The Facebook investors’ lament

By Felix Salmon
September 4, 2012
Andrew Ross Sorkin has a rather odd column about Facebook CFO David Ebersman today, blaming him for the miserable trajectory of Facebook's stock since its gruesome IPO.

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Andrew Ross Sorkin has a rather odd column about Facebook CFO David Ebersman today, blaming him for the miserable trajectory of Facebook’s stock since its gruesome IPO. It’s hard for me to disagree, since I said exactly the same thing back on May 23 putting Ebersman at the very top of the list of Facebook incompetents.

But my post in May was narrowly focused on the Facebook IPO; Sorkin aspires to something bigger. “When Facebook’s I.P.O. first started to appear troubled back in May, I purposely avoided weighing in,” he writes. “Frankly, I thought it was too soon to judge. But we have passed the pivotal three-month mark.”

It’s not actually true that Sorkin avoided weighing in; in fact, at the time, he was calling the Facebook IPO the “ultimate” case of the 1% versus the 99%. Kyle Drennen helpfully transcribed Sorkin’s appearance on the NBC Nightly News:

This idea that the playing field is not level — that certain people, certain investors, are getting access to information, and the other guys, Main Street, isn’t getting the same information. And who’s holding the bag? It’s the greater fool theory. In an IPO, somebody’s buying and somebody’s selling. But in this case, the public is the one that’s the buyer. And in that case, maybe they were the fool in this case.

If the public was the buyer in the Facebook IPO, then the seller — the rich guy with all the information — was David Ebersman, the villain of Sorkin’s current column. So Sorkin hasn’t exactly been scrupulously agnostic on this issue for the past three months.

And here’s the reason why Sorkin thinks that the point three months after the IPO is so important:

Statistically, the three-month mark is a much better predictor of a company’s future share price than any of the closing prices in the first week or two. According to Richard Peterson of Capital IQ, 67 percent of technology companies whose shares lagged their I.P.O. price after 90 days were still laggards after a year. Until Facebook’s stock rebounds, Mr. Ebersman will be feeling the pressure.

In other words, short-term movements in the share price don’t matter. What matters is medium-term movements in the share price!

But while Ebersman can be blamed for messing up the mechanics of the IPO, I do not think it’s fair to blame him for where Facebook’s stock might be trading 3 months or 1 year after the IPO. The stock price is not under his control; Ebersman should be judged on things which are under his control, which generally surround issues like how much money Facebook has, and what it’s doing with that hoard.

As for the idea that Ebersman “will be feeling the pressure” until Facebook’s stock gets back near its IPO price, well, I think that’s probably wishful thinking on the part of IPO investors more than anything else. Certainly Ebersman doesn’t seem to be taking a particularly groveling stance towards his public investors: Sorkin notes that when he met with some of them in New York recently, he sent out the invites so late — for a summer Friday, no less — that many of the more senior invitees couldn’t make it. I’m sure Ebersman wasn’t too bothered.

After all, there’s only one shareholder who matters, when it comes to Facebook, and that’s Mark Zuckerberg. The rest of them can huff and puff to the financial press, but they have no real influence on Facebook or its management — and no real ability to put pressure on Ebersman, either.

The other shareholders who matter are Facebook’s employees, without whom the whole company is nothing. They want to see the share price rise, of course, but Sorkin oversimplifies what’s good for them, and for the company:

Facebook’s falling stock price is not just a problem for investors; it is quickly creating real questions inside the company about its ability to retain and attract talented engineers, the lifeblood of any technology company.

Employees who joined the company starting in 2010, for example, are now holding onto restricted shares that were granted at a higher price — $24.10 — than the current trading price. (It should be noted that these are restricted stock units, not underwater stock options, so they do still have real value, but not nearly what the employees had expected.)

Let’s say you’re an employee who gets $50,000 of RSUs every year. Then in 2010 you got just over 2,000 RSUs, which are now worth about $37,500. Sorkin’s point is that you had hoped that they would be worth more than that by now — maybe you thought that Facebook would be a $100 billion company, and your RSUs would be worth $75,000.

But here’s the thing: if Facebook were worth $100 billion right now, then you would get only 1,300 RSUs this year. Whereas if Facebook is worth only $40 billion, then you’ll get 2,750 RSUs — more than twice as many. You’re increasing your stake in Facebook much faster than you would if it was worth more.

Zoom back and look at what’s happening across Facebook’s workforce as a whole: Ebersman is doling out a lot more shares to employees than he might have expected. That dilutes external shareholders and makes them even less relevant, but it’s not necessarily bad for employees.

Having a low share price can actually help in terms of attracting and retaining talent: it gives existing employees a reason to stay on rather than cash out, and it gives new employees much more upside. After all, anybody coming on board today and getting RSUs at $18 each knows that only a few months ago, there were market participants willing to pay more than $40 per share. And that nothing much has really changed since then as far as Facebook’s fundamentals are concerned.

