NEW YORK (
, but investors itching for a chance to hitch their wagon to Mark Zuckerberg's star should give the company's
a close read.
Because rather than getting a real stake in the social networking giant, it looks like purchasing the stock will at best be the equivalent of being a peasant in
This is the result of the company's decision to opt for a dual class structure for its stock, a practice that's not very prevalent on Wall Street these days. Facebook is selling Class A stock in its IPO, but the real power (and value) will be retained by holders of the Class B shares.
All S-1 filings contain plenty of caveats about how poorly the company or its stock could do in the aftermarket if certain events do or don't come to pass. Facebook, though, is opting to tell potential investors that buying its stock will result in "substantial and immediate dilution" from the undisclosed pro forma tangible book value of the shares as of year-end.
"This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock," the filing read. "You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans, upon vesting of RSUs, if we issue restricted stock to our employees under our equity incentive plans, or if we otherwise issue additional shares of our common stock."
Ouch. So not only are you being diluted right away, there's plenty of opportunities to be diluted down the line as well. Also, remember, the shares will likely be priced at some multiple of tangible book value.
The Class B shares will carry 10 votes per share, while Class A ones will have only one. The filing is short on specifics in parts (number of shares to be sold and at what price) but it does estimate Class B shareholders have 70% of the voting power prior to the offering and warned that: "This concentrated control will limit your ability to influence corporate matters for the foreseeable future."
So much for getting a voice at the table along with your stock purchase. Maybe the board will have room for some independent directors charged with looking out for the little guy? Nope. Facebook is opting to go public as a "controlled company," which essentially means there's no room for outsiders.
"In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and has chosen to have the full board of directors be directly responsible for nominating members of our board, and in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee," the filing said. "Our status as a controlled company could cause our Class A common stock to look less attractive to certain investors or otherwise harm our trading price."
As if it wasn't clear by now who's really running the show (and reaping the gains of this offering), the filing later spells out just how much power its CEO and founder will wield through his control of the majority of voting rights.
"Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets," the filing read. "In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors."
According to the prospectus, Zuckerberg will own 36.1% of the Class A stock and 57.1% of the Class B stock.
So to recap, Facebook is saying that the Class A shares that will eventually be available through its listing on an as-yet-undetermined exchange will be diluted immediately upon purchase, be subject to further dilution in the future, and offer almost no avenue for an individual shareholder to influence the company's strategic direction.
That's not even getting into the financials. The company is profitable but margins came down in 2011 as expenses more than doubled.
It all adds up to an offering that's pretty difficult to like. In a letter included with the filing, Zuckerberg showed his idealistic side, saying Facebook wasn't originally founded to be a company, it was more of a "social mission" to connect the world. He also argued rather unconvincingly that the IPO really isn't about him at all.
"We're going public for our employees and our investors. We made a commitment to them when we gave them equity that we'd work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment," the letter stated. "As we become a public company, we're making a similar commitment to our new investors and we will work just as hard to fulfill it."
Unfortunately, many of the provisions inherent in the structure of this deal would seem to fly in the face of that "similar" commitment, and new investors will just have to trust Zuckerberg's vision will remain revolutionary enough to trickle some appreciation all the way down to them at the bottom of the capital structure.
With 11% of its revenue coming from the aforementioned
game, made by
, there seems to be plenty of work to do on that front. It's tough to imagine digital cows and chickens as the foundation of long-lasting business model.
Ironically, Facebook opted to put a cute little collage in the S-1 filing that shows what are presumably employees holding up signs saying thanks in various languages. The pictures surround these words: "To the millions of you who made this possible: Thank you."
That's nice as far as it goes, but the reality is that Facebook doesn't think enough of the millions that facilitated its money grab by embracing the site to give them the chance to own a real piece of the company they helped create.
Written by Michael Baron in New York.
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