of 4.50x with step-downs over time and a maximum debt service coverage ratio of 3.00x. Consolidated total debt and consolidated EBITDA, which are non-GAAP measures used for this covenant, are calculated in accordance with the definitions set forth in the 2020 Credit Facility. In this

 

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context, these measures are used solely to provide information on the extent to which we are in compliance with these financial covenants and may not be comparable to consolidated total debt and consolidated EBITDA used by other companies or any other non-GAAP measures we present elsewhere in this prospectus. We were in compliance with all covenants under our 2020 Credit Facility as of December 31, 2020.

The following table summarizes our cash flows for the periods presented:

 

     December 31,  
     2018     2019     2020  
    

(in thousands)

 

Net cash provided by operating activities

   $ 37,954   $ 39,902   $ 58,115  

Net cash used in investing activities

     (61,254     (87,383     (115,490

Net cash (used in) provided by financing activities

     (14,248     49,804     124,026  

Net (decrease) increase in cash and cash equivalents

     (37,548     2,323     66,651  

Operating Activities

Our largest source of operating cash is cash collections from sales to our customers. Our primary uses of cash from operating activities are for personnel expenses, data center co-location expenses, marketing expenses, payment processing fees, bandwidth and connectivity, server maintenance and software licensing fees. We have generated negative cash flows and have supplemented working capital requirements through net proceeds from borrowings under our credit facilities and private offerings of our securities.

Net cash provided by operating activities was $38.0 million, $39.9 million and $58.1 million for the years ended December 31, 2018, 2019 and 2020, respectively, primarily driven by an increase in cash collections from higher revenues offset by an increase in cash expenses from personnel related costs and higher interest payments.

Investing Activities

Net cash used in investing activities was $61.3 million, $87.4 million and $115.5 million for the years ended December 31, 2018, 2019 and 2020, respectively, primarily as a result of increases in capital expenditures to purchase property and equipment to support additional data center co-locations, capitalization of internal-use software development costs and acquired intangibles related to our IP addresses.

Financing Activities

Net cash used in financing activities of $14.2 million for the year ended December 31, 2018 was primarily due to repayments of financed equipment purchases of $36.0 million, partially offset by net proceeds from borrowings under the 2018 revolving credit facility of $25.0 million. Additionally, the proceeds from the 2018 Credit Facility were used to repay a previous credit facility.

Net cash provided by financing activities of $49.8 million for the year ended December 31, 2019 was primarily due to $59.5 million in borrowings under the 2018 revolving credit facility and $11.5 million of proceeds from third-party equipment financings, partially offset by $22.8 million in repayment of notes payable associated with financed equipment purchases.

Net cash provided by financing activities of $124.0 million for the year ended December 31, 2020 was primarily due to $75.2 million in net proceeds from borrowings under the 2020 Credit Facility, the proceeds of which were used to repay the 2018 Credit Facility, $49.8 million from our Series C preferred stock offering, and $14.0 million of proceeds from the issuance of common stock under our stock plan, partially offset by $17.9 million in repayment of notes payable and capital leases associated with financed equipment purchases.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020:

 

     Payments Due By Period  
     Total      Less than 1
Year
     1-3 Years      3-5 Years  
     (in thousands)  

Long-term debt obligations(1)

   $ 293,868      $ 26,713      $ 57,883      $ 209,272  

Operating lease commitments(2)

     115,473        43,605        48,624        23,244  

Purchase obligations(3)

     22,265        9,530        6,954        5,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

(1)

Includes principal, interest and unused commitment fees on our 2020 Credit Facility and notes payable. The rate assumed for the variable interest component of the contractual interest obligation was the rate in effect at December 31, 2020. See Note 5 to the Consolidated Financial Statements included elsewhere in this prospectus for a further discussion of our Long-term debt.

(2)

Includes operating lease liabilities for certain of our offices and our data centers.

(3)

Includes long-term commitments for bandwidth usage with various networks and internet service providers and purchase orders with various vendors. Additionally, amounts include minimum purchase agreements for certain equipment purchases which we finance with various sellers and/or third parties.

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Risk

At December 31, 2020, we had cash and cash equivalents of $100.3 million. Interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of December 31, 2020, we had $230.0 million outstanding on our 2020 Credit Facility which accrued interest, at our election, of LIBOR plus an applicable margin or a base rate plus an applicable margin. A hypothetical 10% change in interest rates would not result in a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Canada, the Netherlands, Germany, and India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign

 

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currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to other currencies would not have a material effect on our operating results.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.

Revenue Recognition

We adopted Financial Accounting Standards Board Accounting Standards Codification or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, and ASC 340-40, Contract Costs, effective January 1, 2019, using the modified retrospective method of adoption. ASC 606 was applied only to contracts that are not completed at the date of initial application. The adoption of ASC 606 did not result in any significant changes to the amount and timing of revenue recognition in prior, current or future periods. Therefore, there was no cumulative adjustment as a result of adoption. The reported results for fiscal year 2019 onwards reflect the application of ASC 606, while the reported results for fiscal years presented prior to adoption are not adjusted and continue to be reported under ASC 605.

We account for revenue using the following steps:

1. Identify the contract with a customer

We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the customer agrees to the terms of service, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, we apply security checks and validate their payment method.

2. Identify the performance obligations in the contract

Our performance obligation is to provide our cloud-based infrastructure for customers to use at the customers’ election. The availability of services is free of charge, and therefore we have no performance obligation until the customer elects to use the services.

3. Determine the transaction price

The transaction price is calculated based on the customer’s usage for the month at an hourly rate that is published on the Company’s website. None of our contracts contain a significant financing component.

 

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4. Allocate the transaction price to performance obligations in the contract

The transaction price is calculated based on actual monthly usage and pricing that is published on the Company’s website. This is considered a single performance obligation, and thus the entire transaction price is allocated to the single performance obligation.

5. Recognize revenue when or as we satisfy a performance obligation

We provide cloud computing services, including but not limited to compute, storage and networking, to our customers. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and do not include any minimum guaranteed quantities or fees. Fees are billed monthly, and payment is typically due upon invoicing. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Our global cloud platform is supported by various third parties. We considered the principal versus agent guidance in ASC 606 and concluded that we are the principal for all services provided to its customers.

We may offer sales incentives in the form of promotional and referral credits and grant credits to encourage customers to use our services. These types of promotional and referral credits typically expire in two months or less if not used. For credits earned with a purchase, they are recorded as contract liabilities when earned and recognized at the earlier of redemption or expiration. The majority of credits are redeemed in the month they are earned.

