There have been many stories written about the Goldman
Sachs investment in Facebook. On one hand, there is the chatter about the
investment placing the valuation at $50 billion. On the other, there hand there
is the talk about how this affects a possible IPO by Facebook.
There are two main reasons for an public offering of
stock: liquidity and capital.
If you need capital, a public offering of common stock is
merely one of many ways to raise capital. The benefit of this option is that
the capital does not need to be repaid. A bank loan, a bond offering, venture
capital or private capital will generally need to be repaid at some point. Each
source of capital has a price and repayment terms that you need to align with
the company's needs and business plan.
It sounds like Facebook has ready access to capital in
many forms. So an initial public offering may not be the best or the cheapest
source of capital.
The liquidity of public stock is useful for rewarding
employees and cashing out earlier sources of capital. Employee stock is great,
but in a private company is very illiquid. It does you very little good to be a
millionaire on paper if you can't access the wealth. Early round investors,
like venture capital funds, want to be cashed out at some point. They need to
return capital to their investors. It sounds like some of the private trading
of Facebook stock is being done by employees and early investors.
The third reason for a public offering stock was the
reason faced by Google. Once you have more than 499 investors, you need to
start making reports public. So you may as well get the benefits of liquidity
in the stock.
The cash from a public offering does not need to repaid,
but there are costs to the capital. That means complying with Sarbanes-Oxley.
The CEO and CFO has potential criminal liability for false reporting. The board
of directors will now need to include independent directors. The company will
be subject to shareholder lawsuits. There are lots of costs.
To me it sounds like Facebook and Goldman have come up
with an ingenious solution to the address the capital needs for Facebook and to
avoid a public offering of stock. I assume the Goldman investment and its new
fund will be used to provide some capital for expansion and growth. I also
suspect that some of it will be used to cash out early investors, purchase
employee stock, and repurchase stock that has been privately traded. Gobbling
up the stock would be an opportunity to keep the number of investors well below
the 499 trigger point. Early investors may take their money and run.
Assuming Goldman can provide $2 billion and charge its
investors a 4% fee for investing, they have already made $80 million on their
$450 million investment.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.