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.

  • Lack if liquidity is (and has always been) an issue for everybody. Everybody knows (or should know!) that the financing and liquidity window for companies and employees is just like any other window, it cycles from open to closed.

    Regarding Facebook’s options plan: I don’t think they made any promises, did they? I’m sure everything was hedged (i.e. “we are trying to set up this program, but don’t know if or when it will go into effect”). If it wasn’t, then what the hell are they paying their attorneys and Zuck’s handlers for?! Still, it was asking for trouble (even stupid?) to announce something like that before it locked down. That’s what you get with a 24-year old CEO? That and the privacy and other blunders?

    The startup I joined in 1999 went public in December 2001. It was supposed to go happen sooner, but 9/11 closed the window for everyone. Everyone understood. Now is another window-closing crisis. I’m sure everybody understands. Like anything else that’s subject to a window of opportunity, you don’t count your liquidity until the wire clears and the clawbacks, short put options, or other things have expired.

  • Lack if liquidity is (and has always been) an issue for everybody. Everybody knows (or should know!) that the financing and liquidity window for companies and employees is just like any other window, it cycles from open to closed.

    Regarding Facebook’s options plan: I don’t think they made any promises, did they? I’m sure everything was hedged (i.e. “we are trying to set up this program, but don’t know if or when it will go into effect”). If it wasn’t, then what the hell are they paying their attorneys and Zuck’s handlers for?! Still, it was asking for trouble (even stupid?) to announce something like that before it locked down. That’s what you get with a 24-year old CEO? That and the privacy and other blunders?

    The startup I joined in 1999 went public in December 2001. It was supposed to go happen sooner, but 9/11 closed the window for everyone. Everyone understood. Now is another window-closing crisis. I’m sure everybody understands. Like anything else that’s subject to a window of opportunity, you don’t count your liquidity until the wire clears and the clawbacks, short put options, or other things have expired.

  • nic

    Hi Chris – tks for the comment. I think the thing that was a bit different about Facebook is that the option is still open to Zuckerberg to cash out his employees if he wants to – the issue is valuation. That makes it a little different to the markets closing for IPOs, which everyone understands is outside the CEO’s control.

    I’m sure you’re right that nothing was promised in the legal sense. I used the word more loosely than that. The key here is what people expected, and if they really thought they were going to get some cash then they will be disappointed, and that will hit moral.

  • nic

    Hi Chris – tks for the comment. I think the thing that was a bit different about Facebook is that the option is still open to Zuckerberg to cash out his employees if he wants to – the issue is valuation. That makes it a little different to the markets closing for IPOs, which everyone understands is outside the CEO’s control.

    I’m sure you’re right that nothing was promised in the legal sense. I used the word more loosely than that. The key here is what people expected, and if they really thought they were going to get some cash then they will be disappointed, and that will hit moral.

  • Nic,

    am sure you are right. It will affect not just morale, but his credibility as a leader.

    But the point is really this: Zuckerberg can’t ‘cash out’ his employees. He just doesn’t have the cash. Or let’s put it the other way round. Let’s just imagine he bought out his employees. He would essentially tell his employees: “Look, I am cashing you out, this means your shares are undervalued, thanks a lot for giving them to me.”

    What you need is a market for the shares outside of the company’s control. Where people can trade their shares with other people. Oh, wait, that is called a public market…bugger…back to the drawing board.

    What it essentially shows is that companies that should actually be publicly-listed aren’t. Maybe Obama is intelligent enough to understand this problem and remove Sarbanes-Oxley. It sure didn’t prevent the credit crunch. All it does is slow everybody else down.

  • Nic,

    am sure you are right. It will affect not just morale, but his credibility as a leader.

    But the point is really this: Zuckerberg can’t ‘cash out’ his employees. He just doesn’t have the cash. Or let’s put it the other way round. Let’s just imagine he bought out his employees. He would essentially tell his employees: “Look, I am cashing you out, this means your shares are undervalued, thanks a lot for giving them to me.”

    What you need is a market for the shares outside of the company’s control. Where people can trade their shares with other people. Oh, wait, that is called a public market…bugger…back to the drawing board.

    What it essentially shows is that companies that should actually be publicly-listed aren’t. Maybe Obama is intelligent enough to understand this problem and remove Sarbanes-Oxley. It sure didn’t prevent the credit crunch. All it does is slow everybody else down.

  • A very good rule of thumb from Dotcom experience – if the CEO is taking his/her money before you, run for the hills!

  • A very good rule of thumb from Dotcom experience – if the CEO is taking his/her money before you, run for the hills!