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing. Any payments received in advance of billing are a contract liability, which is recorded as Deferred revenue within Total current liabilities on the Consolidated Balance Sheets.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily represents revenue recognized that was not invoiced at the balance sheet date and is primarily collected in the following month. We maintain the allowance for doubtful accounts for estimated losses expected to result from the inability of some customers to make payments as they become due. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on historical loss patterns, the number of days that customer invoices are past due and an evaluation of the potential risk of loss associated with specific accounts. When management becomes aware of circumstances that may further decrease the likelihood of collection, it records a specific allowance against amounts due, which reduces the receivable to the amount that management reasonably believes will be collected. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and relieve the allowance after the potential for recovery is considered remote. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past.

Internal-Use Software Costs

We capitalize costs to develop software for internal use when both the preliminary project stage is complete and management has authorized further funding for the project based on a determination that it is both probable that the project will be completed and used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized costs include external consulting fees, payroll and payroll-related costs, and stock-based compensation for employees in our development teams who are directly associated with, and who devote time to, our internal-use software projects during the application development stage. Once an application has reached the development stage, qualifying

 

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internal and external costs are capitalized until the application is substantially complete and ready for its intended use. Capitalized qualifying costs are amortized on a straight-line basis when the software is ready for its intended use over an estimated useful life, which is generally three years. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized.

Stock-Based Compensation

Compensation expense related to stock-based transactions, including employee, consultant, and non-employee director stock option awards, is measured and recognized in the consolidated financial statements based on fair value. The fair value of each option award is estimated on the grant date using the Black Scholes option-pricing model. Expense is recognized on a straight-line basis over the vesting period of the award.

Our option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates.

These assumptions are estimated as follows:

 

   

Fair value. Because our common stock is not yet publicly traded, we must estimate the fair value of common stock. Our board of directors considers numerous objective and subjective factors to determine the fair value of our common stock at each meeting in which awards are approved.

 

   

Expected volatility. Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since we do not have sufficient trading history of our common stock, we estimate the expected volatility of our stock options at the grant date by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options.

 

   

Expected life in years. We determine the expected term based on the average period the stock options are expected to remain outstanding using the simplified method, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

 

   

Risk-free rate. We use the U.S. Treasury yield for our risk-free interest rate that corresponds with the expected term.

 

   

Expected dividend yield. We utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future.

The following assumptions were used to calculate the fair value of stock options granted:

 

     December 31,  
           2019               2020      

Expected volatility

     47.84     52.06

Expected life in years

     6       6  

Risk-free interest rate

     1.78     0.57

Expected dividend yield

     0     0

 

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We estimate the expected forfeiture rate and only recognize expense for those shares that are expected to vest. We estimate the expected forfeiture rate at the date of grant based on historical experience and our expectations regarding future pre-vesting termination behavior of employees and other service providers and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation is adjusted accordingly.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation.

Common Stock Valuations

The fair value of the common stock underlying our stock-based awards has historically been determined by our board of directors, with input from management and contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors include:

 

   

contemporaneous valuations of our common stock performed by independent third-party specialists;

 

   

the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

   

the prices of common or preferred stock sold to third-party investors by us and in secondary transactions or repurchased by us in arm’s-length transactions;

 

   

lack of marketability of our common stock;

 

   

our actual operating and financial performance;

 

   

current business conditions and projections;

 

   

hiring of key personnel and the experience of our management;

 

   

the history of the company and the introduction of new products;

 

   

our stage of development;

 

   

likelihood of achieving a liquidation event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;

 

   

the market performance of comparable publicly traded companies; and

 

   

the U.S. and global capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including combinations of income and market approaches with input from management. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in our cash flows.

 

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For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock using either the option pricing method, or the OPM, or a combination of the OPM and the probability-weighted expected return method, or the PWERM, which is referred to as the hybrid method. The OPM allocates the overall company value to the various share classes based on differences in liquidation preferences, participation rights, dividend policy and conversion rights, using a series of call options. The call right is valued using a Black-Scholes option pricing model. The PWERM employs additional information not used in the OPM, including various market approach calculations depending upon the likelihood of various discrete future liquidity scenarios, such as an initial public offering or the sale of the company, as well as the probability of remaining a private company.

In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties, and whether the transactions involved investors with access to our financial information.

Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the completion of this offering, our board of directors will determine the fair value of each share of underlying common stock-based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Incomes Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize taxes on Global Intangible Low-Taxed Income as a current period expense when incurred.

We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.

 

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Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including scheduled reversal of deferred tax liabilities, past operating results, the feasibility of tax planning strategies and estimates of future taxable income. Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Should actual amounts differ from our estimates, the amount of our tax expense and liabilities could be materially impacted.

We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries as a result of cumulative and current overall foreign loss. The earnings of non-U.S. subsidiaries are currently expected to be indefinitely reinvested in non-U.S. operations.

Recently Adopted Accounting Pronouncements

See the sections titled “Summary of Significant Accounting Policies—Recent Accounting Pronouncements—Pending Adoption” and “—Recent Accounting Pronouncements—Adopted” in Note 2 of the notes to our consolidated financial statements included elsewhere in this prospectus for more information.

Internal Controls Over Financial Reporting

In the course of preparing our audited consolidated financial statements for the year ended December 31, 2019, we identified a material weakness in our internal controls over financial reporting related to secondary sales of our common stock by current and former employees. We have remediated this material weakness, which we believe has addressed the underlying cause of this issue. For additional information, see “Risk Factors—If we are unable to maintain proper and effective internal controls over financial reporting, investor confidence in our company and, as a result, the value of our common stock may be adversely impacted. We previously identified and remediated a material weakness in our internal controls over financial reporting.”

Emerging Growth Company Status

We are an emerging growth company, as defined under the JOBS Act. The JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

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BUSINESS

Overview

Our mission is to simplify cloud computing so that developers and businesses can spend more time building software that changes the world.

DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for developers, start-ups and small and medium-sized businesses, or SMBs. We were founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and increase their productivity and agility. Over 570,000 individual and business customers currently use our platform to build, deploy and scale software applications. Our users include software engineers, researchers, data scientists, system administrators, students and hobbyists. Our customers use our platform across numerous industry verticals and for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. We believe that our focus on simplicity, community, open source and customer support are the four key differentiators of our business, driving a broad range of customers around the world to build their applications on our platform.

