Goldman's special purpose vehicle sounds like something you'd design if you wanted to piss the SEC off and get into trouble.
Also couldn't help but laugh at this line:
The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google.
One of Wall Street's savviest investors is investing in Facebook in 2011?
"if you wanted to piss the SEC off and get into trouble."
How many officials in the current administration are former Goldman Sachs employees? Do you think that affects the likelihood of them getting into trouble?
The OP is referring to a well publicized controversy about the role of GS in the financial crisis and its influence over government decisions. Here's a good article summarizing common knowledge about GS: http://www.rollingstone.com/politics/news/the-great-american...
The implicit assumption is that people are willing to subvert their current employer for the benefit of their former employer (perhaps with the hope of being rehired by the former employer).
Yup, let's judge people by their former employers, not by their actions. I mean, Hank Paulson's decision not to bail out Lehman would have been totally OK, have he not been former Goldman CEO...
Not sure how many (if any) layers of sarcasm to strip away, so I'll just say: Hank Paulson's decision not to bail out Lehman was not OK regardless. His former employer simply might have informed that incorrect (for the US/world in general) decision. Simple bias; had GS been on the chopping block, I can personally guarantee he would not have advised letting it tank.
Human nature; exceptional behaviour from Paulson, which seems unlikely given the kind of person he had to become and loyalty he had to exhibit to get to be at the head of both GS and the Treasury.
More than that- this type of deal could potentially greatly harm current Facebook equity holders, or much more likely potential buyers of the IPO. If Goldman Sachs is both an investor and the bank that eventually takes them public this deal is rife with conflicts of interest.
Ex: In order to invest at this "low" valuation Goldman had to promise to set the initial price of the IPO to be artificially high. People buy the IPO in Facebook excitement, and right when insiders are legally allowed to sell they dump stock and exercise options and later investors are screwed. Goldman makes huge profit in this situation- on both fees and their sale of stock.
If there are (or will be) investors willing to invest at the initial IPO price, how can you say that price is going to be 'artificially high'?
The IPO investors, themselves will be buying in the hope of making a gain, if their analysis/forecasts/judgement is wrong - it won't be Goldman that screwed them, it will be failure of their own judgement. And also their own willingness to join to 'bubble' to make a gain.
Also, if Goldman are the underwriters of the IPO, and they fail to sell the shares at the 'artificially high' price, they will have to take on the shares themselves. If such a high profile IPO is not fully subscribed, it won't reflect well on Goldman, so setting an artificially high price, is not in their interest, but setting a marketable price is.
Not at all- it's similar to the Real Estate Agent problem that is described in detail in Freakonomics. The bank has some slightly higher interest in raising the price and getting more money- but a much higher interest in offloading as much security as possible. This has led to problems like banks selling to specific IPO turnaround firms that can grab huge share volume early on, sending the IPO up in value before selling out right near close of trading, sometimes trashing hot IPOs on day 1.
'One of Wall Street's savviest investors', GS, put hundreds of millions into Webvan, too. Maybe they're savvy on Wall Street, but that doesn't mean they are savvy tech-wise. They do know how to make money, however, and ethics need not be an obstacle. Hey, that makes them a great match for Facebook!
Is that reasonable? Suppose that Facebook eventually needs to settle at a P/E of 10:1. Then it needs $5B/year of profits. If Facebook is like Microsoft in that it can maintain a high profit margin due to continuing to successfully exclude any competitors from its market, just as it has so far (in Microsoft's case, through a combination of government-granted monopolies, criminality, and consistently not fucking up; in Facebook's case, perhaps not) then it could have profits like that with as little as $6B/year or so of revenue. Presumably, within a couple of years, the majority of the internet's users will be Facebook users, which is something like two or three billion people.
Is it reasonable to expect Facebook to extract US$2 to US$3 per year per user? It's hard for me to imagine how they could fail to extract several times that. If nothing else, the blackmail value of the data they already have on hand ought to be larger than that. ("Upgrade to Facebook Premium today in order to have the option to keep your past private messages from being visible to all your Facebook friends!" But it probably wouldn't be done in such a public way, in order to dampen backlash.) They can probably also sell preprocessed datasets of people who read subversive literature online to national intelligence agencies: not just the US and UK, but also Egypt, China, Pakistan, Syria, Italy, and Russia. If laundered through some kind of data broker, they could even get plausible deniability.
That would be out of keeping with the kind of privacy invasion Facebook is currently well-known for, though, so it probably wouldn't happen without a change of control of the company first.
