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HOT TOPIC Twenty-Three Year-Old Facebook Founder worth $5 billion

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In your opinion, will Facebook.com be around in 5 years?

  • Yes

    Votes: 22 64.7%
  • No

    Votes: 12 35.3%

  • Total voters
    34

WheelsRCool

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Aug 12, 2007
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WHEW!!!! Talk about some cash!!

http://news.aol.com/newsbloggers/2007/10/25/is-mark-zuckerberg-the-new-bill-gates/?ncid=NWS00010000000001

And take note of the part where Yahoo offered him $1 billion, which he turned down (!?!?!?!?!?!?!?!?!) to start a bidding war between Google and Microsoft, resulting in him now being worth $5 billion, on paper anyhow.

I sure hope he is smart enough to diversify his assets, otherwise a market downturn could erase all that wealth (one dude worth $10 billion during the dot-com ear went down to $100 million net worth during the bust).
 

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CRBFL

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Oct 9, 2007
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Yeah a read an article in the paper about it this morning. I was going to post it here, but I figured someone already had. That's a lot of money. It'll be interesting to see how this plays out.
 

Peter2

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He is never going to be able to cash out anything close to that number.
 

Peter2

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How so? Do you mean legally?
I'm pretty sure he is not even a millionaire. That valuation is just stupid fiction and will never translate in to real life. My guess is that they could get $3 billion for the company today, and that is waaaaaaaaaay to high for a company with that kind of revenue and profit.

Mark would get about $900 million of that. Not a bad amount, but far from $5 billion, however it could go the way of Friendster and be worth a fraction of these numbers very quickly.
 
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WheelsRCool

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$900 million, the poor guy.... :D

What do you mean you don't think he is a millionaire though...?
 

Peter2

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$900 million, the poor guy.... :D

What do you mean you don't think he is a millionaire though...?
He is a millionaire on paper, but I don't think he has cashed out anything, so it's not like he could buy a $30 million home today.
 

CRBFL

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Social networking sites are unpredictable, so much of it is trend based. I think he is rather foolish for not taking the billion and running. But like I said it'll be interesting to see how it plays out.
 

imirza

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Jul 29, 2007
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Facebook is the real deal. Trust me. Advertisers can reach out to 100s of millions of people via this social networking website. It has a wider reach than any other medium. Think how much advertisers will pay for spots on FB. Zuckerberg is going to keep his billions and more. He's the 21st century Bill Gates. This may sound crazy but, I believe he will be richer than Gates in a few years.

People today spend more time online than watching TV. The internet is bigger than TV. FB is the internets top dog. Worth every penny. You have millions of people who sign into Facebook every single day and spend hours. Imagine how much advertisers will pay to reach these people ? Imagine how many goods and services you can sell via FB. Facebook has it own economy with people being able to buy gifts to post on their friends profile pages. Its crazy. U guys need to join FB and see for yourself.

Peter2, I recommend you sign up on FB and you will see what I mean.
 

JScott

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$900 million, the poor guy.... :D

What do you mean you don't think he is a millionaire though...?
The point is, Microsoft paid $240M for a 1.6% stake in the company, giving the company an investment valuation of about $15B.

But, this is only an investment valuation, meaning that if another investor were to be interested in a piece of the company, they would pay based on the company being worth $15B.

Other than that, the $15B has no significant meaning, and none of the $240M (let alone of that meaningless $15B amount) makes it's way into the shareholder's pockets.

In fact, the only way that the shareholders (including the founders) make any money is if there is a liquidity event -- a public offering, a private buy-out, a merger, etc.

So, unless the shareholders had money prior to this event, nothing has changed in terms of their financial circumstances...
 

Yankees338

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I agree with you imirza. Also, advertising can be made even more valuable because of the information provided by users such as interests and geographical locations. I've been a user for over a year. In that time, I've seen the evolution from the simple, old-school style Facebook to the new Facebook. The new Facebook offers many new features including the ability to create applications which offer the opportunity for revenue right there. Additionally, advertisements have become increasingly more common. During this time, membership has continued to increase and I've seen no signs of things slowing down. It is very well run and organized; they've done nothing to shun people away.
 

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Peter2

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Advertisers can reach out to 100s of millions of people via this social networking website.Think how much advertisers will pay for spots on FB. Imagine how much advertisers will pay to reach these people ?
Advertisers are not paying very much to advertise on FB, as evidenced by the very low revenue.

I have been online for 12 years and have seen plenty of HUGE things tank completely. There will soon be something else that is bigger and better than FB.
 