Cloud computing is revolutionizing how companies across the globe develop and deploy applications. The cloud offers lower upfront cost and superior flexibility, extensibility and scalability as compared to on-premise software development environments. These benefits are especially valuable for start-ups and SMBs, as they typically have more limited financial resources, operational expertise and IT personnel. As software and cloud-based technologies have become essential across industries and businesses of all sizes, the number of software developers and their strategic importance to organizations are both increasing significantly. According to SlashData, the number of developers globally was 19 million in 2019 and is expected to grow to 45 million by 2030.

Improving the developer experience and increasing developer productivity are core to our mission. Our developer cloud platform was designed with simplicity in mind to ensure that software developers can spend less time managing their infrastructure and more time turning their ideas into innovative applications to grow their businesses. Simplicity guides how we design and enhance our easy-to-use-interface, the core capabilities we offer our customers and our approach to predictable and transparent pricing for our solutions. We offer mission-critical infrastructure solutions across compute, storage and networking, and we also enable developers to extend the native capabilities of our cloud with fully managed application, container and database offerings. In just minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring and scale up and down as needed. Our pricing is consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments.

The global developer and open source communities are fundamental to our business, and a key source of ideas and innovations that support our sustained growth. Our developer-centric approach has helped us foster a large and loyal following. We attract approximately 5 million monthly unique visitors to our websites, host what we believe is the largest hackathon in the world, and offer a comprehensive library of high-quality technical tutorials and community-generated questions and answers. Developers and SMBs especially value open source technology as it allows them greater choice, affordability and flexibility, and our platform is designed to take advantage of open source technology to provide our customers with a much more efficient way to work. Our participation in and support of the open source community further enhance the attractiveness, depth and scalability of our offering.

Our customers depend on us for their critical business needs, and we are passionate about providing superior 24x7 customer support to all of our customers, regardless of size. We believe our customer support, coupled with

 

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our easy-to-use self-help resources and active developer community, has created tremendous brand loyalty amongst our growing customer base. Our customers become great advocates for DigitalOcean and are a common source of new customer referrals. We are proud of our Net Promoter Score, or NPS, which averaged 65 during 2020, comparable to some of the world’s most beloved brands.

We have a highly efficient self-service customer acquisition model, which we have recently complemented with a targeted inside sales force. Our sales and marketing expense as a percentage of revenue was approximately 14%, 12% and 11% in 2018, 2019 and 2020, respectively. The efficiency of our go-to-market model and our focus on the needs of the individual and SMB markets have helped us build a global customer base that continues to grow. We had approximately 573,000 customers as of December 31, 2020, up from approximately 502,000 as of December 31, 2018. Our customers are spread across over 185 countries, and around two-thirds of our revenue has historically come from customers located outside the United States. We have a growing number of customers with higher spending levels, and our existing customers are continuing to expand their business with us. Our average revenue per customer (which we refer to as ARPU) has increased significantly, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for additional information.

We have experienced strong revenue growth and improving margins in recent periods. For the years ended December 31, 2018, 2019 and 2020, our revenue was $203.1 million, $254.8 million and $318.4 million, respectively, representing year-over-year growth of 25% in 2019 and 2020. Our net loss attributable to common stockholders was $36.0 million, $40.4 million and $43.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. Our adjusted EBITDA was $39.5 million, $55.2 million and $95.9 million for the years ended December 31, 2018, 2019 and 2020, respectively. Our net cash provided by operating activities was $38.0 million, $39.9 million and $58.1 million for the years ended December 31, 2018, 2019 and 2020, respectively. See the section titled “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for additional information regarding adjusted EBITDA, the limitations of this non-GAAP financial measure and a reconciliation of this measure to the most directly comparable financial measure stated in accordance with GAAP.

Industry Background

There are a number of key technology and industry trends driving our opportunity, including:

 

   

The Growing Need for Technological Innovation is Driving Cloud Computing Adoption. Technology is transforming how businesses of all sizes engage with customers, manage their operations and drive competitive advantages. The global phenomenon of technology-powered growth and innovation requires nearly every company to focus their efforts on harnessing the power of technology through cloud services. Cloud computing has become the new standard for IT infrastructure as organizations seek to benefit from the flexibility, scalability and reliability of the cloud. Cloud technologies enable businesses to better focus their efforts on customer applications rather than the physical infrastructure required to support their operations. Start-ups and SMBs are particularly focused on leveraging the cloud for capabilities that would otherwise be inaccessible due to the high cost and expertise needed to deploy these capabilities on-premise.

 

   

Proliferation of Cloud Native Start-Ups and SMBs. There are more than 32 million SMBs in the United States alone, according to the World Bank, and we estimate there are at least three times that number, or 100 million SMBs, globally. We expect this number will continue to grow, with more than 14 million net new SMBs created globally each year. This has been driven in part by significantly lower barriers to entry for entrepreneurs looking to create and grow new businesses. In addition, the founding teams of these SMBs are no longer comprised only of technical individuals with advanced software development capabilities, but now include a far wider range of individuals. These individuals

 

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are able to leverage simple and reliable development tools and the widespread availability and significantly lower upfront cost of cloud computing to start companies. As such, a significant proportion of start-ups and SMBs are being built in the cloud to benefit from the faster, cheaper and easier way to deploy and manage their business solutions.

 

   

Software Developers Are Increasingly Influential Within Organizations. Companies increasingly rely on developers to quickly adapt to changing technological and business trends in order to compete. This trend has contributed to the shift to the cloud as cloud-based technologies increase the efficiency and flexibility of those developers. Developer productivity has become a top priority for companies around the world as they recognize the significant benefits derived from providing developers with the most powerful tools available. As a result, the global developer population, which according to SlashData will reach 45 million by 2030, has become increasingly influential on technology-related investment decisions. Across industries and companies of all sizes, IT procurement has shifted from an inefficient and slow-moving process to a more nimble model, with software developers at the forefront of the decision-making.

 

   

Open Source Software Is Accelerating Innovation. Open source technologies are powering many of the world’s most innovative start-ups and SMBs. This trend is expansive and being driven primarily by developers who are increasingly empowered to use the most efficient tools to accelerate the pace of innovation. Open source software enables individuals and businesses to access and use low cost, proven software tools for their applications instead of investing the time and resources in recreating the same use cases in self-developed software. Businesses of all sizes benefit from the many advantages of open source including, lower costs, increased speed to market, application reliability and flexibility and improved security. The rise of open source is expected to continue in the coming years. According to a 2019 survey by IDC, 71% of organizations use open source software and, over the next 12 to 24 months, over 50% plan to expand their use of open source software and another 7% that do not currently use open source software plan to start using it.