So the mere $50B valuation represents an assessment that Facebook's popularity could be short-lived, or that it could become subject to much more intense competition than it is today, driving its revenues down toward their costs.
10:1 would be a fairly low P/E anytime soon for Facebook. They might need to settle there when they're a 35 year old company like Microsoft (which is currently at 12:1). Google is at 24:1 right now and Amazon and Netflix are pretty hot at the moment with 66:1 and 72:1 respectively.
I think 10:1 was the eventual P/E that would have to materialize to justify the $50 billion valuation. I think the historical average is something like 15.
but they have 30 years to reach that. The historical average is probably brought down by much more mature companies. Most tech corps today are 20+, hell Apple and Oracle have almost same P/E at 20 which might be the new average for tech.
Yeah, I was thinking of the 30-60 year timescale. The higher P/Es you're talking about are either the result of suckers or the result of expectations of continued substantial growth over the next decade or three. The historical average is brought up by companies like Apple and Oracle.
Long-run stable P/Es could rise if the internal rate of return of the economy as a whole fell, so that a good safe investment was one that paid 2% instead of 4% after inflation. That could happen under circumstances like these:
- If the peak-oil doomers turned out to be right, and our economic growth actually does turn out to be contingent on continually increasing fossil-fuel consumption; or
- If much of what we think of today as "profit" was actually destructive extraction of natural resources (e.g. overfishing); or
- If some kind of sustained disaster makes profitability difficult (e.g. the aftermath of global thermonuclear war, widespread coastal flooding destroying coastal cities, widespread Farmville addiction, or the gradual collapse of the Westphalian state system in the face of decentralized guerrilla warfare); or
- If we shift to a less efficient way of allocating productive resources than transparent capital markets, to an even greater extent than currently (e.g. war and other forms of theft, taxation for the benefit of wealthy bankers, insider trading, central government planning for the benefit of the politically well-connected).
I consider these scenarios unlikely.
If, by contrast, we keep inventing and putting into practice ways to produce more and more value for less and less effort and natural resources, and knowhow becomes more easily accessible rather than less, then we can expect that the internal rate of return that stocks must compete with in order to get investment dollars will go up. Which means long-run P/E ratios will go down.
To make this concrete, suppose that in 2029, you have US$20 000 to invest. (I'm speaking in 2011 dollars here to avoid talking about inflation.)
In 2029, Apple has settled down to a share price of $100 with annual earnings of about $10 per share (a P/E of 10:1), and no particular expectation that that is more likely to go either up or down in the next few years. So you could buy 200 shares of Apple and get about $2000 a year out of it, with some risk that Intellectual Ventures Hummer Winblad will get greedy and sue Apple into bankruptcy two years from now.
Alternatively, you can buy solar panels and sell the power back to the grid at the going wholesale rate of $0.015/kWh. In 2029, silicon solar panels have finally been edged out of the market by quantum-dot solar panels, which have an energy payback time of 3 months in a sunny climate. Like silicon solar panels, they're made out of some of the most abundant materials on the planet, and their fabrication is fully automatic, so essentially all of their cost is profit, the cost of the risk capital invested in their manufacture, and the energy dissipated in their manufacture. The energy dissipated is $0.033 per average watt, $0.011 per peak watt, but because of the large investments involved and the rapid expansion of solar panel manufacturing, that's only 10% of the actual purchase price of $0.11 per peak watt.
So instead of buying the Apple stock, you can buy 180 peak kilowatts of solar panels, which will generate 60 kilowatts, averaged over day and night, winter and summer. Instead of earning you $2000 per year, this will earn you $7900 per year, and your only risks are that energy prices fall further or someone steals your solar panels.
Since your objective in this investment is to make money, you buy the solar panels, as does everybody else. People sell their Apple shares in order to carpet the Gobi with solar panels. Consequently Apple's share price falls. Eventually it reaches US$25 per share, at which point its P/E is 2.5:1, and it's competitive with the solar panels again.
As long as there are investments available with rates of return similar to those I've postulated for solar panels above, shares will tend toward that 2.5:1 P/E ratio. They aren't doing it now because there are only very limited investments available with such high rates of return: installing a more efficient furnace in your house, maybe, but how many houses do you have? Solar panels, though, and thorium extraction from seawater, and automating custom manufacturing --- those are scalable investments.
Why do you assume the price of energy (and solar panels, for that matter) would stay constant as investors flock to blanket the earth with them?