Sorkin doesn’t get caught up in the detailed mechanics of the IPO: after all, he claims to be interested in the medium term, not the short term. But he never explains what he means when he says that “this wasn’t a traditional IPO and should never have been priced that way” — is he saying that the Facebook IPO was priced in some kind of traditional manner? Because, if he is, he’s wrong.

And more generally, it’s worth noting that Sorkin uses the word “investors”, in this column, no fewer than 13 times: it’s clear where his sympathies lie. But Ebersman’s job is to run Facebook’s finances much more than it is to worry about the mark-to-market P&L of the fickle buy side. He didn’t much care about investors before the IPO, and he doesn’t seem to care much about them after it, either. If they react by selling Facebook’s stock, that’s their right. But Zuckerberg — the guy who really matters — has made it very clear he’s concentrating on the long term. And so long as Zuckerberg has confidence that Ebersman is a good steward for Facebook’s finances, Ebersman is going to be safe in his job. No matter what investors think.

16 comments

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Facebook RSUs vest in dollar amounts, not in quantities of stock?

Posted by MickWeinstein | Report as abusive

If I’m Z’berg, I love Ebersman.

He got me all the cash I could possibly have hoped for in my IPO. Him and me, we were both on the ‘sell side’ – our job was to get the most we could – and we did. I’m untouchable in my control of the company, so what do I care if my investors are upset; like what are they gonna to do – shoot me?

I love him all the more, because you see, what he doesn’t know and what I do is that when the time comes for me to show contrition to the VCs, to the staff and to the world – I’ll do so by throwing him under the bus. Until that happy day arrives, he’s out there in the front rank, taking the poison arrows of Felix and Andrew and who knows (or cares) how many others – my own personal ‘javelin catcher’. Not like I need any more money, so – he really has out-lived his usefulness in that respect, hasn’t he?

And don’t you be feelin’ sorry for Eb – if he bothered to read my bio he’d know this is how I deal with everyone. I’m a horse that always runs true to form. (OBTW: don’t you just get a delicious frisson of Schadenfreude over the double-butt-……. that brother Saverin took by paying exit tax calculated on a price like double the stock’s current value, back when he renounced his citizenship (no loss to US), and then hanging on to all his shares all the way down? What a muppet – he deserves the butt-……. I gave him back in school, doesn’t he?)

Hey – not everyone has to be Mother Teresa, right?

Posted by MrRFox | Report as abusive

Felix, you really need to get away from NYC and spend some time in Silicon Valley. That’s not the way tech employees there think. They are also very aware that the stock price can drop still further, and will do a cost/benefit tradeoff of whether it’s best to stay, or to jump to the next challenge.

That tradeoff involves a bunch of estimates, and there are aspects that are unquantifiable (they will also be very aware of the overall culture and mental outlook of their colleagues), but you simply can’t make the statement that they believe they will have greater upside by staying.

Posted by Curmudgeon | Report as abusive

MrRFox is 100% right here. Everyone in management at FB is sitting pretty here. They sold at the peak, how could they have possibly timed it better?

Now they can all have a fun decade mucking about trying to turn their pot of gold into some sustainable business. Likely they will fail, but they will still be set for life.

Posted by QCIC | Report as abusive

Ebersman’s mistake wasn’t in pricing the IPO too high, it was in selling too many shares. There wan’t enough people who thought the stock was worth $38, but if they sold half as many shares at the IPO, it’s likely it wouldn’t have crashed immediately.

As for it’s recent performance, that is more due to the results and the realization that display ads based on comments posted on facebook pages are worthless. Who could have foreseen such a disaster?

Posted by KenG_CA | Report as abusive

Ebersman’s mistake wasn’t in pricing the IPO too high, it was in selling too many shares. There wan’t enough people who thought the stock was worth $38, but if they sold half as many shares at the IPO, it’s likely it wouldn’t have crashed immediately.

As for it’s recent performance, that is more due to the results and the realization that display ads based on comments posted on facebook pages are worthless. Who could have foreseen such a disaster?

Posted by KenG_CA | Report as abusive

The current price of FB is less a reflection of the IPO and more about how so many people over-estimated its value to advertisers. It took their first quarterly report before people started realizing display ads based on comments posted on facebook pages are worthless. And that they have saturated the markets that can even afford display ads. And that they, like every other ad-supported web company, have not yet figured out how to monetize mobile users.

They could have handled their IPO better, maybe by selling less shares, but it wouldn’t have mattered. The share price still would have declined as reality sunk in.

as for new employees who joined after the IPO, won’t they be receiving stock options, and not RSUs, like employees of other publicly traded companies? If so, it doesn’t matter to new hires, if anything, the price drop is better for them, as there is a better chance (in their minds, not mine) of the price rising now than before the 50%_ decline.

