Remember Facebook? Last night it filed an amended S-1 for its IPO including a bunch of contracts. Those contracts were so boring and bog-standard that ... well, this:
SharesPost Financial Corporation completed its auction of 150,000 shares of the Class B Common Stock of Facebook, Inc. on February 8, 2012. A clearing price of $44.00 per share was established at the auction.
Using the 2.33bn shares implied by the "pro forma diluted share count" in its prospectus, that gets you about a $103bn pre-money valuation, or up about $10bn from this time last week. Assuming a constant price/Likes multiple, which is I assume how social networks are valued, that must mean that Facebook is approaching 3 billion "likes" per day.
The fact that you can get, um, weekly market prints for Facebook means that it is in a weird place for a private company, with a certain amount of liquidity and price transparency provided by private marketplaces. Investors who want to get out can, and accredited investors who want to get in also more or less can. So some think that FB is in essence already public, with most of the trappings of public trading for everyone but non-accredited retail shlubs. This is a good example of why that's not necessarily so.
Public market volatility is actually fairly low (this month!), and the S&P was up about 2% in a comparable time period. But it traded nanosecond by nanosecond - if you wanted to be stopped out at a 1% S&P move, you could have more or less hit that. With Facebook, however, trade 1 was at $40, and trade 2 was a week later at $44. Of course, there are some publicly traded stocks that move crazily - CZR, for instance, was up 71% yesterday on its IPO. But that's in part because only 1.4% of its shares are floated and can actually trade - and because, as a new IPO, it's essentially impossible to sell short (because there's no stock borrow). As one guy said, "You're creating an artificial demand and supply imbalance that leads to speculation."
For Facebook, too, only a tiny fraction of shares are on the market - that SharesPost auction was for 150,000 shares, or 0.006% of the diluted share count. And um FB may have been in the news a bit recently. And while some people think it's overvalued at these levels, those people have no way to express that view since they can't short the stock. (You listening, Europe?) So it's not surprising that it's unusually volatile (and biased upwards). If you're a Facebook investor you no doubt like the fact that the shares are zooming up pre-IPO, but there's something to be said for dampening the volatility a bit and getting a price that is constantly refreshed on Bloomberg and not subject to 10%, week-apart swings.
Now about those contracts. Some have to do with the Zynga relationship, which sounds juicy until you remember that Zynga already filed them. Some have to do with the employment terms of certain celebrities like Mark Zuckerberg and Sheryl Sandberg and here is how in its wisdom Facebook is incentivizing them to keep their eyes on the prize:
In its updated IPO document Wednesday, Facebook included fresh details on the pay of Mr. Zuckerberg, 27 years old, and Ms. Sandberg, 42 years old, who are set to be billionaires—at least on paper--when the company goes public. Facebook said the two executives are in line for annual target bonuses of 45% of their salary plus other base wages. For Mr. Zuckerberg, the bonus could amount to roughly $225,000 this year, based on his annual salary of $500,000. Meanwhile, COO Ms. Sandberg may be eligible for a bonus of $135,000 based on her annual base salary of $300,000.
So Zuckerberg, if he does everything right this year, is in line to receive a bonus equal to about 0.08 basis points of his net worth.* Next year, with his $1 salary, I suppose his maximum bonus will be 45 cents.
That's okay though because his life is pretty inexpensive (and possibly supplemented by food stamps?). For example, if he wants to buy control of Facebook it'll cost him a couple thousand bucks, tops:
After eight years, Mr. Zuckerberg, the co-founder and chief executive of Facebook, has an ironclad grip on the social networking giant. He owns 28.4 percent of all Class B shares, and through a chain of agreements with other shareholders, he has voting control over at least 57.1 percent of Class B shares. ... Now, we know what shareholders got in exchange for ceding precious control: about $100 in cash apiece.
Ha ha ha. This is true, sort of - the three forms of voting agreements (Type 1, Type 2, Type 3) filed with the S-1/A all say "In connection with this Agreement and as partial consideration for the obligations of Stockholder hereunder, Proxyholder [Zuckerberg] shall pay (by check, cash or other valid consideration) to Stockholder the sum of U.S.$100 in the aggregate."
Note that this is of course "partial consideration."** It's a little hard to piece together what the rest of the consideration was. Presumably some of the later-round investors signed these voting agreements at the time they invested, and their consideration was "getting the chance to invest," as it's easy to imagine Facebook wanting to retain some control when issuing stock to Digital Sky and Mail.ru. But the very early investors/employees/consultants seem to have given up control later on, and their contracts have this recital:
Stockholder, the Company and the Proxyholder agree, acknowledge and reiterate that: (a) this Agreement is not being entered into as a condition of or in connection with Stockholder’s employment or consulting relationship with the Company; (b) this Agreement is being entered into at the request of the Proxyholder in his individual capacity as a stockholder of the Company, and is not being entered into at the request of the Company or the Company’s Chief Executive Officer or any member of its Board of Directors; and (c) Stockholder is entering into this Agreement with the express understanding that Stockholder is not being required to enter into this Agreement and that, if Stockholder had declined to enter into this Agreement, Stockholder would not suffer any negative employment or consulting relationship consequences.
See? Facebook's early employees could have hung on to their voting power and told Zuckerberg to sod off, without any negative repercussions. All they'd lose was a hundred bucks.
I spend a certain portion of my time thinking about financial industry comp. One thing to think about comp generally is that, if you rely mainly on finely tuned comp structures to create good behavior, you've already lost. These contracts are a good reminder of that. Mark Zuckerberg isn't working to make a $225,000 bonus this year, and his early shareholders didn't hand over their voting rights for $100 each. Those are inconsequential details compared to the larger fact that they believed that if everyone worked together with a common vision and tight control, they'd make gigantic heaps of money together. And so far they seem to be right.
* For context, if Lucas van Praag accepts our offer to join us as Dealbreaker Vituperation Columnist, his target bonus would be a slightly higher percentage of his net worth. Call us!
** Lawyer-y aside. "Consideration" is a hoary old doctrine of contract law that says that if the shareholders didn't get anything in exchange for giving up control, then it never really happened and they can tear up the agreement. Because it is silly, a small amount of money is probably enough to satisfy it, which is why a lot of contracts say "in exchange for $1 and other good and valuable consideration, the receipt of which is hereby acknowledged," and no one actually hands over the dollar. Sometimes companies merge for $1. A hundred bucks was actually rather generous.