Opinion

Felix Salmon

Mark Zuckerberg’s unpleasant new life

By Felix Salmon
May 24, 2012

Every time there’s a high-profile IPO, a few clever journalists will wheel out their contrarian take. LinkedIn had a huge pop? Then it’s a failed IPO, and Morgan Stanley “screwed the company and its shareholders to the tune of an astounding $175 million”. Facebook fell off a cliff? Then it’s a great success for the company, because it means it got the best price it possibly could. Matt Yglesias has a typical such post up, saying that “Mark Zuckerberg Made out Nicely in the Facebook IPO”. He explains that “for people making the initial sales an anti-pop is ideal. It means no money was left on the table. Or, rather, it means that negative money was left on the table”.

Except, at least in the case of Mark Zuckerberg, that simply isn’t true. When Facebook went public, Zuckerberg exercised all of his options, and converted them into extremely valuable stock. That stock was valued at $38 per share, and he has to pay income tax on the gain; his tax bill is likely to be north of $1 billion. The only stock that Zuckerberg sold was the stock he needed to sell, to pay his tax bill. The rest of his wealth is tied up in Facebook stock. So the degree to which he “made out nicely” is pretty much directly proportional to the secondary-market share price, and not the IPO price.

Of course, Zuckerberg owns a substantial chunk of Facebook, and Facebook is now sitting on a substantial chunk of cash. Facebook itself raised $15.8 $6.76 billion in its IPO, and Zuckerberg owns 26.6% of Facebook. So in that sense Zuckerberg has a direct claim on $4.2 $1.8 billion which is currently sitting in Facebook’s bank account; if Facebook had raised less money, then that number would be lower. But it’s not like Facebook’s going to declare a dividend any time soon: there’s basically no realistic way for Zuckerberg to get his hands on that cash.

Here’s the main reason why Zuckerberg wanted an opening-day IPO pop of at least modest proportions: the last thing he wants or needs is an adversarial relationship with his shareholders. Zuckerberg got to where he is today with the help of extremely supportive shareholders, who were happy to give him as much money as he wanted to build his company and take it to where it is today, without second-guessing any of his decisions. Facebook’s users might not always have been happy with Zuckerberg’s decisions, but he never had any tension with his non-executive shareholders.

Now, however, as the CEO of a public company, Zuckerberg has a fiduciary responsibility to his shareholders, and you can be quite sure that his shareholders are going to get very noisy and upset if he doesn’t give them what they want. Yes, Zuckerberg has an astonishing degree of control over Facebook, and so in theory he can simply ignore what they’re saying. In practice, however, that’s very hard — especially if they’re voting with their feet and sending his stock price plunging.

There are certainly CEOs out there who maintain personal control over public companies in the face of disquiet and unhappiness from external shareholders: Jimmy Dolan, of Cablevision, is a prime example. But Mark Zuckerberg does not want to be Jimmy Dolan. And what he certainly doesn’t want is to send a message to the public markets that he thinks his shareholders are muppets.

Early investors in Facebook, including Goldman Sachs, cashed out to the tune of billions of dollars on Friday; those investors, who will continue to sell their shareholdings once the various lock-up periods expire, are the ones that Zuckerberg gets on well with, partly because he has made them enormous sums of money. As his VC backers rack up their necessary exits, Zuckerberg is going to find himself surrounded by an increasing number of public shareholders, and being asked increasingly pointed questions by stock-market analysts. He can try to take the imperial approach, and ignore all such distractions while he runs his company as a personal fief; indeed, the message sent by Facebook’s dual-class share structure is that he very much wants to be able to do just that.

Zuckerberg is human, however, and he’s had a charmed life so far: he was named, for instance, Time’s Person of the Year in 2010. From here on in, by contrast, Zuckerberg is going to be judged by Facebook’s share price: a minute-to-minute plebiscite on how he’s doing. What’s more, the really important thing about the share price is not the price itself, but rather its direction: if it’s going up then Zuckerberg is a hero, and if it’s going down then Zuckerberg is a goat. This is one of the main reasons why being the CEO of a public company sucks — and the higher your profile, and the more you’re personally associated with your company, the more it sucks.

In a hyper-rational world, it would be better to be Mark Zuckerberg after Facebook has fallen from $42 to $32 than it would to be Mark Zuckerberg after Facebook had risen from $21 to $29. But this is not a hyper-rational world. And it’s increasingly looking that if Facebook was always going to have to go public anyway, it would have been better for the company and for Zuckerberg personally if it had gone public much earlier, at a much lower share price, issuing many fewer shares. That way, the general public, rather than just select insiders, could have had some small part in the big run-up — and there would have been no opportunity for Facebook, its bankers, and the Nasdaq stock exchange to mess this IPO up so badly.