I like your general logic - but I disagree strongly with your prediction that buying solar panels will generate 40% return on investment (in year 1!) in 2029.
> Why do you assume the price of energy (and solar panels, for that matter) would stay constant as investors flock to blanket the earth with them?
I don't; the energy price I used is about a third to a quarter of today's wholesale electrical price, and the solar-panel price is about a tenth of today's. I assume that those prices will drop rapidly. I think they will probably drop a lot further than that, but it's very difficult to imagine what will happen when some resource drops in cost by more than a factor of ten.
> I like your general logic - but I disagree strongly with your prediction that buying solar panels will generate 40% return on investment (in year 1!) in 2029.
I'd like to disclaim that prediction! It was a scenario, not a forecast.
It doesn't have to be solar panels specifically, but my point is that over time, we may develop capital goods whose internal rate of return is well over the 3% we've become accustomed to. (Solar panels are a plausible candidate because their production is already highly automated, they're made of dirt-cheap raw materials, and they produce energy.) If that happens, whether it's solar panels or automated moon factories, P/E ratios will drop --- at least until the new exponential takeoff hits some resource limit. In the case of solar panels, that will probably be land, until we construct a Dyson sphere.
If a company is not growing anymore, the only reason to own shares is to get dividends. If the P/E ratio is too high, then the amount of annual dividends per dollar of share won't be worth the risk of the company going bust.
Stocks make investors (contrasted with traders) money either by (a) going up in price or (b) paying a dividend every quarter. In order to make your stock price go up, you have to show not just profits, but growing profits. With something like Wal-Mart, this just means either cutting costs or selling more stuff to more customers. However, Facebook is going to (over the next few years) approach market saturation - they hit 500 million users 6 months ago, and there are only two billion internet users world-wide, meaning they can't keep growing at their historical pace forever. As that user growth slows, there are two ways to increase revenues (and profits) - either extract more money from each user or diversify into other products or services. If they can't do that, then they have to reorient into a "own our stock because we pay dividends" slow-growth company like Microsoft.
A company can also buy its own stock. In the short term this has little impact on the stock price, but as future profits are shared among a smaller pool of investors you can cycle though rising price and splits even with a stable income stream.
PS: This is only really efficient when the P:E hovers around 10:1 but it has great tax implications for long term investors.
Most tech companies do stock buybacks rather than dividends. From the point of view of shareholders, it is almost the same thing.
Here are the differences. Dividends generate ordinary income, which people may have to pay taxes on. Dividends drop the price of the stock by the amount of the dividend.
By contrast a stock buyback reduces the value of the company and the outstanding stock by the same amount, and therefore leaves the stock price alone to first order effects. Over time this increases the likelihood of incurring long-term capital gains, which are generally better from a taxation purpose.
The never stated difference, which I think is important, is that dividends hurt anyone holding options, while a stock buyback increases volatility which helps anyone holding options. Since tech companies tend to have lots of employees with options, this matters a lot to them.
Very few, and why does anybody buy their stock? This guy I know has been borrowing more and more money for years and never paid a red cent back, and now you want to lend him your money?
A company does not need to pay dividends in order to be worth to have a share in it. As long as the assets of the company are stable or growing, owning a piece of it is like having a secure bond. Dividends are either profit sharing when the company can't do anything productive with their extra cash... or attempts by management to keep their valuation afloat in order to collect bonuses.
I'd say that if a company has extra cash, it is better off paying its long term debts rather than dishing it out to the shareholders. Stock valuations rise and fall, but the underlying stability of the company should be worth more.
A share of a company is in theory optimally priced when it has the same value as the net present value of all future income streams that come from it: that includes both its dividends, and any profits from reselling it. Assuming we're talking about a company that is no longer growing (that's the presumption in the post you are replying to), then owning a share of it has negative value unless its dividends (or moral equivalents, like share buybacks) exceed at least the rate of interest - you can earn more risk-free by putting your money elsewhere.
> I'd say that if a company has extra cash, it is better off paying its long term debts rather than dishing it out to the shareholders.
That kind of blanket statement makes absolutely zero sense to me, and surely if you thought about it for more than 5 seconds, you too can see how silly it is. If the company's return on borrowed money is higher than the interest rate it pays on that borrowed money, paying down the loan would be a waste of money.
Consider a large shop that has a mortgage on its premises. Is it best for it to invest all its profits in paying down its mortgage? Or should it open up a new branch elsewhere instead, borrowing the money for the premises, on the basis that its business model has been proven to have profit that exceeds the cost of finance? Which would make more money? Now consider another scenario: rather than the shop opening up a new branch, what if the investors (i.e. the owners) want to invest in a different or new business, with potential for higher returns in the future?
