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

Discussion in 'Lessons from Success/Failure' started by WheelsRCool, Oct 25, 2007.

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

  1. Yes

    20 vote(s)
    62.5%
  2. No

    12 vote(s)
    37.5%
  1. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    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?
     
  2. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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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...
     
  3. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    This would be my guess as well.

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

    -Russ H.
     
  4. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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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...
     
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  5. Rawr
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    Rawr Gold Contributor Speedway Pass

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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!
     
  6. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    I'm guessing there is some sort of exclusivity deal for advertising, but the important thing to keep in mind is that Facebook wants to be the "platform" for social networking on the web. Microsoft has dominated the platform business for nearly 30 years now, so I imagine the sharing of best practices and strategic vision is a big part of this "partnership" as well. Should be interesting to see...

    In terms of bandwidth costs, here's something to think about: do you think it costs them more to support their bandwidth needs or more to support their storage needs?

    Keep in mind redundancy, backup, MTBF of server hardware, database architectures, etc. I wouldn't be surprised if bandwidth was a smaller cost overall than storage! (though I haven't done the math myself)

    Much like Google, if they really want to thrive, they will need to become as much a hardware company as a software company in the near future...otherwise they won't be able to afford their own success (growth)... :)
     
  7. piranha526
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    piranha526 Contributor

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    You are mistaken here. The Google guys are the next Bill Gates(s).
    Microsoft is forced upon user and Facebook is a choice. Could be a here today, gone tomorrow story (with a blink of an eye).

    Microsoft wasn't and isn't going anywhere fast because you MUST use the software. This will change as time moves forward but Facebook is not a must. A new Zuckerberg could appear tomorrow and take every one of his users.

    Peopel have been trying to do this to Gates for 20 years and it still hasn't worked!
    If I was a betting man, The Google guys are the ones that will make Microsoft and Gates look like a mild success, not Facebook.
     
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  8. M-M
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    M-M New Contributor

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    OT: Russ, I wanted to send you a PM, but can't. What car is in your avatar?
     
  9. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    It's an FFM GTM.


    Since I'm more into performance than svoopy doopy lines, I'd buy an Ariel Atom before I got one of these.

    But the GTM is serious eye candy for me. I just like to look at it (I feel the same way about my classic Mercedes 280SE).

    I look at cars the same way some folks look at sculpture, or paintings.

    Comes from growing up in Detroit, I s'pose. :)

    If I did get a GTM, I'd have a professional race shop (like Roush) build it for me. So it would be a one of a kind, not a "kit car".

    OK, back to Facebook being worth . . . what? Hundreds of dollars? ;)

    -Russ H.
     
  10. WheelsRCool
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    WheelsRCool Contributor

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    Very interesting discussion guys; I have some questions from all this, regarding the discussion and also what Russ mentioned about that guy he knew whose $80 million net worth dropped off real fast:

    1) If you build up a business, then say it gets sold for shares in another company, or IPO, is it wise to just sell the shares for cash immediately?

    2) Does the term "cash" just refer to money in the bank, not susceptible to the stock market? For example, is it a solid asset?

    3) How do you learn all this financial stuff (it is confusing!). Are there some specific financial books people can recommend. I'd imagine learning basic finance and reading other books is critical.

    4) When you become wealthy, say, worth $200 million, would it be wise to have say $100 million cash in the bank, and the other $100 million invested in various areas, so that if the stock market crashes and you have $80 million tht goes down to $8 million, you still have at least $100 million in the bank for example...?

    Being wealthy sounds so confusing, I'd want to invest lots of my money but also have a good-sized chunk stored away in a safe area as a solid asset that isn't susceptible to the market's fluctuations.

    I read in one of Donald Trump's books, he said, "Always keep a good-sized chunk of cash on hand..."

    I would be nervous as hell if my net worth was based solely on my stock in one company. If I was in the position of Russ's friend, worth $80 million from stock, but waiting to cash out for a few months for tax reasons, I'd

    1) Watch the market very closely so I could cash out earlier if necessary
    2) Keep living in the cramped apartment and driving the fifteen year-old pickup truck until I actually did cash out.

    Otherwise, you could find yourself $8 million in debt and worth $8 million, thus back to square-one.

