Aug 7, 2008 01:00 PM
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The prospect of Facebook minting new Valley millionaires is too delicious a story to check the facts. For example: Has Mark Zuckerberg, Facebook's CEO, actually sold shares? Sarah Lacy wrote that Zuckerberg sold $1 million in shares early in the company's history. BusinessWeek repeated the notion. Too bad it's not true, as Zuckerberg himself told the company in an email last Friday announcing a plan to let employees sell some of their Facebook shares.
This much is true: Zuckerberg came close to selling his shares. But at the last minute, he backed out, and instead accepted a cash bonus of $900,000 from the company. Technically true that that wasn't a stock sale; but it did amount to a liquidity event for Zuckerberg — one that didn't quite make him a millionaire.
Hence the seemingly arbitrary limit on employee's stock sales. In November, employees will be allowed to sell either 20 percent of their shares, or $900,000 worth of stock — whichever is less. (The $900,000 limit, seemingly arbitrary, was based directly on the size of Zuckerberg's cash bonus.) Those shares must be sold at the common-stock valuation of $4 billion, not the $15 billion valuation Microsoft paid for in preferred shares. (Preferred stock, because it allows owners to be paid first in the case of a sale, among other rights, is more valuable than common stock, which carries no such privileges.)
Those are the rules, at any rate. Facebook will have a tough time enforcing them. There's nothing under the law preventing employees from selling more than $900,000 or more than 20 percent of their holdings, and there are plenty of willing buyers, some of whom may be glad to buy the shares at a valuation higher than the sanctioned $4 billion. (Facebook hopes to prevent sales at a higher valuation to avoid a revaluation of the company that could make it harder to recruit new employees.) What's likely to happen is that employees who break Facebook's rules will see promotions disappear and future stock grants dwindle — which will matter little to the company's earliest employees.
How much money is at stake? A startup typically allocates 20 percent of its shares to employee options. Even at the lower $4 billion common-stock valuation, that's $800 million waiting to bust loose from Facebook's coffers. Will Facebook's earliest employees be satisfied with a six-digit payout, knowing that some wealthy investor would be glad to make them multimillionaires?
(Photo by AP/Ruttle)
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