Yes, if a company has stopped growing, then its valuation will go down in time (primarily due to inflation), but then giving dividends just hastens the decline. If a company's value is going down, it makes only short-term sense to give out money. It may just mean some unprofitable assets have to be sold off, or the company needs deeper restructuring.
If the company is profitable and its value is growing against inflation (slow growth), then it's worth having a share in it even if it's not paying dividends. (It's actually hard to find something solid that grows against inflation, in the long term).
>If the company's return on borrowed money is higher than the interest rate it pays on that borrowed money, paying down the loan would be a waste of money.
The company's 'returns' on paying dividends is actually negative, all other things equal.
>Now consider another scenario: rather than the shop opening up a new branch, what if the investors (i.e. the owners) want to invest in a different or new business, with potential for higher returns in the future?
If the investors really think they're not getting their money's worth (i.e. the separate assets are worth more or the management is bad), then it makes sense to initiate a takeover.
P.S. please downvote after you have heard a reply.
You're providing a hypothetical conspiracy theory business model, and assuming that FB has a high profit margin. FB's revenues seem to come primarily from ads. No one knows how much money they're actually making from virtual currency.
Take a look at what FB actually offers its users: core services: photo sharing, video sharing, blogging, micro-blogging, instant messaging, event/group management. non-core services (apps): quizzes, casual games, horoscopes.
Sounds like any other company everyone knows (Yahoo)? The difference is that FB offers all this with a single login, and the (perceived) greater privacy offered for things you post online. Yahoo never even managed to implement a single login across all of its sites and acquisitions.
The problem is that just like Yahoo and Myspace, there's nothing stopping Facebook from losing users to other sites. The business model is to have a lot of visits from a lot of users and serving them ads that don't bring in much profit. That's a lot of risk, and the upside isn't that great.
I don't see FB moving to a paid premium model. Even if it did that, it wouldn't be that different from what AOL had 10 years ago.
There's just not that much value in what FB does, and not much from preventing others from taking that value away from them.
Why in the world are you talking about Facebook blackmailing users to earn $2/$3 per user? Advertising (and maintaining what's left of their reputation) is clearly fall more lucrative. If each user just clicks on one Facebook ad each year, that's $2/user/year right there.
First, I continue to not trust advertising as a long-term stable business model. If some piece of information is valuable to somebody, they'll tend to want to pay to get it, and they certainly won't want to be denied it simply because its publisher didn't pay a middleman enough. By contrast, if an advertiser is paying a middleman money to shove their advertising in your face, it suggests that you seeing that information has positive value to the advertiser and negative value to you. In the long run, advertising tends to get trapped in an arms race between ever-more-aggressive advertisers and ever-more-jaded advertisees with mute buttons, fast-forward, and AdBlock Plus.
Of course, in real life, we don't live in a perfectly efficient market. There's lots of friction. There are probably any number of mutually beneficial commercial transactions I would like to engage in right now but can't because I don't know about the possibility, and advertisers paying middlemen to tell me about them is a Pareto improvement. And not everybody will install AdBlock Gold 2015 even if it does benefit them.
Anyway, so that's why I continue to be surprised at the continuing viability of internet advertising, and have been every year for the last 14 years. Maybe one of these days I'll finally learn, or reality will finally catch up with my expectations.
So suppose that cost per click falls to US$0.01 or US$0.001 (what are they now?), and click rates fall to substantially less than one click per user per year.
Second, blackmail could in theory extract the entire discretionary income of all of Facebook's users. If you earn US$100 000 per year, Facebook could very likely get US$20 000 per year out of you with blackmail.
"If you earn US$100 000 per year, Facebook could very likely get US$20 000 per year out of you with blackmail."
How exactly would that work? People keep their skeletons in their closets, not on Facebook. No one (aside from journalists writing for old people) cares that you have college party photos of you and your favorite beer bong posted on FB.
Given GS's recent history, do they even care about profitability, the long term safety of investors money, or how much the company will earn? All they're betting is that they'll be able to make a short term profit on this.
If these were $50M and not $50B your analysis would've been correct. But with such enormous amounts, it's not about money anymore, it's about power. And Facebook has the power to understand and influence what ppl think.