MJ DeMarco

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He is a millionaire on paper, but I don't think he has cashed out anything, so it's not like he could buy a $30 million home today.
He did cash out and experienced a liquidity event -- 1.6% of his shares (which are privately owned) -- this was his liquidity event, his sale - $240M. As the article states,

"Rapidly rising Internet star Facebook has sold a 1.6 percent stake to Microsoft Corp. for $240 million, spurning a competing offer from online search leader Google."

Microsoft has to pay $240M and as far as I know, it doesn't go to Facebook, it goes to the founder(s) who sold shares - he is liquid that amount at least until the IRS hits him for the capital gains on it.

In fact, the only way that the shareholders (including the founders) make any money is if there is a liquidity event -- a public offering, a private buy-out, a merger, etc.
This acquisition was a private buy-out, a partial liquidity event of 1.6%. If you sell X% of your company, you receive a "liquidity event" as the proceeds goes to the founders. This wasn't a $240 million "investment" or "funding" - it was a sale of privately held shares.

That makes Zuckerberg worth 240M liquid and 15B illiquid.
 

Peter2

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That makes Zuckerberg worth 240M liquid and 15B illiquid.
Not even close. He does not own 100% of the company.

Either way, these type of sites are no different than night clubs. They are only popular for a short time until the next best thing is coming along.
 

MJ DeMarco

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Not even close. He does not own 100% of the company.

Either way, these type of sites are no different than night clubs. They are only popular for a short time until the next best thing is coming along.
$240,000,000 X (His ownership stake) = His liquid.

Im not privy to his ownership stake, but I'm sure it was more than 50%.

$120M isn't exactly pocketchange.

Point I'm making is: A 1.6% sale was a liquidity event that would be substantial to anyone, especially a kid in his early 20's.

Microsoft doesn't pay $240 million and that money goes no where, or is put into some special account - it goes to whomever sold the shares. As far as I know, Zuckerberg was the primary shareholder.
 

JScott

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This acquisition was a private buy-out, a partial liquidity event of 1.6%. If you sell X% of your company, you receive a "liquidity event" as the proceeds goes to the founders. This wasn't a $240 million "investment" or "funding" - it was a sale of privately held shares.

That makes Zuckerberg worth 240M liquid and 15B illiquid.

I think you're wrong on this one MJ...

According to Microsoft during today's conference call, the investment was in an "equity stake in Facebook's next round of financing at a $15 billion valuation":

http://seekingalpha.com/article/51455-microsoft-facebook-partnership-announcement-call?source=yahoo

Who knows...perhaps it was Zuckerberg's shares that got sold, but there's no indication that's the case from what's been covered publicly.
 

MJ DeMarco

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I think you're wrong on this one MJ...

According to Microsoft during today's conference call, the investment was in an "equity stake in Facebook's next round of financing at a $15 billion valuation":

http://seekingalpha.com/article/51455-microsoft-facebook-partnership-announcement-call?source=yahoo

Who knows...perhaps it was Zuckerberg's shares that got sold, but there's no indication that's the case from what's been covered publicly.
Thx JScott althought I wouldn't say wrong (wrong in this scenario), but more like ill-informed! :smxB: None of the articles I read stated "equity stake" (and I looked for it) so in light of this information, the original suppositions are correct and makes this an entirely different story - then the $240M goes into company coffers instead of founder's pockets. What I was saying wasn't incorrect - just incorrect for this particular acquisition.
 

Russ H

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OK, let me start by saying that I'm a compleat idiot when it comes to net-based stuff.

I did happen to have a client whose company was bought by Nortel for 1M shares of Nortel.

This was during the great Nortel upswing. When I left for Paris and Budapest to study architecture for the opera house I was building on his property (no lie), Nortel was trading between 40 and 80 a share (I can't remember where it was).

He was holding onto the stock b/c in a few months, he'd be able to cash out at a much lower tax rate.

By the time I got back from Europe, Nortel was trading in the 20s, and just kept going south.

So I actually knew someone who was worth over $80M one year, and next to nothing the following year (when you have $80M, committing to $5-8M in debt is no big deal-- until your net worth slides down to $8M).

Great guy, BTW.

I don't think I would have handled it as well as he did. When I asked him why he rode it down, he said, "Because I was stupid. I played the markets for years, so I knew exactly what was happening. Problem was, I stopped playing by the rules I'd learned and started believing my own b*llsh*t".

As I said, quite a guy. I have no doubt he's on his way back up (this was 6 years ago).

