Mark Zuckerberg’s unpleasant new life

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.


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