Are you suggesting that people buy Wal-Mart and Microsoft stock not because they expect to make money, but because Wal-Mart and Microsoft use their power to induce them to do so? Perhaps Microsoft will make your PC crash if you don't own enough of their stock? I am skeptical of your theory.
I'm suggesting GS would buy FB stock even if FB was loosing billions every year and there was no hope for future profits. In the same way GS and company are spending who knows how much on political campaigns and lobbing.
If you look at the market prices of newspapers, radios, TV stations, you'll see that they depend little on their earnings. The buyer pays for influence on the public opinion.
How much do you think will FB support be worth to GS during the next bailout? In understanding what are the common fears, arguments for and against. Even now GS manages many deals, parts of the society don't like - outsourcing, green house options trade, arab and chinese investors, etc.
I don't know whether your first statement is true, but I'm skeptical. Certainly there are some cases where newspapers continue to operate at a loss over many years, but in those cases we hear rumblings about hostile takeovers.
Regardless, I don't think GS comes close to getting that kind of editorial control or information access with this deal.
Although you do suggest the interesting point that Facebook private messages and even public postings could be a very valuable source of insider trading information.
From later in the article, it's a total of $2 billion, with 1.5 billion being in a special fund designed to make a mockery of SEC regulations: "As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation".
What's the leak? They are a holding company and a member of FINRA. I'm genuinely interested in how you think the SEC might shut them down.
Besides, SecondMarket is growing fast in Europe and Asia too.. They trade stocks all over the world now, so it's not just one 'leak' that the SEC can plug.
Is that Google Spreadsheet publicly-viewable? Your page is showing either "User not signed in" or "Access denied" (if signed into Google), in the spot where I assume there should be an embedded spreadsheet.
Sorry, should be working now. Had the spreadsheet on "Anyone with the link can view" but apparently the embedded chart is only available if you make the spreadsheet public to everyone.
If $US 810^8 (from http://economictimes.indiatimes.com/infotech/internet/Facebo...) is a good estimate of Facebook's revenue, then, assuming fairly stable advertising income (a reasonable assumption, as Facebook has a market share nearing saturation, and the market in social networking is mainstream enough that it probably won't grow too much), a valuation of $US510^10 is 62.5 years of growth. Facebook's brand has a lot of valuable goodwill, but they are still vulnerable to competition, and might not last 62.5 years - so the valuation seems way too high.
Anecdotally, I know a few companies spending between $15k and $50k+ per day on facebook's version of adwords to shovel the masses into games.
You know how people attribute worth to meaningless points in games? Kid CEOs these days attribute worth to the live-updating user stats (DAUs and MAUs, oh my) of their facebook casual-social-viral games. They'll do anything to make those numbers go up, including spending $200k to $1MM+ per month on ads.
I don't think Goldman's position is really revenue based. It looks more like they are pretty much trading on the value of the company shares. I think this is really a way for them to get in on what they believe will be a pretty large IPO, and a way to make money trading on Facebook shares by getting in sooner rather then later. At some time Facebook's revenues will become relevant but you can likely make some serious money having a position in Facebook before it reaches that point.
Valuation is always a dicey territory to be in, especially when done by an investment bank. Their interests are not exactly in line with putting the actual picture out there.
One of the companies I had worked for once had its valuation done by a pretty big i-bank at $1 billion. We were flabbergasted, but they were also going to be underwriters for the issue.
This deal comes 6 months after AOL (an experienced tech player, mind you) sells Bebo for about $10m rather than the $850m it spent to acquire it. The context is markedly different, of course, notably since Facebook was the reason for the collapsed value over at Bebo.
I don't think he needs to be. It's just a standard tactic at their blog. They always come off as being a bit contrarian for the sake of it. Or they just want more traffic.
While talking to Jason Fried after Startup School 2009, I realized that trolling on their blog is what they do instead of adding features to their products.
Everybody needs a creative outlet! Letting everyone at 37signals post directly to SvN is a way to keep the minimalists sane.
Are the extremely high Facebook valuations a result of the company's stock structure? I'll admit my only information on the subject comes from The Social Network, but it sounded like only ~35% of the stock was actually sold. So, since investors are fighting over 35% instead of 100% of the company, a more accurate valuation would be .35*50bil = $17.5 billion. Is this remotely reasonable, or am I way off?
I think Facebook will issue new shares to the new investors so who owns the existing shares doesn't matter. The new valuation is determined only by the total number of shares before the deal, the number of shares being issued, and the size of the investment.
