Insiders at Facebook are selling stock in the social networking company, and the prices they are getting for their shares suggest the sky-high valuation backers once placed on the company may prove unrealistic.
Just a few months ago, Facebook was widely viewed as the next Google in Silicon Valley. Microsoft bought a small equity stake last October that implied a valuation of US$15 billion for the whole company. Shareholders in the still-private company appeared to be setting themselves up for a blockbuster initial public offering.
But in recent months, a number of current and former executives have put some of their stock up for sale. Laurence Albukerk, who brokers the sale of stock in private companies in the Valley, says he knows of at least nine people who have sold or are trying to sell Facebook shares. He estimates "dozens" are peddling stock altogether, through him or other brokers. Another finance executive, who would not speak for attribution, confirmed Facebook insiders are selling. Among those who have sold are CEO Mark Zuckerberg and executive Matt Cohler. A Facebook spokeswoman said both declined comment for this story.
The prices for Facebook shares in these transactions are far below the US$15 billion level. Albukerk, the founder and managing director of EB Exchange Funds, says two current directors and one former executive recently contacted him about selling some of their stock for a US$5 billion valuation. He also says two investment firms have bought large chunks of Facebook stock at a valuation of about US$3.75 billion. Hans Swildens, founder of a San Francisco firm called Industry Ventures that buys stock in private companies, says his firm has been talking with a growing number of Facebook employees. "There's a lot of interest among people to sell shares," says Swildens.
Rank-and-file stock sales
Such stock sales are both unusual and controversial at technology startups. In the past, entrepreneurs have not had the chance to cash in until their company goes public or is sold. When they do sell, it can create conflicts of interest with venture backers and other employees who have not realized the same wealth. The sales at Facebook have led to controversy within the graffiti-covered walls of the social network's Palo Alto (Calif.) offices. After word got out that Zuckerberg, Cohler, and other top employees sold, there was grumbling among the rank and file, say two financiers who have spoken with the company's staff.
Facebook is taking steps to address the issue. On Aug. 5, the company said it will begin helping current employees sell some of their stock. "To provide employees with a financial cushion while we continue to build the company, Facebook has designed a one-time program to enable employees to realize some liquidity," the company said in a statement. Facebook declined to outline details of the current plan. But VentureBeat, a blog that first reported the existence of the program, said the plan would limit Facebook workers to selling 20 percent of their vested stock options at a US$4 billion valuation, starting this fall.
Facebook is also putting restrictions on stock sales by some employees who leave the company, BusinessWeek has learned. Facebook is requiring such workers to sign agreements that prevent them from selling shares at more than a US$3.75 billion valuation, according to one source close to the company. That figure has special significance. According to documents from a lawsuit involving Facebook reviewed by BusinessWeek, the startup's board approved a so-called formal valuation resolution required by the Internal Revenue Service valuing the common shares at US$3.75 billion.
There are at least two possible reasons for the restriction. First, it could suppress stock sales by employees who think their shares are worth more. Second, it could help Facebook avoid raising its official valuation with the IRS. Raising the valuation could trigger tax bills for employees and make it harder to lure top talent. "I've never seen that before," says Albukerk. "The company has a real problem and they are trying to control it."
Lacking promise?
The stock sales at Facebook do not necessarily mean Microsoft loses out. The software giant paid US$240 million for a 1.6 percent stake, but it bought preferred stock that carries special rights. For example, it has "liquidation preferences", meaning it gets paid before common stockholders if the company gets sold.
Still, there are several reasons Facebook is probably worth less than the US$15 billion trumpeted at the time of the Microsoft deal last year. For starters, the public equity markets have gotten crushed over the last year, driving down the value of companies from Google to Apple. Skittish investors have also lost their appetite for IPOs, with only a few so far this year.
In addition, the social networking business does not look nearly as promising as it did in 2007. Growth in the number of U.S. users at Facebook, MySpace, and other sites has slowed considerably this year. And social networks have struggled to generate revenue through advertising at nearly the rates originally expected. News Corp., the parent of MySpace, and Google, which places ads on the site, both say advertising growth has been disappointing.
Facebook may mark something of a turning point in Silicon Valley. Top-tier startups may allow employees to sell some of their stock privately, if the prospect of an IPO remains remote. Though the approach may make sense, it makes some venture capitalists nervous. "I would have a concern," says Eric Hippeau, managing partner of SoftBank Capital. "Am I facilitating people leaving the company to start their own businesses?"
Play video
There are currently no comments for this post.