 

   

Organizations are Increasingly Using Multiple Clouds. According to IDC, 88% of organizations have employed a multi-cloud approach for their cloud and hosting services. Multi-cloud deployments have become increasingly common as individuals and businesses seek to match their applications with the best technology stacks and commercial models to run them while avoiding vendor lock-in akin to legacy IT infrastructure services. The future growth of the cloud-computing market across the globe will benefit significantly from this expanding trend of multi-cloud adoption.

Limitations of Existing Offerings on Developers, Start-Ups and SMBs

Existing offerings from large public cloud vendors are designed for complex, enterprise use cases such as migrating legacy workloads from on-premise to the cloud. The products and services offered by these vendors are not tailored for the needs of individual developers, start-ups or SMBs. These offerings lack the simplicity required by these users, suffer from near-infinite feature complexity and have opaque pricing and billing practices that are often accompanied by significant hidden costs. As a result, developers, start-ups and SMBs are often unable to leverage the benefits of cloud-based technologies.

The limitations of these enterprise-focused offerings include the following:

 

   

Difficult to Use. Enterprise-focused vendors frequently have complicated implementation processes, which require a significant amount of time to learn complex user interfaces and features rather than allowing developers to focus on building and deploying applications. These unintuitive or inconveniently packaged services have limited the ability of start-ups and SMBs, who typically do not have IT departments or large teams, to maximize the value of their cloud investments due to the amount of time and resources required to train on and manage underlying infrastructure.

 

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Uncurated Set of Offerings. Traditional public cloud vendors have built their platforms to serve global enterprises with large development teams. The thousands of ancillary products and services that are offered by these vendors create a significant amount of complexity that is difficult for developers, start-ups, and SMBs to manage.

 

   

Complex and Opaque Pricing. Existing cloud providers often have intricate and unpredictable pricing and billing practices. The lack of pricing transparency frequently leads to surprise charges and higher than expected costs, making budgeting and cost optimization very difficult. Companies frequently need dedicated employees, pricing analytics tools or even specialized consultants to understand how products are priced and how to manage their bills. The potential for unexpected or unbudgeted charges is especially burdensome for start-ups and SMBs that do not have the same financial resources as larger enterprises.

 

   

Lack of Customer Support. As traditional public cloud vendors target large enterprise customers, smaller buyers often do not get the necessary level of support required to manage their infrastructure. These smaller buyers, including start-ups and SMBs, are often those most in need of and reliant on support to help them manage their infrastructure effectively and efficiently. The lack of a focused customer support ecosystem to assist these smaller customers is further exacerbated by the complexity of the documentation produced by large cloud vendors.

Our Solution

DigitalOcean was founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. We pioneered the developer cloud platform to simplify cloud computing, enabling developers and developer teams to quickly deploy and scale applications, collaborate efficiently and improve business performance. Empowered by an easy-to-use self-service model, intuitive control panel and highly predictable pricing, our customers are able to rapidly accelerate innovation and increase their productivity and agility.

 

   

Simple and Intuitive. Our platform is engineered to take a user from inquiry to deployment within minutes, without any specialized training or heavy implementation. We abstract away the complexity that is generally found across legacy cloud providers to provide a compelling, intuitive interface with click-and-go options. Our platform provides users with a deployment interface that is comparable to interfaces provided by consumer internet leaders and is designed to minimize the number of steps to deployment.

 

   

Designed by Developers for Developers. Our platform was built with a developer-first mentality and is designed for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. Our innovative cloud platform is designed to eliminate the complexity and obstacles associated with deploying in and managing the cloud. Simplicity starts with our Droplets, which have revolutionized the way developers and teams deploy in the cloud. Droplets are our virtual machines that can be spun up in less than a minute, enabling developers to spend less time managing infrastructure and more time innovating.

 

   

Built to Help Businesses Scale. Our highly-curated set of solutions, including compute, storage and networking offerings, managed databases and developer and management tools, are all designed to address the needs of start-ups and SMBs as they scale their businesses and require more cloud capabilities. Our managed services, including our Managed Database, Managed Kubernetes and App Platform services, are specifically focused on enabling our SMB customers—regardless of business type or geography—to scale their operations on our platform.

 

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Open Source. Our participation in and support of the open source software community enhances the attractiveness, depth and scalability of our offering. It increases the transparency of our technology and allows our customers to more efficiently write their own integrations. We give back to the community by sponsoring projects to create content and tools that help developers build great software and hosting events that are focused on driving the growth of open source, such as our Hacktoberfest, which we believe is the largest hackathon in the world.

 

   

Differentiated Customer Support. We offer expert 24x7 technical support and customer service, with support staff spanning various time zones to ensure our customers quickly achieve their objectives and overcome challenges. Developers and engineers are a key part of our customer support team, and our technical support is—and always has been—available free of charge to all customers. Customers cite our attentive support as a key driver of their decision to start and grow their businesses on our platform.

 

   

Broad-Based Community Ecosystem: We have built one of the world’s largest developer learning communities, with approximately 6,000 high-quality developer tutorials and over 28,000 community-generated questions & answers. The strength and continued growth of our community ecosystem, which is managed by our internal developer relations and editorial teams, is predicated on differentiated content on our community education website, which attracts approximately 3.5 million monthly unique visitors. As our community grows and generates more valuable content for our platform, we are able to attract more users, which ultimately increases our customer base and reinforces our highly efficient self-service model.

 

   

Transparent and Predictable Pricing. Our approach to billing and pricing is simple, intuitive and transparent. Our pricing is consumption-based and renewable monthly, making it easy for our customers to optimize their deployments. We provide detailed monthly invoices, irrespective of the customer’s size or number of products purchased, making it easy to track usage on an ongoing basis. We enable our customers to completely control their spending and ensure there are no hidden charges that appear at the end of the month. Like everything we do, we approach billing with a customer-first focus, enabling our customers to spend more time developing and deploying innovative applications rather than interpreting and navigating convoluted invoices.

 

   

Security and Data Protection. Maintaining the security and integrity of our platform is a critical focus for us, as well as for our customers who rely on us for their critical business needs. We invest significantly in securing the computing infrastructure foundation upon which our customers build and scale their projects. We remove the complexity of securing infrastructure for our customers and make it simple for them to build the security layers required for their use cases. We are also committed to customer data privacy and utilize best-in-class access, encryption and data protection technologies and processes.

 

   

Built for Collaboration. Our platform enables secure and efficient collaboration across developer teams to manage and scale infrastructure and applications. We support thousands of developer teams on our platform and provide them with easy-to-use tools to better manage their workflows.

