Blog Post

Facebook's Liquidity Troubles

Facebook has postponed its employees’ stock sale, perhaps indefinitely, the Wall Street Journal reports today.  Facebook’s postponement is an understandable bow to market reality — and it prevents the company from setting an official valuation that the social networking site’s investors would consider too low. The market is pretty sure the company is worth less  than the $15 billion Microsoft (s MSFT) bought into, or even the $4 billion internal valuation, but until a sale occurs, that value is theoretical (even if that theoretical value has very real business impacts).  Maybe by the time its investors are required to officially asses the value of their investment in the social network, times will be flush, and they won’t have to write it down. But given the Microsoft money, I really doubt it.

9 Responses to “Facebook's Liquidity Troubles”

  1. Silence DoGood

    Stacey, Thanks for the clarification on the liquidity and I do agree with you on the employee impact although I’m not sure what all those FB employees do.

    I still have to disagree with your assertion that the sale of employee options at a lower price necessarily impacts the overall valuation of the company and it’s ability to do strategic deals. The price of employee options is NOT the same as the value of the preferred stock of the company. FB’s investors hold preferred stock which carries many more rights and preferences (5x liquidation preference for example)than employee common stock. As a result employee common stock is almost always valued (in a private company) at a discount and sometimes a substantial discount to preferred stock. Therefore when companies do strategic deals the meaningful number is total value of all shares. This is the weighted average of the number of preferred shares * preferred price + the number of common shares + common price. My sense is that the Twitter deal didn’t work because in a private to private transaction you look at the relative value between the two companies. In this case Twitter would have preferred a lower FB value thus receiving a higher % of the company.

    FB could be worth $100M and Twitter $10M for all it matters and the deal may or may not work. As long as both parties agree on a transfer value that prices one company at a certain % of another company than a deal gets done. The pricing of employee stock options has virtually nothing to do with this.

  2. Stacey Higginbotham

    Silence, the headline was alluding to the fact that FB just doesn’t have liquidity because it’s a private company and so can’t sell the employees stock right now without setting a low valuation. As to point two, valuation can affect both attracting and retaining employees as well as Facebook’s ability to do deals such as the Twitter story I linked to. That does affect the way the way you might run the comapny from a variety of reasons from strategic planning to allocating capital for salaries. On point one, I don’t know if MSFT needs to mark down its investment in Facebook or not. Not sure if it was material and it may be that the “unobservable inputs” have only recently changed since there isn’t a public market for the stock.

  3. Facebook should have sold themselves when they had the chance. The big money was there and now they’re going to have to wait and wait. In the meantime, Google will continue to grow and take over with more Gmail growth.

  4. FB will be making less than $270M in 2008, a far cry of the $300-350 from early this year.

    Now, considering they have $400M in expenses, and that most users are coming from countries with small (if not nonexistant) ad markets and therefore when coupled with the crisis, no hope of a significant increase for 2009, those $500M in funding wont last long.

  5. Silence Dogood

    I’m not sure I understand the title of the article. Why does the cessation of the employee stock option sale impact Facebook’s liquidity?

    A couple of other points.
    1. Irrespective of the option sale, investors should be marketing the assets to market on a quarterly basis. As a public company MSFT should have to although VC’s can do it optionally since they are private. Under FAS 157 the option sale may have been a benefit to investors giving them a market datapoint to set the value to. Sure $4B is way below $15B but it’s way higher than they would be valued if they were public.

    2. What are the business impacts of an arbitrary and illiquid value??? Whether Facebook is valued at $1 or $15B is meaningless to how you run the business other from a perception standpoint. Fact is they generate revenue and are burning cash with no business model and no chance for a liquidity event unless they sell the company.

    3. Of course not allowing employees to sell stock options impacts them since they probably traded lower salaries for equity which is illiquid. Welcome to the great start up dream and be happy you have a job. Now if you argue that FB will need to raise salaries since employees don’t see the value in the equity then there is a business impact. However this is from the illiquidty in the market for the stock not the valuation.

  6. Wasn’t screwing up Facebooks employee hiring and retention the whole point of the Microsoft investment? For $250 million they ensured that FB’s new option issues would always be under water, ruining secondary awards and rendering the place less attractive to new hires (including Microsoft employees). What an elegant way to throw sand in the gears…

  7. Heather Kennedy

    I’m one of those who never ‘got’ the point of Facebook, so it’s interesting to consider the business side. I wish I could peek over the shoulder of someone who used the site efficiently and was truly happy with it. Until then, I’ll just content myself with my very bare bones LinkedIn entry and leave it at that.