MJ, from what I have read (very little, to be honest), here's how the math would go (somebody PLEASE tell me I'm wrong here-- PLEASE! :) ):

1. Mark Zuckerberg owns about 30 percent of the company (not sure if my sources are the same as Peter's-- prob not-- but that's the # I get).

2. From what I read, it's an Equity investment, not a cash deal. An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises (Kinda like my Nortel guy). There may be some very specific rules/regs about anyone cashing out the stock options on this for months-- or even years. Again, I'm preaching to the choir here-- most of you know WAY more about this stuff than I do (I'm a RE guy-- I deal in *dirt* ;))

3. $240M * 30% = $72M in stock options (when he is able to liquify any of that, I don't know).

$72,000,000 in stock options is still pretty slick-- but it may hinge on Facebook performing at a certain level, or the options are reduced in kind or even pulled altogether (I could not find the particulars of the deal).

Microsoft is a smart company, with lots of assets/cash. As I see it, their buy in was not a valuation of the company as a whole (which is the $15B figure you see in all silly media pieces).

Since they were already huge advertisers on Facebook, this was a sweet deal for them. I'm sure it gives them some rights to ads or access to account info-- both worth big $$ to MS.

So how did I do? Do I have a cranium-rectal insertion? Or did I get the gist of it right?

-Russ H.
 

Andrew

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Aug 8, 2007
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Here is what I think about Facebook.

First, advertising. I heard a lot about it not being a good deal. I tried it out, the traffic is high quality. Just today I was looking at one of my Google ad campaigns and noticed that what appears to be a third-party Facebook application was sending me the best converting traffic of the day. I am not over-paying for any of my advertising. This tells me that Facebook has enormous room for boosting their advertising revenue.

Facebook may very well turn out to be "the Google" of social networking web sites. A lot of search engines came before Google. Other than Yahoo, they are all history. Google got it right, at the right time (post-dot com bust.) Facebook is doing a lot of things right and users are happy. The same can not be said of either Friendster or Myspace.

If Facebook does stick, that $15 billion isn't a crazy number by any stretch.
 
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FT1

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He owns 1/3, which means he just pocketed $80,000,000.00 cash, and has a net worth of $5 Billion, at age 23. If Facebook's value dropped by 2/3, he'd still be a billionaire. That dude is sitting pretty right now and i'm pretty sure he's not worrying about his billions being on paper.
 

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JScott

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He owns 1/3, which means he just pocketed $80,000,000.00 cash, and has a net worth of $5 Billion, at age 23. If Facebook's value dropped by 2/3, he'd still be a billionaire. That dude is sitting pretty right now and i'm pretty sure he's not worrying about his billions being on paper.
First, if you take a look at some of the posts above, you'll see that he likely hasn't pocketed anything...the infusion of cash was into the company, not any existing shareholders (at least based on the public information released).

Second, the $15B valuation is meaningless. If I were to sell .00000001% of my company to you for $1000, that would give my company a $100B valuation. And by the same reasoning you use above, I'd be worth $50B (since I own 50% of my company). But, since there is little reason to believe that I could sell the other 99.99999999% of my company for the same amount, it really is meaningless.

Likewise, Facebook most probably couldn't find another company(s) to purchase the other $14.76B of it's stock anytime soon (do you think they could?).

By the way, it's also important to note that when you use the phrase, "on paper," it implies an unrealized gain. In the case of an investment valuation without any true financial backing (like in this case where we have a $15B valuation without $15B actually existing), there is no realized or unrealized gain.

So, even saying he's a billionaire "on paper" would be incorrect.

At best, since he controls about 1/3 of the $240M investment, he has $80M "on paper."
 

FT1

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Likewise, Facebook most probably couldn't find another company(s) to purchase the other $14.76B of it's stock anytime soon (do you think they could?).

By the way, it's also important to note that when you use the phrase, "on paper," it implies an unrealized gain. In the case of an investment valuation without any true financial backing (like in this case where we have a $15B valuation without $15B actually existing), there is no realized or unrealized gain.

So, even saying he's a billionaire "on paper" would be incorrect.

At best, since he controls about 1/3 of the $240M investment, he has $80M "on paper."
First, the article said: "The deal makes geeky twenty-three-year-old Mark Zuckerberg, at least on paper, worth $5 billion."

If the valuation is meaningless, feel free to take that up with the author of the article. Furthermore, I never said they could sell the company for $15 Billion. My comments were based solely on the article.
 

Russ H

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FT1-

You need to hear what some of us are saying.

Please.

A simple analysis of the news will tell you which account is more accurate, and which is overblown hyperbole.

YOU are the one who is responsible for believing what you read. Please don't blame it on the article.

