Hours before Facebook finally kickstart this entire IPO process in New York, many of you are wondering what the hell is the big fuss? Unless you happen to be into technology, or just happen to work in either the financials or technology industry, you would have simply just heard it was going to go and offer its shares to the market.
Well, here’s a bit of a summary on why, and how will it change Facebook.
Money, Money, Money
Facebook’s main motivation is simply to get more money – and looking at the recent news on it, it could raise a lot of money with a price of $38 per share. While it currently relies on advertising for money, selling shares also gives some sort of additional revenue stream to spend on new acquisitions – which is pretty handy if it does want to improve its mobile strategy – and to work on new products to offer.
However, it is also give some sort of return to companies who had invested before the IPO. In fact, it is reported that 60 percent of all shares in the IPO will be existing shareholders selling it to the market – and there are some, like Goldman Sachs, selling at least half of its current holding of stock. But venture capital firms and banks are not the only people who own shares, employees within the company own some shares too. And once 11am hits, when Facebook starts selling, many will be instantly rich.
But they too will be able to sell their own shares in the stock market – and that poses a problem. How many employees are going to divest some or all of their shares? If they do it really quickly, then the shares will soon lose their value and that could be damaging to both Facebook and its new shareholders.
Facebook in the past has been really generous with its employees. In a Reuters’ report, Engineers with 15 years experience could buy 65,000 shares for $6 per share in 2009. A stock split in 2010 saw that increase up to 325,000 shares. But that has changed, with the company being “stringer in handing out equity to noncore employees”.
So, if we see the stock fall – don’t be surprised, it’s those who are selling their shares to get money. And with Europe’s crisis worsening, many could be pulling out within weeks.
Mixed Fortunes for Others
Facebook hasn’t been the only startup that has entered the stock exchange – though it is the biggest. Companies such as Yelp, Groupon, Pandora, LinkedIn and Zynga (which contributed to 15 percent of its revenue) are also in the game, but their fortunes are mixed.
LinkedIn, which launched at $45 per share, is currently trading at $100+ mark, though it has steadily lost its hype. Pandora, Groupon and Zynga, however, went up and fizzled back down. Groupon, which launched at $20 per share, is nearly half of that. Zynga ($10 at launch) is trading in single digits and Pandora ($14) is just above the $10 mark.
Facebook basically needs to maintain its hype – which it can do with such ease. It has over 900 million people on the site and has pretty much taken the throne as the king of social networking. But, it now can’t rely on the hype on the people, it has have hype within Wall Street.
By the Numbers
We could do it all in text format, but we’ve decided to source an infographic from KISSmetrics.
A Bit More Transparent
Going public means that Facebook needs to be more transparent in its earnings, meaning that they have to – like many other companies – report quarterly on how much they make, how much they spend and other stuff about the company. It basically has to do what Google, Microsoft, Apple and other companies have to do now.
But why haven’t they done this before? Financial laws in the United States allows a company to not disclose its earnings to the public if it has less than 500 shareholders. This has pretty much allowed Twitter and many other startups to basically not show how they are making money – though, the tech media is pretty good in getting a bit of information about their cash raising with venture capital firms.
However, there are loopholes within that – and were used by Facebook to make sure it didn’t have to go public (until now). This was evident in Goldman Sachs’ investment into Facebook back in 2011, where the bank created a “special purpose vehicle” to allow its clients to buy shares of Facebook without breaking the 500 shareholders rule.
Will it affect me?
For most, it will most likely mean that you could see more advertising, especially on mobile platforms. Currently, Facebook’s advertising model is on display advertising on the web – that sidebar on the Facebook News Feed. Mobile Advertising is different – mainly because of the screen size of mobile devices.
Theoretically, if Facebook has some sort of decision that a vast majority of users do not like – let’s say that they decided to start forcing all users to pay a monthly subscription fee, laced with advertising, and that you couldn’t do even the most basic features without being a subscriber. Well, Mark Zuckerberg could basically suggest the idea and it will get through since he holds more than 50% of voting power within the company.
But as well, he could also veto that idea if it was suggested by anyone else.