    I read a lot of hedge-fund type folks got burned badly in the tech bust since they had all their money in tech stocks, one guy went from net worth $50 million to $1 billion, then to negative $15 million after the crash. Excitement, and greed, overtook the good, conservative business/investment sense of this guy too.

    I don't know how these movie stars like Britney Spears keep track of their wealth.
     
  11. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    It depends on a lot of things. First, the terms of the deal. In some cases, stock is distributed all at once (in which case you can do anything you want with it); in other cases, stock is distributed over a period of time, or after certain business milestones are set. In my experience, it's generally distributed all at once, and you can do whatever you want with it, with the following caveat:

    Depending on the percentage ownership you have in the buying company, whether the buying company is public or not, and whether you have material knowledge of the business, you may be susceptible to specific SEC regulations that determine if/when you are allowed to sell your shares.

    Other than that, it's a personal decision between you and your accountant on whether you'd rather have the stock or the cash.

    Generally, yes. Though these types of deals could be structured in a lot of different ways, and "cash" may not necessarily mean cash. Though often times it does.

    The basic financial stuff you can learn from books. How these things work in real life generally comes from experience. I've been in the tech industry in Silicon Valley (big companies, startups, and in-between) for 10 years now, and it's just one of those things that you end up being part of -- or knowing people who are -- so often, that you eventually learn how things tend to work.

    Well, I can't speak for people *that* wealthy, but speaking for those in the $1-20M range, most of it is generally invested, and not straight cash. Investments may be as safe as t-bills or bonds, but invested nonetheless. Additionally, for a lot of people in this bracket, a decent percentage of their money is likely in real estate. The rest is in the market (diversified), with an emergency cash fund as well.

    Of course, your mileage may vary...

    Again, cash doesn't necessarily mean cash (or maybe to Donald it does). It generally just means a relatively safe, fairly liquid investment like t-bills or bonds.

    The smart ones hire a good accountant. The dumb ones hire a bankruptcy attorney.
     
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  12. dhuang
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    dhuang New Contributor

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    I've made a post on Facebook on 6speed as well. So I'll just recap here.

    What I can tell from keeping up with the Web 2.0 world, is that Microsoft invested $240M for 1.6% stake of Facebook to:

    1. Inflate the value of Facebook to a point where it will ward off major competitors. i.e. GOOG.
    2. $240M isn't a lot to secure an ad partnership till 2011. Microsoft is probably spending more than that a year on other ads. A partnership with FB will tap into the 40-50 million people "Social Graph" and give Microsoft the quality traffic they may need.
    3. Mark Zuckerberg will have a net worth of 3 Billion if Facebook is really worth $15B.

    Still, I believe Facebook won't be around in about 4 years. The valuation is ridiculous, $15B means that each account is worth around $300. Just like Friendster and Myspace, Facebook is just a passing fad.

    Mark Zuckerberg also talks like a robot. I don't. Let me take his place. :)
     
  13. WheelsRCool
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    WheelsRCool Contributor

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    JScott, thanks for the information. Just wondering, what do you do in Silicon Valley? Are you an engineer? I had been dead-set on moving out there, then decided against it, now I might though, not sure still. I do have dreams of starting a tech company at some point though :)
     
  14. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    I manage a part of Microsoft's Unified Communications business, specifically working to integrate voice technology into consumer devices.

    If you want to start a tech business, Silicon Valley is a great place, for a number of reasons:

    - Plenty of funding
    - Plenty of great engineers
    - Plenty of commercial property geared towards incubation/startup companies
    - And just an overall mindset geared towards innovation and tech incubation

    Feel free to PM me if you have further questions...
     
  15. dhuang
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    dhuang New Contributor

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    And the fact that you'll meet people such as Sergey Brin at your local Starbucks. Naturally, his Prius will be parked outside.

    I have a friend who just moved from Oregon to the Bay Area for those very reasons. I too, am trying to launch several web startups as well! :)
     
  16. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Actually, I went to college with Sergey, but now that I work less than a mile from the Google campus, I haven't seen him in nearly 3 years... :)
     
  17. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    JScott, Rep++, your input has been great in this thread.
    I read in this article that he owns 20% of the company:

     
  18. michael515
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    21st Century Bill Gates? That's a big statement there. IMO it's much too soon to compare this guy to Bill Gates. Gates is a great businessman tested over time. How long has Facebook been there?