So in a way it makes sense that Zuckerberg decided to get married at the same time Facebook went public. The latter means that his life as a public-company CEO is going to be reasonably unpleasant for the foreseeable future. Maybe he hopes to counterbalance that with a bit more stability at home.

Comments
14 comments so far | RSS Comments RSS

“the higher your profile, and the more you’re personally associated with AAPL, the more it sucks.”
-Something Steve Jobs never said

Posted by johnhhaskell | Report as abusive
 

So he’s married the woman he loves, he has more money than either him or his great-grandchildren will ever need, he spends his day doing exactly what he wants to do and he doesn’t have to listen or pay attention to chattering-class posts that try to second-guess his nature.

If that’s an unpleasant new life, where do I sign?

Posted by ottorock | Report as abusive
 

Well, that’s one way to look at it, FS. However,…

If Z’berg was the kind of guy who gave a damn about other people’s opinions of him he wouldn’t have handled Saverin and the Winklevoss twits the way he did, would he? Looking at his record, he seems less like a young Steve Jobs than a young Victor Posner, at least on the facts to date.

Anyway, it’s all over now – except for the litigation; like he cares about that. And OBTW – lucky for the new Mrs. Z that they married a day after the IPO, or she’d be looking at getting a Ruth Madoff-style going-over.

Posted by MrRFox | Report as abusive
 

johnhhaskell said: “-Something Steve Jobs never said”

Oh I don’t know, I bet he was thinking something pretty similar in 1985.

Posted by spectre855 | Report as abusive
 

And before the FS resident grammar police arrest me, yes I’ve seen my mistake and humbly apologize. Are we good?

Posted by ottorock | Report as abusive
 

It was good for sellers. If that is all he sold he may be regretting not selling more, but that his unsold shares are down is only a loss (from the open) if and when realized and that shouldn’t bother him if he wants to keep them. If he got $38 for shares worth $32, he should count himself lucky. Who knows what they will be the next time he sells.

Posted by MyLord | Report as abusive
 

If I were of a conspiratorial bent (and I am, oh, I AM) I might suspect that the initial price was set with an eye on the State of Cali’s desperate need for cashola. A lower price would have brought in hundreds of millions less for Jerry Brown (whose aura smiles and never frowns), and that just wouldn’t do. How much business does the state do with Goldman? A few muppet corpses are a small price to pay for a much needed feast, shared by bankers, stakeholders and the state.

Posted by LadyGodiva | Report as abusive
 

“When Facebook went public, Zuckerberg exercised all of his options, and converted them into extremely valuable stock.”

Just FYI, he had already exercised most of his options at this point. I don’t know exactly what he did, but it looks like he exercised 60 million, sold 30.2 million and in the end had 503 million.

It doesn’t really matter except readers might be misled to think that employees and founders of start ups don’t exercise their options until the stock IPOs. This is only the case for people with restricted stock units, not for the earlier people with stock options – especially now that many companies often have a pretty liquid pre-IPO market.

Posted by random_trader | Report as abusive
 

@ ottorock,

We’re good, but we’d be better if you had apologized humbly.

Great post, by the way.

Posted by WeWereWallSt | Report as abusive
 

He thrives with adversity.

Harvard tried to discipline him for starting a prototype of Facebook, calling it “immoral” I think. So he dropped out and started his own company, and made billions while Harvard had to issue bonds to survive a budget crisis!

I think Zuckerberg will do just fine with adversity. That’s not meant to be a comment endorsing or condemning the transparency or lack their of prior to the issuance of the IPO.

Posted by jo5319 | Report as abusive
 

So how much money does Zuckerberg make from the deal? Sorry if I missed it…

Posted by FifthDecade | Report as abusive
 

Felix,

You people need a SERIOUS reality check.

The travails of the wealthy do not constitute an “unpleasant life”, new or not.

Posted by Gordon2352 | Report as abusive
 

Mr. Zuckerberg will do the right things, he and the Mrs. will live a comfortable family life together

Posted by running | Report as abusive
 

I may be mistaken, but I had carried away the impression that a portion of the greenshoe was his selling more than necessary to pay taxes, i.e. that the fact that he was selling just enough to pay his taxes was no longer true once the greenshoe was exercised. Even at that, it was not my impression that he was taking a lot of cash out, and it may well not have been enough to compensate for other costs of a first-week drop.

Posted by dWj | Report as abusive
 

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