Key Benefits to Our Customers

Our solution is designed to empower our target customers with best-in-class cloud technologies, while supporting them with superior customer service. This customer-centric focus underpins our mission of simplifying cloud computing so developers and businesses can spend more time building software that changes the world. Our NPS averaged 65 during 2020, which is comparable to some of the world’s most beloved brands. For our customers, the key benefits of our solution include:

 

   

Accelerating innovation by leveraging the full power of the cloud

 

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Making it simple to build, deploy and scale applications

 

   

Achieving rapid time-to-value with a reliable, highly-performant and cost-effective platform

 

   

Spending less time managing infrastructure and more time on higher value tasks that drive the growth and success of their businesses

 

   

Superior customer support that is free to all customers

 

   

A highly-reliable, scalable and secure platform

We have a highly diverse customer base that uses our platform for a variety of projects and applications. Recent customer success stories include:

 

   

RouteTrust, a telecommunications start-up, launched a Platform-as-a-Service (PaaS) offering that processes billions of voice calls each month using our Droplets and our Managed Kubernetes service.

 

   

Cloudways, a managed hosting company in Malta, provides web hosting services to over 250,000 websites using our Droplets.

 

   

Rockerbox, an advertising and analytics company, dramatically reduced their cloud costs by 80% by efficiently running their data collection and analysis using our Droplets and our Managed Kubernetes, Managed Databases, Load Balancers and Spaces services.

 

   

Jiji, an online marketplace platform in Nigeria, serves over 200 million buyers and sellers across five countries in Africa.

 

   

Parabol, a remote meeting platform for teams embracing agile practices, makes it easier to host planning sessions, scrums and meetings online using our Droplets and our Managed Database service.

 

   

Centra, a Software-as-a-Service (SaaS)-based e-commerce platform in Sweden, provides a powerful backend offering that allows brands to build custom-designed, online flagship stores.

 

   

An entrepreneur in the United Kingdom utilizes our Managed Kubernetes service and open source software to profitably scale his API-centric product helping online media companies automate their quality assurance testing.

Our Market Opportunity

The Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) markets are two of the largest and fastest growing markets across all industries. According to IDC, the worldwide IaaS and PaaS markets for individuals and companies with less than 500 employees are estimated to be approximately $44.4 billion in the aggregate in 2020. The 2020 IaaS market, which is comprised of compute and storage, was estimated to be $31.9 billion. The 2020 PaaS market, which includes database management systems, application platforms and other platform services, was estimated to be $12.5 billion. According to IDC, these combined IaaS and PaaS markets are expected to grow to $115.5 billion in 2024, representing a 27% compound annual growth rate.

We believe the individual developer, start-up and SMB markets are underserved, and we expect our massive addressable market to continue to grow rapidly beyond 2024. The key drivers of this growth come from the increasing technological innovation which drives cloud adoption combined with the growing number of developers and SMBs worldwide. According to SlashData, the global developer population is expected to more than double over the next 10 years to approximately 45 million by 2030. Furthermore, there are more than

 

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32 million SMBs in the United States alone, according to the World Bank, and we estimate that there are at least three times that number, or 100 million SMBs, globally. We expect this number will continue to grow, with more than 14 million net new SMBs created globally each year.

Our Growth Strategies

We are driving significant growth by executing on the following key strategies:

 

   

Growing Our Customer Base. We believe there is a substantial opportunity to further expand our customer base. We have historically attracted customers by offering a low-friction, self-service cloud platform combined with a highly-efficient self-service marketing model. We are investing in strategies that we believe will continue to drive new customer adoption, especially among SMB customers, including new marketing initiatives that further optimize our self-service revenue funnel and targeted expansion of our inside sales teams, including in select international locations.

 

   

Increasing Usage by Our Existing Customers. Our customer base of more than 570,000 customers represents a significant opportunity for further sales expansion through increased usage of our platform and adoption of additional product offerings. Our ARPU, which in part reflects increased usage by our existing customers, has increased significantly in recent years, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020. We expect to continue to increase our ARPU through the introduction of new products tailored to our customer base and an expanded go-to-market initiative focused on larger customers and specific use cases, both of which will drive enhanced usage of our platform and product offerings by our existing customers.

 

   

Investing in Our Platform and Product Offerings. We have a history of, and will continue to invest significantly in, delivering innovative products, features and functionality targeted at our core customer base. We believe the market opportunity for serving developers, start-ups and SMBs is very large and goes far beyond providing the core IaaS services of compute, storage and networking. We have successfully attracted new customers to our platform and driven expansion with existing customers through new product launches, such as our Managed Kubernetes offering in late 2018, our Managed Database offering in 2019 and our App Platform service in October 2020.

 

   

Augmenting Our Platform through Opportunistic Strategic Acquisitions. We believe that strategic partnerships and acquisitions will allow us to accelerate our key platform, product and marketing initiatives. For example, our App Platform service originated from an acquisition and we have expanded our community tutorial content through two small acquisitions, and we believe that additional acquisition opportunities will supplement our organic growth strategy. Likewise, we believe that strategic opportunities provide an attractive avenue to expand our product portfolio and customer base. We intend to actively pursue both strategic partnerships and acquisitions that we believe will be complementary to our business, accelerate customer acquisition, increase usage of our platform and/or expand our product offerings in our core markets.

 

   

Growing and Engaging Our Community. More than 5 million unique visitors interact with our websites, including our developer community, each month to learn, share and educate others. We are committed to supporting and expanding this community of innovators and technologists through high-quality content and expanded developer-focused programs and events around the world. We had approximately 170,000 participants in our Hacktoberfest event in 2020, up from 130,000 participants in 2019. In April 2020, we established our Hollie’s Hub For Good initiative, to provide infrastructure credits to non-profit companies that need resources to pursue charitable and philanthropic ambitions. Supporting and educating the developer community is one of our core values, but it also drives brand loyalty, expands our customer base and drives increased adoption of our products.

 

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Our Platform and Product Offerings

We have designed our global cloud platform to ensure a simple, reliable and affordable cloud computing experience for our customer base of individual developers, start-ups and SMBs. This entails maintaining a high-performance global infrastructure, offering a highly curated set of solutions and providing a superior customer experience. The combination of these three elements enables our customers to focus their time and attention on building and running their applications or businesses rather than managing the underlying infrastructure.

