Why 'Joe Facebook' wants to cash out
Was there an unexpected rush of Facebook employees looking to cash out their stock? Yes, says BusinessWeek's Sarah Lacy, who said that the $100 million buyback orchestrated by investor Digital Sky Technologies has been oversubscribed. Which means that a fair number of employees have been looking to cash out some stock even though it may be worth far more down the road when (and if) Facebook goes public. It's the sort of thing that would've left pre-IPO Googlers feeling awfully sheepish.
But what's more surprising, Lacy found, is that the high demand for Facebook cash-outs seems to run contrary to Silicon Valley's characteristic idealism.
"What has happened to the start-up work ethic in Silicon Valley?" she asked. "Time was, the region was teeming with believers--be it believers in a company or believers in the sometimes naive, lottery-ticket hope that options would make them billionaires. People who work at the most highly valued startup in Silicon Valley and rush to sell for a smaller valuation--just as an IPO is starting to look likely--aren't believers. They are mercenaries."
Not at all, I would argue.
Imagine, for a moment or two, that you are a character whom we will call Joe Facebook. You are a software engineer, so it's pretty safe to say that you're a dude (apologies to all the women in computer science out there). You're in your mid-20s, and you've been working for Zuckerberg & co. for a few years now, ever since you graduated from Harvard or Stanford or some other big-name institution with a hefty price tag. You grew up in a small town in the Northeast or Midwest, which is why instead of living in Facebook's hometown of Palo Alto, you've opted to get a taste of the cosmopolitan by living in San Francisco and making the commute in this sweet little Prius you bought last year. Your girlfriend, who's been remarkably tolerant of all those late nights of coding, said something recently about how it's a buyer's market and she's getting sick of her roommates. Maybe you'd like to pay off some of those student loans and stop living like a bike messenger.
This, of course, is a stereotype. But employees cashing out some of their stock after working long hours and living in one of the most expensive cities in the country shouldn't be that shocking.
Facebook's salaries, people in the industry tell me, tend to be a little bit lower than those at many of their Valley counterparts. That's understandable: it's one of the hottest companies to work for, and could have a huge IPO down the line, which would mean that a lower salary now would ideally pay off big-time later. But some of those early employees were probably expecting Facebook to have gone public by now. In this kind of economic climate, there's going to be some hand-wringing.
Facebook's revenues are projected to be about $500 million this year with its current, advertising-based model. But it's just barely started to alpha-test its new "credits" payment system, a potential cash cow that was once rumored to be debuting a year ago.
The Web 2.0 bubble didn't pop suddenly like its late-'90s counterpart. Rather, it's still deflating. This week, it was made official that MySpace had acquired iLike, a social music start-up that had $17 million in venture funding pumped into it during the digital media VC heyday. But revenues didn't roll in as promised, and iLike's final sale price was reportedly just $20 million--news that called into question the profitability of an entire (big) niche of Web start-ups, ad-supported streaming music. Facebook is obviously far beyond that stage, but these reality checks can make a massive, Google-style IPO seem even further away.
Then there are services like Sharespost, an exchange for private stock trades. The fact that these sites are drumming up interest is testament to the current uneasiness of many dot-com employees, especially young ones trying to establish some stability, and more particularly those who might not be privy to the big-picture plans getting painted in the executive boardroom. Given the dreary market for M&As and IPOs right now, their supposed personal wealth might as well be in Monopoly money.
And working at a tech start-up, with its casual dress code, oddball hours (think college-style all-nighters fueled by Red Bull and pizza), and young workforce, can seem like a limbo of adolescence--even if the old dot-com stereotypes of Foosball tables and free beer are kept to a minimum. As short-sighted and greedy as it may seem, swapping in some of that Facebook stock now (not anywhere near all of it, mind you) is an upward move for the quarter-life-crisis crowd. It's a down-payment on that cute Victorian in Noe Valley, the last of those student loans, the extra cash to start building up an investment portfolio while stock prices are low. It's growing up, Silicon Valley-style. Even in the bright and happy Candyland of innovation (literally), cash is still king.
Mercenaries? Hardly. More like average 20-somethings.
Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos. E-mail Caroline. 
I'm an early-20s, relatively recent college grad. I see a couple types of guys my age. Most are frivolous, debt-laden girls with backwards priorities, overpaying for their crappy city places and throwing their paychecks away on ringtones and club drinks. Those aren't the ones working for companies with IPOs around the corner.
The ones who are think more long term. They have inexpensive but comfortable places outside the city, save and pay down debt, and put off buying glittery toys while they work toward a career that will give them whatever lifestyle they want down the road.
This type of guy isn't selling his stock in a way down market, pre-IPO, because his girlfriend wants him to buy her a "cute" (cramped) place in whatever overpriced area of the city she wants to brag to her friends about. He's putting every dollar he can into buying dirt cheap stock, waiting for the IPO, and content inviting his girlfriend over to watch a movie on his worn but comfy couch. Or finding a more down-to-earth one if she doesn't stop nagging him to fund her short-term lifestyle...
They all had 20 somethings working at and running them. But now they are all gone. The employees move to other companies and tout their experience. The world will keep turning and new companies replace the old.
By the way, who here remembers shrimp at the launch party? And then watching Bloomberg to see how much they made above the strike price?
If you haven't wait five years, you'll see... life moves on.
[CNET editors' note: Promotional link deleted]
Why? People will get tired of the same ol' thing. That's why we saw a large move from My Space to Facebook. (At least I noted that most people I know stopped using the former in favor of the latter.) I'm already hearing lots of complaints about how noisy FB is. You log in and there's all kind of studpid stuff in your face. I say "stupid", because it is in my opinion. I'm not talking about a friend posting comments, but these "applications" where I get informed that "Suzie Q just took the Blah Blah Blah Quiz".
Anyway, we'll see. I think longevity will perhaps come through innovation and change that keep people interested. But, as long as it stays the same ol' way, I'm not sure people will stick around long enough to see a massively successful company. But, their destiny is certainly in their hands. We'll see...
One specific challenge of current alternative trading systems is the lack of 'true price discovery'. When are broker operated trading systems not controlling the transparency? If someone is controlling the transparency then that can not be the true price.
The counter parties must determine the true price and not with a broker operated trading system. When counter parties are matched together, this is not the true price.
Question for the current alternative trading systems, 'where are all the other brokers and their inventory'? The last thing we need is another vertical silo trading system where one broker makes all the money.
The most favorable opportunity of liquidity for investors and lenders of Facebook and all others would be a horizontal platform where all licensed and bonded brokers are welcomed and are providing inventory, and other support services.
A utility ... where there are no spreads, commissions or margins may be an answer for raising capital and global distribution of all classes of assets.
It is time for new thinking.
[CNET editor's note: Prohibited spam deleted.]
Also the Joe Facebookers also may see something on the inside that has them eager to cash out now. And everyone knows now the IPO millionaires aren't the guys in the trenches with rules on how long they have to hold their employee stock, but the guys at the top who can cash out right before the crash.
IPOs don't generally make everyone a millionaire (and why would they?), they just give a much more lucrative return for betting on the company's success. Yes, you have the stories about secretaries and groundskeepers for Microsoft choosing stock over bonuses and becoming millionaires, but unless your IPO is a huge deal and your company is very tiny, it's not a lottery ticket.
It's more like a really big bonus for casting your lot in with a venture whose future is uncertain. Not really sure where your "cash out right before the crash" part comes from; sounds like a generic rant against the guys who brought you all the things that make your life easier (feel free to turn in your gmail, iphone, 3G, netbook, big screen, blu-ray, wi-fi, and broadband).
Add your scenario the much broader reality that in this market, a valuation in the hand is worth two IPOs in the bush; and the fact that this isn't your father's venture capital market, and it's easy to see why a young employee might take the money and run.
- by famebook September 4, 2009 10:05 AM PDT
- I think 'Joe' is smarter than people give him credit for and watching a valuation go from $15 billion down to $6.5 billion with revenues still effectively undefined properly suggests only one sensible conclusion. The cash is safer under their mattress until the profitability is proven!
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