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The Facebook secondary market

It’s not a secret that there was an active secondary market for Facebook common shares.

And it looks like there continues to be significant interest in the common stock. VentureBeat reports that Facebook employees are selling $150M worth of common shares to a combination of new and existing investors.

Few thoughts on the matter:

1 –  The news here is the $10/share number and the total amount of the deal. The valuation isn’t available. I’m guessing this deal could represent as much as 3-4% of the company in aggregate or as low as 1%. And that is for common stock.

2 –  As many of you know when you join a startup and receive options they are typically priced at 10-25%  of the preferred price per share. (I won’t go into the logic of that in this post). But needless to say that low price per share is a big incentive to employees. This is a great way for companies to recruit without burning near term cash. Plus, it ties together employee and company long term goals. 

However, if there is an active secondary market for employee shares the presumably higher valuation for those shares will significantly impact common options for future grants. The company’s board can’t approve an option for a new employee at $1.00/share if the outside world is pricing those common shares at $15/share. 

3 –  We need incentives for investors and employees to gain liquidity. I’m all for that as you can imagine. This secondary tells me that a FB IPO isn’t close at hand. So this active secondary market has some nice attributes for buyer & seller. I could be wrong but it doesn’t appear that any existing investor is selling any shares at this price. 

4 – Employees receive the proceeds not the company balance sheet. Right now Facebook isn’t cash flow positive.  I’m an outsider I don’t know how close they are to CFBE. Maybe they are quite close. It’s a key question and impacts all shareholders.

As a general rule, if a company needs cash then I would limit these secondary deals if possible. If the company is printing cash then I would have less concerns.