Facebook: The smart money exits

By Felix Salmon
May 16, 2012
$18 billion.

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The Facebook IPO is now set to raise an absolutely astonishing amount of money — as much as $18 billion, if the greenshoe is exercised and the offering prices at the top of the indicated range. As a result, it’s certain to be the single largest technology IPO of all time. (Most companies don’t even have a valuation of $18 billion when they IPO, let alone have $18 billion worth of stock for sale to the public.)

So what is Facebook going to do with all that money? Well, it turns out that in upsizing the size of the IPO, Facebook has not actually increased the number of shares it’s selling to the public. Instead, most of the new shares being sold are coming from Mark Zuckerberg personally. He’s now going to sell 126 million shares in the IPO, and other early investors, including James Breyer and Peter Thiel, are cashing out too.

I’ll do the math for you: 126 million shares, at $38 a piece, comes to almost $5 billion. That’s a lot of money to raise in one day. When Facebook first filed for an IPO, Zuckerberg was only selling enough shares to allow him to pay what will probably be the single largest individual tax bill the IRS has ever seen. But now, Zuckerberg’s going to be a billionaire excluding his Facebook stake.*

More generally, this seems to be the point at which the smart money is getting out of Facebook. Accel Partners is now selling 49 million shares in the IPO (think $1.8 billion), while DST and Mail.Ru will sell some $2.5 billion of stock in total.

Capital markets are not particularly efficient, but one thing nearly always holds true: when stock prices are high, companies issue more stock, and when stock prices are low, they issue less stock. In general, we’re not seeing a huge number of primary or secondary offerings right now: it’s still cheaper for companies to issue debt rather than equity. The exception, of course, is in technology companies, where it’s clearly possible to go public at frothy multiples — even if those IPO valuations don’t last long.

The Facebook strategy is an interesting one: a lot of the time, in technology IPOs, you see companies issuing a pretty tiny number of shares, and using artificial scarcity to boost the price. That’s definitely not happening here — Facebook stock is going to be a highly-liquid price discovery tool from day one. And if there are lots of institutional investors out there wanting to own a piece of Facebook at a $100 billion valuation, then frankly you can’t blame Zuckerberg and Accel and DST for taking them up on their offer.

But it’s worth remembering, here, that the main reason that Facebook is going public at all is that it has more than 500 shareholders — and the reason it has more than 500 shareholders is because early investors, including Accel and DST, have been selling down their stakes in private markets for some years now. The main difference between the public markets and the private markets is not the valuations available — $100 billion is very much in line with where Facebook stock has been trading privately — but rather in the sheer volume of stock that can be efficiently sold at one time.

When this IPO is over, Zuckerberg will still have complete control over the company, with more than 50% of the voting rights. But his new shareholders will look very different from his old shareholders, even if the board remains the same. And by far the biggest difference is that while the old shareholders were all sitting on monster paper profits, on their Facebook stock, the new shareholders won’t be. They’re going to want to see the share price — and Facebook’s valuation — go up, substantially. Which means that they’re going to want Zuckerberg to come up with a plan to make Facebook worth $200 billion, or $300 billion, or more.

In order to do that, it’s not going to be enough for Zuckerberg to build a platform: he’s going to have to monetize it, to the tune of way more than a billion dollars a year in advertising profits. Facebook, right now, is trading on its potential for making future profits. At some point, and it’s not all that far away, Zuckerberg’s going to have to realize that potential. Or face some extremely angry shareholders asking whether he played them for suckers when he sold those 126 million shares.

*Update: It now seems that the extra shares being sold by Mark Zuckerberg are not shares he owns, but rather shares he doesn’t own. Zuckerberg has an “irrevocable proxy” over certain shares, which means that he controls them without owning them. He seems to be selling those shares, not shares he owns pesrsonally. So he won’t personally receive the extra billions.

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