-Russ H.
 

Russ H

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JScott-

Thanks for your example.

I'm still waiting for any of our resident internet gazillionaires (those who have actually sold web property) to tell me my assessment was incorrect.

All quiet so far . . .

-Russ H.
 

MJ DeMarco

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JScott-

Thanks for your example.

I'm still waiting for any of our resident internet gazillionaires (those who have actually sold web property) to tell me my assessment was incorrect.

All quiet so far . . .

-Russ H.
From what I gather based on the other articles provided by Jsctt, the $240M goes into the company's coffers as an investment to fund growth. Zuckerberg doesn't see any of it. I don't think stock options have anything to do with it, but I could be wrong.

What I am curious though is this ... the tax treatment?

Assuming Zuckerbergs portion was $80M, does that increase his basis? Is that $80M taxable even though it stays with the company and is more liken to a capital contribution?

If you were Zuckerburgs CPA, how do you handle this transaction?
 

JScott

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Have absolutely no idea of the details (and there are a million ways this *could* be structured), but if I had to guess, I would guess that the 1.6% of the stock came from equity that has been created but not distributed (float shares that have yet to be allocated).

This would be the same pool of stock that is used to give employees options and other equity needs of the company.

And if that's the case, the equity is part of the company, which is independent of the owners' share of the equity (i.e., no tax implication on the owners, but definitely on the company).

Again, just a guess...
 

Russ H

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if the equity is part of the company, which is independent of the owners' share of the equity (i.e., no tax implication on the owners, but definitely on the company).
This would be my guess as well.

And to my best knowledge, companies are taxed on earnings, not estimated worth.

-Russ H.
 

JScott

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Just to clarify for anyone else who may still be confused...

Starting from the beginning, and speculating in some cases since there's no way of knowing if this deal may have deviated from standard operating procedures (it may have):

- The founders of Facebook create a corporate entity (a "C" Corporation) to hold their asset (the business)

- The corporation issues shares of stock (this is done on paper, and there are likely multiple "classes" of stock issued)

- The founders grant themselves some percentage of the Class A stock (the kind that gives voting rights, etc)

- The founders probably granted themselves somewhere between 50-80% of the company stock, with the rest going into a pool used for other equity needs (employee stock options, investment rounds, etc)

- The corporation appoints a Board of Directors, who likely have control over the major financial aspects of the company (allocating stock, granting more stock, etc)

- As the company hires employees, they give the employees stock options out of this additional pool (likely Class B shares, without voting rights, etc). Every options grant must be approved by the BOD, and the founders likely no-longer have final say over approval of equity distribution

- Microsoft comes along and wants a piece of the pie. After a lot of negotiations, they all agree that MS will buy 1.6% of the company for a total of $240M

- The Facebook BOD approves the private equity investment, and allows 1.6% of the company stock to be distributed for the $240M investment

- The company now has $240M in its bank account (or however Facebook and MS agree to deal with the cash), and MS now has 1.6% of the Facebook stock. Depending in whether MS got Class A or Class B shares (or potentially a whole different class of shares), they may or may not have voting rights, veto rights, etc

- The $240M is now subject to the same financial rules and regulations as any other money in the company, meaning it's likely that any major expenditures must go through the BOD

- This means that the founders can't just sell off their shares in return for a portion of this money, unless they either get BOD approval or its already addressed in the company by-laws

- This means that the founders are likely no more liquid than they were two days ago, and while they are potentially worth $80M "on paper," it's very possible that they could never see any of this money unless/until there is a real liquidity event

- In fact, I'm guessing that Facebook has already laid out for MS what the money will be used for and how it will be spent (there may even have been agreements signed)

- Lastly, this is not considered a liquidity event for the company (based on any definitions I'm familiar with), as it's likely the only shares purchased by MS were previously unallocated and controlled by the Facebook BOD (i.e., no-one made any money other than the company itself)

Now that I think about it, it's likely not a taxable event for the company, as investment funds aren't taxable going in...only coming out...I think...others would know the tax stuff much better than I... :)

By the way, the above is just speculation, but as I've now been part of two acquisitions by MS (including a recent one that was about 4x the size of the Facebook investment), I'm guessing it's along these lines...
 

Rawr

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Very nice write up J, makes it much easier to understand.

Correct me if I am wrong, someone must own at least 2% of the shares to be constituted as an owner - so it would be interesting to see what perks MSFT gets from this.

In one of my classes yesterday we tried to calculate how much Bandwith Myspace needs every month. It turned out that it will take about 20-30 MILLION per MONTH to keep it running. That was a surprise!
 

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