    Don't get me wrong, FB is :thumbsup:and this guy will most likely be richer than almost any entrepreneur at his age, but again, it's too soon to pass judgment to compare him with Gates and put in in the category with elite-class entrepreneurs.
     
  19. michael515
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    michael515 Contributor

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    :iagree: Now Google IS the real deal...
     
  20. dhuang
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    dhuang New Contributor

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    Well... they both dropped out of Harvard? :iagree:

    I don't know. Personally, I think Gates is a genius. Zuckerberg, with the connectu controversy, etc. It's pretty hard to tell at this point. Gates is quite business savvy, Zuckerberg is a puppet to his investors.

    I've been a Facebook user since the beginning of time, and I do miss the exclusiveness of the network. With the open development platform, it's becoming more and more like *gasp* Myspace. :eusa_naughty:
     
  21. imirza
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    I don't think Facebook is a choice. FB is fast becoming a necessity . Social networking online is huge and will only get bigger. I think Facebook will be the winner.

    25 years ago people did not see the PC as a necessity. Today you would be foolish to think otherwise. The same goes with online social networking. A lot of people may not see it as a necessity but 10-15 years down the road will be a different story. Keep in mind a lot of the younger generation will practically grow up on FB. For them, FaceBook will be part of their lives. It will be as necessary as oxygen or drinking water. And as they grow up, they will continue using Facebook into their 40s, 50s, 60s and on. Today I think its hard for most people over 30 to understand Facebook. To fully understand it, you would have to put yourself into the shoes of an 18 year old. The average user spends 2.5 hours per day on Facebook. Thats huge.

    I don't think another Zuckerberg will come along and steal Facebook users. It was more like Zuckerberg came along and created a better alternative to Friendster and Myspace.
    A whole lot of Facebook users are ex friendster and myspace users. Also on Myspace there was no way to track real users from fake ones. Lots of people came along and created fake profiles or multiple ones. Facebook is a lot more strict on people being 'real' and having only one profile. Thats a big advantage.

    I think Zuckerberg is a great businessperson because, he was offered millions of dollars for Facebook over the last few years numerous times but, he patiently held out. He believes so much in his company that he refuses to sell it. Even now, he's only given up a tiny stake. You can tell he has passion for what he does and is not all about cashing in. That make a true businessperson/entrepreneur versus someone who only does it for the money.
     
  22. WheelsRCool
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    WheelsRCool Contributor

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    JScott, thanks for the info!

    The only thing that scares me from California is that it is rated as one of the worst states to start a business in because of ultra-high taxes, so I am considering Nevada, North Carolina, and Texas too.

    IMO healthcare, education, communications, and energy will also all be huge industries for growth over the next thirty years. Social networking probably too. I just don't want the next decades to pass me by.

    The 1980s passed and people were like, "WHEW! boy did I miss out on getting rich then," then the 1990s passed, and people were like, "HOLY CRAPPOLA! did I miss out on that wealth boom," now there's now, and I don't want to miss out on it!

    I hope to become a venture capitalist, philanthropist, and yacht racer in the future :)
     
  23. JScott
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    Google makes nearly 95% of their revenue off of advertising...based on that, it's pretty hard to argue the value of ads on the web...

    Not to mention, assuming a valuation that is a 3x multiple of revenue (which is low in this space), Facebook would only need to earn about $.70 per user per month to justify a $5B valuation. Closer to $2 per user per month to justify a $15B valuation. At a 6x revenue multiple (which is more realistic in this space), it's only $1 per user per month.

    I don't think it will be very difficult for FB to monetize their average user for $12/year if they're smart...
     
  24. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Many times the value in advertising is not the click, but the impression for branding and customer awareness. Everytime I hit MySpace, I'm inundated with ads for the latest movies and video games -- although I don't click on the ads, the exposure hits my eyeball and I am made aware of the product, like it or not.

    An example of this is a movie like SuperBad that caters to a Facebook type crowd. If you want to announce and promote this movie pre-release to a younger set, advertising at Facebook would pay off and would be worth thousands. The impressions, branding, and awareness drives the ad model, not necessarily the clicks.
     
  25. Rawr
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    Rawr Gold Contributor Speedway Pass

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    How was Sergey in college?

    Facebook is huge, but I can and have lived without it. I can't live without Windows.
     

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