 

 

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Our Global Infrastructure & Technology Network

Our global infrastructure and technology network, built on the foundation of open source scalable cloud-native technologies, allows us to deliver an exceptional developer experience and suite of infrastructure and software solutions to our more than 570,000 customers spread across the globe. Our infrastructure is deployed to 14 data centers worldwide that are connected by a high-speed private backbone, enabling our customers to

 

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deploy their solutions across eight different geographic regions. We lease data centers in the New York City and San Francisco metropolitan areas, as well as in India, Germany, the United Kingdom, Canada, the Netherlands and Singapore. These site locations were selected for their close proximity to key customer markets and allow access to global internet exchange points to provide consistent low-latency connectivity to large end-user networks. This allows our customers to choose where best to deploy the solution to optimize performance and minimize latency for their users. We lease data center space from leading providers to provide us the flexibility to quickly enter new markets and align our global footprint with our go-to-market strategy.

We work closely with hardware manufacturers when designing our server platforms to continue to reduce acquisitions costs while at the same time optimizing reliability and performance for our customers. Our hardware engineering team works closely with CPU manufacturers to align our long-term server strategy to future technology advancements. We staff our data center operations team to ensure that we can provide the physical security, reliability and availability necessary for our customers—and that team additionally manages the physical server capacity to ensure that we are able to meet our customers’ demands. Our network engineering team manages the global backbone to ensure that we are making the best connectivity peering agreements to get customer traffic to the destination via the best available path. Our operations team actively monitors the cloud environment, responding to network incidents to ensure that customer impact is minimized and service availability is managed.

We focus heavily on securing our network, products and customer data from potential security threats with a dedicated team of security professionals. We continually monitor our infrastructure network for vulnerabilities and risk through our security observability platform. The backend components of our network have been built with a view towards security using layers of multi-factor authentication, authorization and role-based access and are monitored for abnormal behaviors or intrusions. Security architecture and design is embedded in our product development lifecycle, and we continually test our products and infrastructure for security flaws. In addition, we apply rigorous privacy standards to all the customer data we protect in accordance with applicable privacy laws and best practices. We have put measures in place to collect personal data only to the extent necessary to service our customers and we protect customer content data through limited access.

In combination, our infrastructure and network provide our customers with a reliable, highly-performant and cost-effective platform to confidently build, deploy and scale their optimal solution, from single node based applications to globally distributed systems.

Our Product Portfolio

We provide a variety of cloud products and services that are specifically designed to address the needs of individual developers, start-ups and SMBs. We listen carefully to our customers’ feedback so we understand what they want and need to simplify cloud computing for them. Our goal is to address the core needs of this underserved customer base instead of offering thousands of complex products and services that are more suited to large enterprise companies or companies looking to move from an on-premise environment to the cloud. This focus has allowed us to expand our ARPU, especially among our larger customers, while maintaining very attractive customer retention metrics.

Our initial product, launched in 2012, was the Droplet, a virtual machine that provides flexibility to build, test, secure and grow customers’ applications from start-up to scale. Since then, we have successfully launched many new products, which honor our commitment to always provide a simple, reliable and affordable experience for our core customer base. We have expanded our product portfolio with product innovations such as Dedicated Droplets, Spaces, Managed Kubernetes, Managed Databases and App Platform, which have proven our ability to successfully launch many new products to market and serve our customers’ needs. We have developed a product roadmap that will expand our managed and software offerings and enhance our ability to offer secure, scalable and reliable solutions for customers to grow their applications or businesses.

Compute Offerings. Our compute offerings provide “simplicity with choice” so that developers can build and release scalable applications faster in the cloud. We provide flexible server configurations sized for any

 

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application, attractive price-to-performance and highly predictable pricing that is the same across regions and usage volumes. Our current compute offerings include: 

 

   

Droplets (Virtual Machines): Developers can spin up the virtual machine of their choice in under a minute. We offer basic Droplets and Dedicated Droplets, such as general purpose, CPU-optimized, memory-optimized or storage-optimized configurations, which provide flexibility to build, test, secure and grow any application from start-up to scale. Our Droplet offerings continue to represent a significant majority of our revenue.

 

 

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While developers love simplicity, they also value choice. With our product portfolio, we strive to give our customers the optionality they desire. Droplets provide developers with full control over their infrastructure, and with our new compute offerings, we manage the infrastructure for them, such as Managed Kubernetes and App Platform.

 

   

Managed Kubernetes and Container Registry: In late 2018, we launched our easy-to-use Managed Kubernetes service that provides scalability and portability for cloud-native applications. Customers can get started at just $10 per month and scale-up and save with our free control plane and inexpensive bandwidth. Our Managed Container Registry offering lets customers easily store and manage private container images for rapid deployment to our Managed Kubernetes service. The continued popularity of cloud-native development and the Kubernetes ecosystem has made our Managed Kubernetes service one of our fastest-growing products.

 

   

App Platform: App Platform, launched in October 2020, is a PaaS offering that allows customers to build, deploy and scale applications quickly using a simple, fully-managed solution. We handle the

 

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infrastructure, application runtimes and dependencies so that developers can push code to production in just a few clicks, enabling them to deliver applications to market faster and on a global scale. We believe that our open source software-based architecture positions App Platform well for our core customer base. We also believe that the launch of App Platform will allow us to expand into new markets such as Function-as-a-Service (FaaS) and Container-as-a-Service (CaaS).

 

 

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Storage Offerings. Our storage solutions allow our customers to store and quickly access any amount of data reliably in the cloud. We offer several kinds of storage offerings, depending on the customer’s needs, including:

 

   

Spaces (Object Storage): Our object storage with a built-in content delivery network (CDN) makes scaling easy, reliable and affordable. Our simple and predictable pricing makes this offering very attractive compared to established public cloud providers.

 

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Volumes (Block Storage): Our block storage product allows customers to add more storage space and mix and match compute and storage to suit their database, file storage, application, service, mobile and backup needs. This provides supplemental storage beyond the generous local solid-state drive (SSD) offered with our compute offerings.

 

   

Backups: Our automatically-created disk images of Droplets provide peace of mind and a sense of security to our customers. Our Backups offering allows weekly system-level backups, providing our customers with the ability to revert to an older state or create new Droplets.

Networking Offerings. We provide a suite of networking capabilities to secure and control the traffic to our customers’ applications. Data transfer costs can quickly become a major expense for the developer of any reasonably complex cloud application. At DigitalOcean, we provide a generous amount of bandwidth with each successive Droplet purchase. This bandwidth is pooled for the customer’s account and shared by all applications or resources running in their account, which we believe is a key differentiator for us in the marketplace. Our key networking product offerings include:

 

   

Cloud Firewalls: Software service that allows customers to quickly secure their infrastructure from common vulnerabilities and define what services are visible on their infrastructure. Cloud Firewalls are free to our customers and are used for staging and production deployments of software.