Posted by KenG_CA | Report as abusive

I don’t believe that most RSU programs work in dollar amounts, nor are they granted every year. RSUs usually work like options grant: You get a certain number of them when you hire on, and then vest in them over time (usually over 4 years). Sometimes companies will refresh grants (i.e., give additional grants), but those are for special reasons (promotion, compensation review, stock price tanking), not part of your standard compensation.

Now ESPP programs work in dollar amounts, but those are rather different.

Posted by secretivek | Report as abusive

What’s peculiar is trying to parse blame among team members. That’s like “deciding” what’s wrong with your neighbor’s marriage.

What we actually know is enough: The company was over-priced; specific decisions were taken
in the days and hours before the IPO not to mitigate that disaster, but to further exploit it; Zuckerberg has no taste for the business part of the business, which changed dramatically on one not-so-fine May morning, and most shareholders won’t tolerate someone who is at best an indifferent CEO.

I can’t to see what happens at their first sharwholder’s meeting.

Posted by johncabell | Report as abusive

secretivek, refresh grants are a standard part of compensation at many large SV companies (I don’t know FB’s policy in particular). They’re usually annual or biannual, the value targeted to some fraction of salary and the number of shares calculated based on that. So Felix’s statement about the value of refresh grants being independent of stock price history is correct.

Felix underplays things a bit though. The labor market is very competitive, and your unvested RSUs effectively function as a buyout price if another firm wants to poach you. If the stock price drops 50%, it’s that much cheaper for Google or Apple to buy a Facebook engineer.

Facebook can prevent this with a counteroffer, but it’s laborious and at that point the engineer’s already started to wander. They can also broadly issue more RSUs to employees (other companies have done the equivalent with options – resetting strike prices when the stock drops, etc.) to prevent this.

Posted by absinthe | Report as abusive

What’s peculiar is trying to parse blame among team members. That’s like “deciding” what’s wrong with your neighbor’s marriage.

What we actually know is enough: The company was over-priced; specific decisions were taken
in the days and hours before the IPO not to mitigate that disaster, but to further exploit it; Zuckerberg has no taste for the business part of the business, which changed dramatically on one not-so-fine May morning, and most shareholders won’t tolerate someone who is at best an indifferent CEO.

I can’t wait to see what happens at Facebook’s first shareholder’s meeting.

Posted by johncabell | Report as abusive

What’s peculiar is trying to parse blame among team members. That’s like “deciding” what’s wrong with your neighbor’s marriage.

What we actually know is enough: The company was over-priced; specific decisions were taken
in the days and hours before the IPO not to mitigate that disaster, but to further exploit it; Zuckerberg has no taste for the business part of the business, which changed dramatically on one not-so-fine May morning, and most shareholders won’t tolerate someone who is at best an indifferent CEO.

I can’t wait to see what happens at Facebook’s first shareholder’s meeting.

Posted by johncabell | Report as abusive

secretivek, refresh grants are a standard part of compensation at many large SV companies (I don’t know FB’s policy in particular). They’re usually annual or biannual, the value targeted to some fraction of salary and the number of shares calculated based on that. So Felix’s statement about the value of refresh grants being independent of stock price history is correct.

Felix underplays things a bit though. The labor market is very competitive, and your unvested RSUs effectively function as a buyout price if another firm wants to poach you. If the stock price drops 50%, it’s that much cheaper for Google or Apple to buy a Facebook engineer.

Facebook can prevent this with a counteroffer, but it’s laborious and at that point the engineer’s already started to wander. They can also broadly issue more RSUs to employees (other companies have done the equivalent with options – resetting strike prices when the stock drops, etc.) to prevent this.

Posted by absinthe | Report as abusive

What’s peculiar is trying to parse blame among team members. That’s like “deciding” what’s wrong with your neighbor’s marriage.

What we actually know is enough: The company was over-priced; specific decisions were taken in the days and hours before the IPO, not to mitigate that disaster, but to further exploit it; Zuckerberg has no taste for the business part of the business, which changed dramatically on one not-so-fine May morning; most shareholders won’t tolerate someone who is at best an indifferent CEO.

I can’t to see what happens at their first sharwholder’s meeting.

Posted by johncabell | Report as abusive

sad as a company collapsed as promising as Facebook, but fell into the snares and Wall Street greed destroyed a dream … Facebook as a company does not pay its advertising is not effective as its rival Google and that’s the problem dot com http://mulatahosting.com/

Posted by andres636 | Report as abusive

Sadly collapsed as a company as promising as Facebook, but fell into the snares and Wall Street greed destroyed a dream … Facebook as a company does not pay its advertising is not effective as its rival Google and that’s the problem dot com http://mulatahosting.com/

Posted by andres636 | Report as abusive