[wkasel]

Logical explanation, however the point of an IPO is not just liquidity in for your employees, but also to raise money for the company, and allow the public to buy in. If you don't price it so the price goes up, then you're doing everyone, even your shareholders a dis-service because they have a 180 day lockup period, so when the stock is at $15/share at the end of lockup, you actually screwed employees as well. The only person who actually made money on this was Merrill Lynch.

[goodcanadian]

Facebook got a huge injection of capital at very favourable rates which was good for all holders prior to the IPO. I understand that it might be disappointing to see your stock go from $38 to $15 over the lockup period, but my point is that it was never worth $38 in the first place, so by getting new buyers to pay $38 for a $15 stock, the current owners increase the real value of their own stake for free.

I will agree, however, that the biggest winner is and probably always will be the investment bank. Well . . . sometimes the bank loses, but not very often if they do their job right.

[thebmax]

I believe that Peter Thiel, Accel Partners, and several other early investors sold a considerable part of their shares in the IPO.

That being said, I agree with your article and you make lots of good points!

[wkasel]

Yes, typically you have a negotiated rate, such as 5%, 10%, whatever. You're right I saw the s-1, but even then they still lost a lot, and the employees got screwed.

[wkasel]

Fair, but the only problem I see with your reasoning is stock grants were being issued as far back as 18 months ago at $25/share, which means that those employees DID lose money.

[goodcanadian]

I don't know much about the FB employee stock plan. If they were given grants, the price doesn't matter. They gained shares of the company. If those shares were labeled $25 when they were in fact worth $15, they can't be said to have lost $10 because they actually netted stock worth $15. You might argue taxes as they would have to pay tax on the $25 income, but when they later sell, they can claim the $10 capital loss. Assuming they are in the same tax bracket, it is a wash.

If they were given options which the employees had to pay $25 to exercise, then yes, the employees lost money. However, they had the same opportunity to make the analysis that any other investor had. No one forced them to exercise their options, and those who did paid too much.

[robryan]

That is the same though as investors buying in at $38. Employees could always choose to negotiate the grants or leave if they think they are bad value.

[wkasel]

The root of my argument though is that as Silicon Valley know-it-alls we assumed the world would gawk in awe of our amazing creation and throw money at us, which it did not. It's a shame you can't buy put's on that, because THAT would have been worth it. :)

[epistasis]

People did gawk at the amazing creation and throw money at Facebook needlessly, and that's the problem. In a way, Facebook has been able to do a bit of market segmentation, and take the initial money from those that thought that it had the most value, without having to listen to the dissenting voices that think it's worth less. Typically, markets prevent such a great information disparity.

Before IPO, nobody knows for sure what the real valuation of Facebook is. They have their own personal valuation, but the eventual price on the market is going to be a reflection of the combined valuations, it's an average of sorts of everbody's belief about Facebook's ability to make money over the time scale that each particular investor cares about. You can make a price-demand curve out of it; pre-IPO I wouldn't have bought Facebook at any price, some people thought $15 per share, some people $20, some people $38, and some would have bought no matter what.

Facebook was unique in being able to take advantage of this market uncertainty, namely each investor's uncertainty about what everybody else thinks. They shielded the overoptimistic from the pessimists' views, or the overoptimistic didn't bother to acknowledge that there would be pessimists, and Facebook took the optimists' money first. In doing so they got the most capital for giving away the least possible. (This shwredness probably bodes well for their ability to make money in the future.)

Usually tech stocks go the other way because the company doing the IPO has very little leverage to set their own price; investment banks are the gatekeepers and won't let anyone through unless their customers unless they and their most-favored-customers make a bundle on the initial sale. Facebook was able to flip that dynamic around and make sure that they themselves made a bundle while all the investment banks' customers lost out. It takes both leverage with the investment banks and knowledge of the demand curve in order to pull something like that off.

If the overoptimistic end up being right on the long enough timescale, they'll get their money back. But for the moment there are too many pessimists about the future potential of Facebook for a $38 buyer to be able to get what they deem a fair value.

Buy low, sell high, simply means being optimistic when others are overly pessimistic, and being pessimistic when others are overly optimistic. There's a bit of predicting what the objective financials of a company are, but it's far more about realizing the psychology of everybody else with money to trade. It's not just Silicon Valley engineers that are overoptimistic...

[goodcanadian]

Indeed. Despite our disagreement higher up this thread on who gets screwed and why, I did quite enjoy the article. I looked at it more as a cautionary tale about getting drawn into the hype surrounding IPOs in general and tech IPOs in particular. The market is not as efficient as economists sometimes like to pretend, but it does have a central tendency and if the fundamentals don't support the valuation, the market will bring the price back down.

I say, if you can IPO at an overpriced level, do it, but don't believe your own hype and buy into it yourself. You will be disappointed.

[robbiep]

Si. I really think the role of history here is important- there is nothing new or especially important about the current burst of innovation, or as Joseph Shumpeter termed it, creative destruction. We are just in another phase of human and economic history- and the valley is a remarkable centre of a lot of this innovation. However the same rules of hype, hyperbole, boom and bust that have governed all pervious cycles of human history still work in the information age. So none of this is new, and it won't be the last time it all happens either!

[pbreit]

I don't think it's appropriate to call it "losing money" when one does not have the ability to sell. Probably a bad analogy but it might be like saying a baseball team lost the game because it had fewer runs in the 5th inning.