 

   

Managed Load Balancers: Software service that allows customers to load balance traffic to their software applications located on multiple Droplets, enabling them to scale their applications and improve availability, security and performance across their infrastructure in a few clicks with affordable pricing. In late 2020, we launched a new version of this product that targets customers with larger-scale applications.

 

   

Virtual Private Cloud (VPC): Private network interface for DigitalOcean resources collections. VPC networks provide a more secure connection between resources because the network is inaccessible from the public internet and other VPC networks, enabling our customers to manage their information and data traffic between applications without exposure to the public internet. Unlike many cloud providers, a VPC, including floating IP addresses, is available at no additional cost to our customers.

 

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Managed Databases. In 2019, we launched our Managed Database solution, which provides a fully-managed database. Managed Databases provide our customers with the application performance they need without the operational demands that come with building and running a database server. We currently offer managed offerings for relational databases (SQL) such as PostgreSQL & MySQL, as well as in-memory key-value data structure stores such as Redis. We plan to offer additional database engines starting in 2021.

 

 

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The Developer Experience

We believe that providing a differentiated developer experience is a critical element of our success. To ensure a positive developer experience, we provide rich content resources focused on optimizing cloud usage, a powerful and easy-to-use interface, and a variety of technology tools. This enables our customers to get started on DigitalOcean very quickly and easily and seamlessly expand their usage of our products and services as their needs evolve and scale. We believe this focus on helping our customers onboard and better utilize our products and services builds brand loyalty and generates referrals by our customers who are strong advocates for DigitalOcean around the world.

Our community education website contains thousands of detailed, high-quality technical tutorials written, edited and/or updated by our editorial team. These tutorials cover a wide range of topics relevant to developers, including programming how-tos for specific technical hurdles and guidance on the latest techniques to secure their computing environment.

We are very proud of our easy-to-use user interface, which enables customers to be up and running in the cloud in as little as three clicks and in less than a minute. We utilize intuitive application programming interfaces (APIs), command line interface (CLI) and plugins/integrations which automate interactions with our cloud platform. This allows customers to use popular tools like terraform to automate infrastructure as code to provision and manage their DigitalOcean deployments. All DigitalOcean products come with detailed product and technical documentation to help our customers deploy to our cloud platform more quickly.

We provide management and collaboration tools to enable our customers to monitor and manage both their software and their team. We currently offer these tools free of charge to our customers as it drives brand loyalty and customer retention across our customer base. Our management and collaboration products include:

 

   

Insights for Monitoring: Provides a turnkey visibility solution to seamless infrastructure monitoring. Customers can collect metrics to monitor Droplet performance and can receive alerts if infrastructure issues arise—with no configuration required.

 

   

Projects: Allows our customers to organize their DigitalOcean resources (including Droplets, Spaces and Managed Load Balancers) into groups that fit the way they work. Customers can create projects that align with the applications, environments and clients they host on DigitalOcean.

 

   

Teams: Allows customers to securely and efficiently collaborate on projects with unlimited users, two-factor authentication and a single bill for all projects.

 

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We operate the DigitalOcean Marketplace, a platform where developers can find pre-configured applications and solutions quickly. Our Marketplace contains highly curated everyday applications and cutting-edge technologies, providing customers access to the most efficient tools to build their businesses while removing the time and expense of research, configuration and manual setup. We work closely with partners to deliver a truly seamless experience for customers, creating the ability for developers to deploy thoroughly tested app environments with the click of a button on Droplets and Kubernetes clusters. More than 150 preconfigured one-click applications are available in the Marketplace, including WordPress, LAMP, Docker and Plesk, among others.

 

 

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Our Customers

DigitalOcean was founded to meet the needs of the overlooked developer audience that works independently, at start-ups and within SMBs. Our customer base is incredibly diverse and includes:

 

   

Individuals running their personal web projects and learning cloud computing and modern technologies, whether it be programming languages, application frameworks or open source technologies

 

   

Start-ups and SMBs creating SaaS applications across numerous industry verticals, including education, finance, advertising, e-commerce, media, gaming and many more

 

   

Start-ups and SMBs providing customer relationship management (CRM) products, developer tools, API services and technology products and services

 

   

Managed hosting companies providing value-added services on top of our platform to their customers, including maintenance and control of servers, managing websites and operating content management systems (CMS)

 

   

Web development agencies building custom websites and projects for their clients

Since DigitalOcean provides products across the spectrum—from infrastructure to fully-managed PaaS—we are able to serve users of all technical skill levels, including system administrators, backend developers, frontend developers and DevOps practitioners, among others. Increasingly we are also seeing a trend where people without a traditional software development background are able to utilize our services for compute intensive workloads such as data analytics, video conferencing systems, and popular online gaming servers. Additionally, our marketplace offers a rich set of pre-configured applications that allow non-developers to simply start using popular open source software without worrying about infrastructure configuration.

Our customer base is global, and we have historically generated a majority of our revenue outside of the United States. The map below represents in blue every country in which we had a customer during 2020.

 

 

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Red = Countries and territories subject to U.S. government comprehensive sanctions programs.

 

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We have been very successful in increasing our customer base and ARPU as we expand our product portfolio and optimize our sales, marketing and customer success and support initiatives. We had approximately 573,000 customers as of December 31, 2020, up from approximately 502,000 as of December 31, 2018. Our ARPU has increased significantly, from $35.97 in 2018 to $40.16 in 2019 to $47.78 in 2020.

We have no material customer concentration, as our top 25 customers made up 11%, 10% and 9% of our revenue in 2018, 2019 and 2020, respectively.

Customer Case Studies

The examples below illustrate how and why companies of varying sizes and from different industries and countries around the world use DigitalOcean.

Rockerbox

Start date: 2013

Location: United States

Rockerbox is a marketing analytics platform that helps businesses aggregate and understand marketing and conversion data, enabling them to make better decisions about their marketing strategies and improve conversion.

Situation: Rockerbox needed to build a reliable infrastructure that could power the marketing operations for hundreds of direct-to-consumer brands and businesses.

Solution: In 2013, Rockerbox began hosting a few servers on DigitalOcean due to DigitalOcean’s ability to offer powerful, cost-effective virtual machines and bandwidth capable of processing large amounts of data. The efficiency of DigitalOcean’s solution and its API flexibility allowed Rockerbox to run its own container cluster on top of Droplets. Rockerbox has expanded its usage of DigitalOcean’s platform over time and currently uses Spaces for object storage, Load Balancers, Volumes for block storage and the Managed Kubernetes offering.

“With DigitalOcean, we have been able to make scaling the technical infrastructure of our business highly efficient. DigitalOcean provides just the right set of cloud services to run our business and we utilize almost every product they offer.”

