RICH PICKINGS: Four challenges for Facebook's new millionaires
The public float of social network sensation Facebook has produced around 1000 new millionaires. The challenge for them now is to make that money last.
And by everyone, we don’t just mean Mark Zuckerberg and the gang of high-flying company founders and investors who now own stakes in a public company worth billions of dollars.
The company’s 3500 employees are sitting on about $10 billion of the equity. It has been estimated that somewhere around 1000 of those will become millionaires (on paper at least) after their previous holdings – which were in something called restricted stock units – converted to actual shares as a result of the IPO.
While Mark Zuckerberg will be the biggest winner from the float with a stake worth around $19 billion, his use of shares to lure employees has ensured everyone can share in the hype machine that Facebook has become.
In the early days, everyone from coders to the graffiti artist who decorated Facebook’s first office were paid in some form of stock, so tight had been cash.
But even when the company was established and primed for an IPO, stock remained a key remuneration weapon.
According to a story from CNN last week, an average package for a software engineer joining the company in late 2009 would have included around 10,000 RSUs. A year later, Facebook did a five-for-one share split, so the engineer would have held 50,000 shares. Based on the IPO price of $38, that stake would now be worth something like $1.8 million.
It should be party time, but it’s not that simple. As the old saying goes, more money equals more problems.
Here are four key challenges that Facebook’s millionaire army faces.
One problem with getting big chunks of money is that the tax man always wants his take, too. So it was no surprise that Facebook founder Eduardo Saverin decided to renounce his American citizenship, apparently to reduce his exposure to the US tax regulator, the IRS. But as several reports have mentioned, Saverin’s decision will only reduce his future tax bills – he won’t be able to dodge the massive bill heading his way after the float.
Because Facebook shareholdings are held in restricted stock units, they attract big tax bills. The IRS treats RSUs as income when they vest, meaning Saverin – and every employee stock holder – will need to pay as much as 45 per cent tax on the entire value of their stock at IPO time. The tax take on the $10 billion equity held by Facebook’s employees could be as high as $4 billion. Ouch.
It’s worth remembering that the majority of Facebook employees coming into money are still young, so it will be essential that they manage their money well and make it last. And that means getting a good wealth adviser.
According to reports, the biggest winners from the float – including Zuckerberg, investor Sean Parker and Facebook’s chief operating officer Sheryl Sandberg – are clients of a top-flight wealth management firm called Iconiq Capital, run by three former Goldman Sachs employees, Divesh Makan, Chad Boeding and Michael Anders.
If you’re not a billionaire then you’re probably not going to be on the radar of Iconiq. But Goldman, Morgan Stanley and the usual suspects of the private banking and wealth management world will be rushing to scoop up Facebook clients.
What will the Facebook millionaire army need help with? Tax planning and investment advice are probably on top of the list, but other issues might include estate planning and structuring gifts to family, friends and others.
Facebook’s IPO is a huge milestone in the company’s life, but Zuckerberg and his executive team will no doubt be keen to reinforce with staff that it is the beginning of a new phase not the end of an old one.
That could be tough. Motivating a stock-owning engineer who has worked huge hours to take a 'start-up' to the public market could be difficult – they’ve climbed a peak and in some ways it could be all downhill if the company’s entrepreneurial culture is replaced by pressure from Wall Street for financial returns.
There won’t be an immediate exodus – Facebook’s employees can’t sell their stock before October, so they will have time to see if the company’s culture changes post float.
But Facebook should heed the words of Jamie Still, a former LinkedIn developer who left the company in February after cashing out about $US2 million in shares.
As he told the Wall Street Journal, he was ready for a new challenge in the shape of a role at a start-up called Zimride.
"There was no incentive for me to stay to collect stock. Four years is a long time to be at a company in the Valley."
Spending the loot
This is the fun bit. According to Forbes, the car of choice for your average tech-head is the electric-powered Tesla Model S, a snip at $50,000. The holiday of choice is likely to involve skiing and the best watch for a tech head is the HM4 Thunderbolt, made by a company called MB&F and retailing for around $205,000.
Aside from the baubles, property is a likely place to park some cash. According to USA Today, house prices in the Silicon Valley have risen around 10 per cent in anticipation of the Facebook float.
Philanthropic initiatives are also expected to increase as a result of the IPO
But the most common use of the cash is expected to be recycling – that is, the Facebook millionaires are likely to plough a good deal of cash back into start-up ventures.
This was highlighted last week when four investors with ties to Facebook – including Peter Thiel, who was the first investor Facebook and Adam D’Angelo, Facebook’s first chief technical officer – took part in a $50 million round of financing for Quora, a content sharing start-up.
D’Angelo, who co-founded Quora with former Facebook employee Charlie Cheever, could well provide the prototype that other cashed-up Facebook workers will follow – get rich and go on the hunt for a new start-up challenge.
That will be incredible for the Valley’s start-up community, but potentially bad news for Facebook.