Are Facebook employees who took advantage of the ability to cash out some of their stock holdings as part of a tender offer from investor Digital Sky Technologies "mercenaries"?
Controversial BusinessWeek tech reporter Sarah Lacy thinks they are. The reason: they're giving up too soon. Lacy believes the $100m tender offer, which is giving some employees the ability to sell up to 25% of their Facebook stock at a $6.5bn valuation, will prove to be a steal for Digital Sky Technologies.
I'm pretty certain that a few years from now, when Facebook does go public, I'll be writing about the $100 million deal that gave Russian investors a chunk of Facebook on the cheap, and the boneheaded employees who gave up too soon.
According to Lacy, the fact that so many employees have rushed to sell (the tender offer is oversubscribed) is reflective of a Silicon Valley culture in decline:
What has happened to the startup work ethic in Silicon Valley? 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. What's next? Giving up options altogether for a bigger paycheck?
Lacy's article sparked some very strong responses. While some were unfairly harsh, I think many made valid points. The most important: there's nothing wrong with liquidity.
Employees at startups take significant risks. Because they're working at young, unproven companies that typically rely on outside funding to pay the bills, startup employees have historically received lower salaries than they otherwise would have working for larger, more established firms. To compensate for risk and salary differentials, stock-based compensation became one of the standard means by which startups lure talented employees.
In many cases, stock-based compensation turns out to be of little to no value. Startups fail. Some that are lucky enough to exit are so diluted at exit that employees make little more than enough to pay for a vacation to Hawaii. Google-like stories, where the first secretary walks away with millions, are the exception, not the rule. And once public, many employees learn the hard way that having your entire net worth tied up in your company's stock can be a bad thing. Enron, anyone?
Today, the IPO market has slowed significantly thanks to the economy and even though it appears that there are some companies (like Facebook) which could go public if they wanted to, it's unclear how well they would fare. For most startup employees, today's environment leaves little choice but to wait and hope.
Digital Sky Technologies is providing Facebook employees with an opportunity most startup employees don't get and aren't getting: the ability to obtain some liquidity before increasingly elusive traditional liquidity events. To understand why this is particularly important at a company like Facebook, you have to consider the following:
- Facebook's workforce is young and you'll find a lot of 20-somethings roaming the company's Palo Alto campus. Naturally, many of them are just starting their careers and are not yet 'financially secure'. The ability to take some money off the table is therefore extremely appealing to them. Whether to pay off student loans, start a family, put a down payment on a house or what have you, it takes a lot of chutzpa to call a young person interested in setting themselves up in life a "mercenary".
- Facebook is a unique startup in that has already received significant investments at valuations as high as $15bn while still a private company. Even though Facebook might have a very bright future, it still hasn't turned a profit and nobody knows whether it could eventually falter like Friendster and MySpace before it. If Facebook were to go public tomorrow, there's no guarantee it will receive a valuation significantly north of $6.5bn. Already, Facebook stock has changed hands privately at valuations south of $6.5bn. Looking at it from this perspective, employees have to grapple with the fact that there might not be much more upside and there could be downside. We're talking about a multi-billion dollar valuation here and the ability to cash out up to 25% of your holdings at a multi-billion-dollar valuation before your company has gone public or been acquired is not common. Therefore nobody should be faulted for doing so.
At the end of her article, Lacy admits "maybe I'm drinking the Kool-Aid". She is. Kool-Aid may be liquid but it isn't what most of us are talking about when we talk about liquidity.
This isn't about a "startup work ethic" and it's not about "mercenaries" and "believers". It's about being smart. Startup employees who are fortunate enough to be rewarded with liquidity aren't doing anything wrong by "jumping ship" when the water is clear, blue and warm. I'm pretty certain most of the paper millionaires who watched their vapor wealth evaporate when the .com bust occurred would have a simple message for Facebook employees: better to cash out early than never at all.