Rick O’Toole, Cofounder & CTO of Rockerbox

Jiji

Start date: 2014

Location: Nigeria

Jiji.ng is one of the biggest online marketplace platforms in Africa serving over 200 million buyers and sellers across 5 countries, including Nigeria, Ghana, Uganda, Tanzania and Kenya.

Situation: As Jiji’s online marketplace rapidly grew, the company needed to find a modern cloud platform to help serve its users reliably and efficiently, something the local hosting providers could not guarantee.

Solution: The recommendation for Jiji to deploy DigitalOcean came from the company’s developers who had previously used Droplets for their own personal projects. By using the DigitalOcean API and other open source tools, Jiji is able to automate its infrastructure provisioning process giving the company a high degree of control on its usage. With the introduction of new Droplet types, Jiji has also been able to move some of its bigger workloads to CPU-optimized and memory-optimized Droplets, improving page rendering and response times across its website by 25%.

 

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“How quickly we can turn a product idea into a shipping feature is what determines our success. We feel the DigitalOcean cloud allows us to do just that. As a longtime customer, we feel the interactions we have with DigitalOcean - whether product or humans - are consistent and valuable. In our experience the customer has always been a priority and the experience is a striking difference to anything else we have seen in the market.”

Nick Zorin, Founder and CEO of Jiji

RouteTrust

Start date: 2014

Location: United States

RouteTrust is a state-of-the-art telecommunications platform that processes billions of voice calls each month and helps telecommunications providers simplify their operations to increase efficiency and profitability.

Situation: RouteTrust initially invested in its own servers for running its voice over internet protocol (VoIP) system, but it soon discovered this was not a scalable solution and that it needed a cloud provider. The company prioritized exceptional network performance and reliable, transparent pricing.

Solution: RouteTrust selected DigitalOcean as the best cloud provider to meet its requirements, including standard Droplets that came with generous bandwidth. RouteTrust saves hundreds of thousands of dollars per year by partnering with DigitalOcean instead of using a larger public cloud provider. Today, RouteTrust has shifted all of its workloads to the cloud and expanded its usage to hundreds of Droplets on DigitalOcean. RouteTrust takes full advantage of DigitalOcean’s global footprint to create a geo-redundant voice network, using multiple locations in New York and San Francisco.

“We’re a small company and are focused on operating efficiently. We found that if we were to run on other clouds, we wouldn’t be able to compete in certain products. DigitalOcean has not only provided a viable platform to run our business, but exceeded our expectations for network performance, which is critical for our business.

David Shifley, CTO of RouteTrust

Cloudways

Start date: 2014

Location: Malta

Cloudways is a managed hosting platform that allows its customers to build powerful websites on the cloud without having to worry about web hosting complexity and support issues.

Situation: Cloudways identified that multiple agencies and web development companies employed developers who were experts in website development, but did not have knowledge of infrastructure management. Cloudways needed to find an infrastructure partner that developers love and has a strong presence in the developer community.

Solution: While Cloudways allows its customers to build websites using any cloud provider, DigitalOcean has become Cloudways’ largest partner and is now its preferred cloud provider. Cloudways’ customers choose DigitalOcean due to its high performance, reliability and the strength of DigitalOcean’s brand in the developer and hosting communities. Today, Cloudways’ customers serve more than 250,000 websites on DigitalOcean infrastructure.

 

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“Cloudways needed a different cloud provider in order to reach a larger number of SMBs and we found a perfect partner in DigitalOcean. They pioneered simplicity and predictability in the cloud space and their price-performance ratio and reliability are unmatched.”

Aaqib Gadit, Cofounder & CEO of Cloudways

Parabol

Start date: 2016

Location: United States

Parabol is a remote meeting platform for teams embracing agile practices, making it easy for teams to host planning sessions, scrums and meetings online.

Situation: With the COVID-19 pandemic accelerating the business world’s shift online and to digital meetings, Parabol saw weekly customer sign-ups increase by more than ten times. The company needed to rearchitect its infrastructure solution to keep up with unprecedented demand.

Solution: Parabol chose DigitalOcean because it wanted an easy-to-use infrastructure cloud offering. Parabol’s initial use case included running a self-hosted open source PaaS (Platform as a Service) solution on Droplets. As consumer preferences changed and demand increased significantly, Parabol was able to quickly and easily redesign its infrastructure setup to allow for greater scale using additional DigitalOcean Droplets and the Managed Databases offering. This allowed Parabol to move from hosting approximately 10,000 simultaneous sessions to several hundred thousand without disruption.

“As a founder, I didn’t want to spend time micromanaging infrastructure and doing XML sit-ups. When the pandemic happened and traffic grew tenfold, the robust DigitalOcean platform allowed us to scale seamlessly, without any disruption to our operations, so we could continue to focus on running our business.”

Jordan Husney, Cofounder & CEO of Parabol

Bunnyshell

Start date: 2018

Location: Romania

Bunnyshell provides a self-service infrastructure automation platform to deploy, scale, and optimize applications.

Situation: Bunnyshell’s mission is to allow developers to focus on building applications without worrying about infrastructure. It offers cloud-agnostic infrastructure management and application management, as well as DevOps tools for deployment and monitoring. Bunnyshell was looking for an infrastructure provider that allowed it to provide reliable services to its customers in a cost-effective manner.

Solution: Bunnyshell joined the DigitalOcean startup program Hatch and built autoscaling, monitoring and DevOps services wrapped around the DigitalOcean cloud. DigitalOcean’s excellent price-performance along with the extensive API allows Bunnyshell to automate all of its infrastructure operations. Since graduating from the Hatch program, Bunnyshell has continued to grow its usage of DigitalOcean and has referred several customers looking for infrastructure management services to DigitalOcean. Bunnyshell now serves hundreds of customers ranging from simple WordPress sites to massive e-commerce sites and SaaS applications, all running on DigitalOcean infrastructure.

 

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“What we really like about DigitalOcean is the keen customer focus. As a company that serves developers, we want a partner that understands our customers and has a shared purpose. DigitalOcean not only provides world-class infrastructure but they truly get developers. This makes our job easier in terms of building management services for them.”

Roxana Ciobanu, CTO of BunnyShell

Intricately

Start date: 2014

Location: United States

Intricately’s insights power prioritization and propensity models for many of the leading vendors across the cloud ecosystem. The company’s data platform provides detailed visibility and insights into cloud product adoption for more than six million businesses globally, enabling its customers to receive proactive notification of sales cycles, identify churn before it happens and more.