Facebook options debacle shows lack of liquidity is an issue for startups

Back in August LinkedIn and Facebook initiated schemes designed to allow some of their employees to profit from their options even though both businesses remain private.  As I said at the time I thought this was a smart move – when companies come to be valued as highly as Facebook and LinkedIn are it is only fair that option holding employees get the chance to share in the good times, to an extent at least.

I say that because the way venture has traditionally worked over the years most startups have gone public or been acquired before they are worth the $1bn associated with LinkedIn or the $15bn associated with Facebook.  So when people joined those two companies that would have been their expectation.  As we know the world has changed and an IPO has become less attractive for these two companies, particularly their founders, but for me it makes sense for them to try and deliver on the spirit of the original deal that employees signed up for, if they can.

I’m writing this now, however, because the latest word is that Facebook has abandoned it’s plan.  The following excerpt is from Valleywag last Thursday:

The revolution is over, Zuckerberg told his company today. “I’m writing this note to let you know some bad news,” he wrote in an email to all employees at the 800-person social-network startup this afternoon. “Despite a lot of work, we have not been able to finalize a plan for the employee stock sale we announced in August.”

Unless they pull off some miracle of employee management going back on a promise like this is going to have a significant effect on employee moral.  Particularly given the fact that Zuckerberg is not suffering the same fate of having to wait before he sees any benefit from his Facebook shares.

So the lack of liquidity options for companies like Facebook might be starting to hurt their operations in the same way as it is making life difficult for their investors.

Well functioning capital markets are a vital piece of the startup ecosystem and it is starting to look like we need some new options.