Facebook CEO Mark Zuckerberg recently told employees he realizes the slump in the company’s stock – now at half its IPO price — is “painful” for some of them, according to the Wall Street Journal. Other company executives have reportedly made similar statements, acknowledging that some employees are distracted by the realization that their stock options are worth less than when they were granted.
It wasn’t supposed to be like this.
Zuckerberg carefully set things up so he wouldn’t have to care about Wall Street – at least in theory. He gave Facebook a dual-class stock structure that allowed him to retain 57 percent percent of voting shares with only half as much actual stock. And before Facebook went public, he signaled to prospective investors that he wasn’t going to worry too much about making his quarterly earnings numbers.
“We don’t build services to make money,” he wrote in Facebook’s IPO prospectus. “We make money to build better services…. People want to use services from companies that believe in something beyond simply maximizing profits.”
Facebook’s arms-length approach to the stock market mirrored that of its Silicon Valley rival Google, which wrote in its defiant 2004 “founder’s IPO letter” to future shareholders, “We will optimize for the long term rather than trying to produce smooth earnings for each quarter…. Google is not a conventional company. We do not intend to become one.”
But unlike Facebook, Google became a Wall Street darling as mushrooming search-ad revenue helped it blow past investor expectations; by late 2005 profits had multiplied more than seven-fold and sales had nearly doubled. That sort of rocket ride kept investors off the company’s back and allowed the founders to basically ignore Wall Street.
Facebook has no such luxury. Its post-IPO income is rising nowhere near as quickly Google’s, and it priced its shares very aggressively to begin with. Only now that its stock is coming back down to Earth does Facebook seem to be thinking about how Wall Street’s valuation impacts the company. With many employees’ stock allotments now underwater, morale has to take a beating. And it isn’t just company spirits that are suffering. Because of its drooping share price, Facebook won’t be able to pay off a multibillion-dollar tax bill on employee equity by issuing more stock in a secondary offering, as it had planned. Meanwhile, the press, rather than focusing attention on the company’s products and features, is fixated on Facebook’s daily performance in the market.
In other words, Facebook has had to let go of the fantasy that it could take Wall Street’s money and not pay attention to Wall Street. It must now make an uncomfortable choice between accepting those costs or trying to impress investors by getting more aggressive with its advertising, a move that could easily backfire.
Watching from the Silicon Valley sidelines, Tech startups (and their backers) are getting a lesson in how public stock investors can be much more demanding than the angel investors and venture capitalists of Silicon Valley, and how it takes more than a defiant note in the prospectus to tame them. Early stage companies have already been urged to conserve their money. Those who are closer to going public would be well advised to either find a fountain of profits, a way to remain private, or to prepare, as distasteful as it may seem, to play by Wall Street’s rules.
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