Valuation = new value per share * total shares = (amount invested / # new shares issued) * (# existing shares + # new shares issued)
Although they probably agree on the valuation and the amount of capital to be invested first. Then the number of shares to be issued is set so those numbers to match.
Right, but if the movie is to be believed, then Zuckerberg and several others have non-diluting shares. I'm wondering how much that restriction on the circulating share pool affects the valuation.
Well, Google has essentially the same number of users and is traded at 190B capitalization. So, a Google user is worth over $300. As people spend more time on FB then at Google, I can understand why FB user is seen as $100 asset.
A reasonable point, but Google has several years' worth of results under its belt. When the IPO was conducted I think the company was valued at about $25 billion; now it has net annual earnings about $6-7 billion - so while the P/E ratio is still high, at least it's based on actual numbers. I'm not saying FB couldn't be worth even more than Google - it's just that since they've never had to file earnings statements etc. yet, all such estimates are far more speculative.
Well stated argument, but I think Google (at present) is much more diverse a company product-wise, and way better at monetization in terms of screen real estate and multi-modal revenue streams. (infrastructure, ad networks, functional products, etc)
Virtual gifts aren't changing the world anytime soon.
Another thing that's included in Google's market cap is their technology and assets. The # of users might make up a portion of it, but it's not fair to just divide the market cap/users and come up with a figure that's easily comparable across companies.
Now that you put it that way, why not? Maybe not all of them, but the high-spending ones offset the poorer ones, no? That being said, I've read earlier that Fb actively dangles the $100Bn valuation post-IPO scenario to lure new hires. So perhaps it's not entirely a surprise that GS wants in on some action.
By that logic you should stop doing business with any company that Goldman Sachs has invested in, which I think you'll find is just about every major company in the world.
Social media in general seems to be a fad. Maybe I'm wrong, but I just have to wonder out loud. When Farmville and fart apps are worth 50 billion dollars and everyone is into it, I just have to shake my head and wonder if we are squandering some great technology while this fad passes
Don't get me wrong, there's a time and place for this sort of thing, but it seems too front and center today.
Fellow HNers, a real question - what would be the risks of buying Facebook shares in an IPO? Facing (no pun intended) past IPOs like Google's and other tech dears, where the stock multiplied in a very short time and profits in hindsight seem practically guaranteed, what are the risks?
For some reason I find it hard to love facebook and I am not sure I understand why. I am certainly not jealous of their (relatively) easier path to glory or I am too suspicious about their lapses in user privacy (most companies had their fair share, including google). Yet I find it easier to like google as a companies and not like facebook at all.
Anyone else feels like this?
I think, to me, facebook reminds me of microsoft too much. They have similarities in the way they work by selectively closing everyone off of their pretty little garden.
I know I'll get downvoted for this, but honestly I think it's all just hivemind at work. There's no reason to hate facebook as much as people do.
Facebook's core business is closed, just like Microsoft's, and yes Google's. People just get seduced by all the 'free' and open services Google provides and forget that their core business is search, which is just as opaque.
> For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.
Interesting. Does anyone know how many options a newbie engineer gets at Facebook?
at $50B, 0.1% of the company == $50M and 0.01% = $5M not a bad payout vesting over four years, when the stock is probably going to go up... no wonder Google is having trouble keeping talent!
0.001% is still probably a generous estimate -- given Facebook's 3000 or so employees and the fact that all not-very-senior employees should add up to 2%.
Also, stock options need to have a hardly-discounted exercise price attached. That is, an employee that gets a stock option package reflecting shares worth $500K will have to shell out (at least) $450K to exercise them when the time comes. So based on this valuation, if facebook is worth "only" $70B in 4 years, the profit is going to be $250K or ~$60K/year. Nothing to sneeze at, and definitely a nice bonus -- but not more than that. And if facebook is worth $30B at the end of 4 years, today's stock option grant is worth virtually nothing.
My understanding is that all new hire grants @ facebook are given in restricted stock units (RSU) not options, in part to avoid the 500 shareholder rule.
I don't know how RSUs count against the 500 shareholder rule -- but for tax purposes, they count as an UNrestricted grant. That is, if you get $1M equivalent shares in RSUs, you get taxed immediately on that value, regardless of the restrictions. So you have to pay $350K (and that's just federal!), which you have no way to recover until the restriction is lifted. Worse, if you get fired the next day, you're out $350K with no way to reclaim them.
Pay attention to tax laws. If you are well off, that is your single largest expense.
Also couldn't help but laugh at this line:
The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google.
One of Wall Street's savviest investors is investing in Facebook in 2011?