The Biz of Coding

Facebook Employees Selling Stock at Valuation of $4-5 Billion

by Ujwal Tickoo on August 13th, 2008

Facebook that has been widely reported with a valuation of US $15 billion is allowing its employees to sell 20% of their vested stock options at a company valuation of $4 billion. This was first reported by Eric Eldon at VentureBeat. The news has been confirmed by the company (Facebook) and BusinessWeek is carrying an article also. Eric had believed that it was a move good for employees but BW suggests that employees are unhappy:

Eric: "this is a nice early windfall for Facebook employees, assuming my sources are correct. the company values its common stock at $4 billion but also values its preferred stock at $15 billion. The reason for the $15 billion preferred-stock valuation is that preferred stock holders have certain rights, including the right to sell their stock first and get their invested money back before common stockholders are allowed to sell any stock. "

BusinessWeek takes a pessimistic view of Facebook: "in recent months, a number of current and former executives have put some of their common stock up for sale. Laurence Albukerk, who brokers the sale of stock in private companies in the Valley, says he knows of at least nine people who have sold or are trying to sell Facebook shares. He estimates that "dozens" are unloading stock, through him or other brokers…Among those who have reportedly sold are founder and CEO Mark Zuckerberg and departing vice-president Matt Cohler…The sales at Facebook have led to controversy within the graffiti-covered walls of its Palo Alto (Calif.) offices. After employees heard that Zuckerberg and Cohler had sold, there was grumbling among the rank and file, say two sources who have spoken with staff….There are several reasons that Facebook is likely worth less than the $15 billion value it cited when announcing the Microsoft deal. The public equity markets have gotten crushed over the last year, and skittish investors have also lost their appetite for IPOs."

Eric has also pointed out that LinkedIn is planning a similar move for its employees and explained why there is a difference between Internal and External Valuations of a company:

In case you’re wondering why LinkedIn’s reportedly internal valuation for its employee stock is $500 million,  as some commenters asked on that story, the reason is that this number reflects what it reported to the Internal Revenue Service by law. Companies sometimes have two valuations, with the more expensive one being for preferred stockholders — preferred stock comes with uniquely valuable rights — and the lower valuation being for common stock, with fewer rights. Employees get common stock, at the lower valuation.

If Facebook and LinkedIn set up a new trend, then other start-ups may have to come up with similar plans for their employees to get some liquidity. It might be a good trend as start-ups employees often take salary cuts and accept stock options (partly out of choice, partly out of negotiation pressure).

POSTED IN: Facebook