Facebook is going to raise $5B. However, all the aspiring investors
will pay a steep excess to the initial share price. So people would be
MORE THAN HAPPY to pay twice the initial share price. So why can't
Facebook profit on this?
1. Instead of issuing $50/shares and 100,000,000 ($5B in market cap),
why can't they issue only 50,000,000 @ $100/shares, and thus sell LESS
OF THE COMPANY FOR the same amount of money? This would benefit Mark
Zuckerberg twice as much.
If you were selling 50% of your fantastically successful business.
Wouldn't you sell it at a steep premium? Say 10X annual revenues,
since your goal is to maximize earnings.
An auctioneer or a seller who doesn't sell a business for what it's
worth has failed, so I don't see why the I-Bankers would sell it so
cheaply knowing that this stock will double in price in 10 days.
The only downside is to investors who purchase the richly-priced
shares. Their ROR would be 10% over 10 years, and not 17.9% ROR.
I appreciate your time, once again, sir, You've always been very
knowledgeable and a wealth of info to me. OK, Rod Speed, this is my
You own a gas station called "Speedy's Gas Station, LLC" (SGS). The
real estate, assets, and everything earns $100,000 NET every year
without fail. Currently, the discount rate for something that yields a
consistent earning should be about 5%, let's say. This discount rate
is less than for a stock and more for a governmental security. So this
SGS is worth $2,000,000.
One day, you decide to sell only 10% of this company. Now, you and I
know that this 10% stake in the company is worth ~$200,000 +/- $20,000
----> $180K-$220K. That's all. But people are hyper-exuberant. They
are ready to pay $400,000K for this stake in SGS. Now, you're an
honest and generous man. You're content with $200,000.
So when you decide to sell 10% for your $200,000, a whole bunch of
different investors pay exactly this much total. In a few days, this
shares are appraised at $400,000.
But couldn't you have sold your 10% stake at your company for $400,000
to begin with? Let the people pay more if they choose to.
Operations like google and facebook are nothing like a gas station.
That isnt the basis for the facebook IPO, their earnings.
Its essentially a bet on what the stock price will do, just like it was with
While that works for a gas station, it doesnt for an
operation like google and facebook at the IPO stage.
They arent with gas stations.
No they arent.
That doesnt happen with a gas station.
And that is precisely what is happening with the facebook IPO.
It turned out that with the google IPO, they could have flogged the stock
for a hell of a lot more than they did flog it for, but its always very difficult
to decide what you can ask IPO price wise and not see the price of the
stock sag when its first listed and so punish those who chose to buy the
stock in the IPO, particularly with something like google and facebook
which are both outstandingly more successful in the market than the
alternatives and when there is nothing much to compare them with IPO wise.
The prospects for google were very different than facebook and its
much easier for a comptitor to move the users of google away to some
other operation if it does a better job than it is with something like facebook
or ebay which see massive inertia with the current users for various reasons.
Oh Lord, where do I begin...
Look, it's nice of you to try to help the guys running the
Facebook IPO, but I guarantee you they don't need your help.
Although they're a little rusty since the dot-com bust over
10 years ago, when they took hundreds of companies public that
failed just months later, they still remember all the tricks
to extract as much money from American sucke--er, investors
Number one, they ARE trying to sell as little of the
company as possible for as much money as possible. They
do this with good old-fashioned promotion and PR, so
the sucke--er, investors don't bother to really look
at what they are actually buying and at what cost.
I remember working for a company that went public and
getting regular e-mail updates from the company president
as he worked his way around the country on a classic
pre-IPO "road-show". The investment bankers who underwrote
the IPO set these things up with big-money sucke--er investors
to dazzle them with giant growth prospects of their
potential investment in the IPO. Note that Facebook
is using the media to do free advertising for their
IPO; every TV news show is covering it like it was
actually news or sumpin. That's the underwriters
feeding the news outlets "press releases" that are
little more than pre-canned "news" stories that
the newspapers and TV networks can air with little
or no actual work on their part to create.
You seem to be confused about so much, but nothing
more so than talking about Mark Zuckerberg as if
he actually controlled this IPO or even the company.
There are two groups of people controlling this,
the venture capitalists, typically for a "Silicon
Valley" company the guys who have their offices
on El Camino Real around Page Mill Road in Palo
Alto, and the investment banker underwriters
of the IPO. The goal of all the venture capitalists
is to gain controlling interest of start-ups by making
relatively large investments in "promising" companies
in their early days. They, more than Zuckerberg,
"own" the company and this is THEIR big pay-day
(not that he won't profit tremendously), THEY'RE
the ones selling out a good portion of their stake in
the company. The IPO underwriters stand to rake in
a nice cut of the action for doing nothing more
than getting the sucke--er, investors in the
tent to be fleeced.
Back in the "good old days" for these guys, they
would sell less than 5% of the company, and the
sucke..er, investors would be so frenzied to get
in on the "action" they'd bid up the IPO price
to insane levels, like 100x sales or more, for
companies that hardly had any sales and even
less profits. The LESS of the company they
sold, the HIGHER price they could get for it,
because it became a rare commodity in that
oldest game of supply and demand. They even
had a name for it, they called it the "keyhole
effect", because they didn't open the door
for the public to invest in the company, they
just let them have whatever small part of the
company they could "suck out the keyhole" (this
is an actual quote from a venture capitalist).
William Ernest Reid (man, that Facebook must
be sumpin, "Dumb Mikey Lubow" Tenenbaum is
Thank you Bill Reid. I'm going to comment below to your post.
This bit is confusing here above as well. You see, Mark Zuckerberg is
already worth $20B+. How do you figure that he's going to get any
richer? At the most, Z will be richer by 28%*$5B = $1.4B. Where am I
getting these numbers? Z owns 28% of Facebook, and they will raise
$5B. Therefore, he will make $1.4B from this transaction. But he's
already worth more than $20B. So I'm not understanding what you're
I believe that they were fantastically wealthy BEFORE and not much
richer AFTER the IPO. You believe that they weren't that rich BEFORE
the IPO, but only rich AFTER the IPO.
Finally, with this IPO, how was it determined what percentage of
Facebook is worth $5B?
Well if their goal is to fleece investors and maximize profits, than
they'd better off sell *1%* for $5B and not 10% for $5B. Think about
it. Suppose I were an investor of a company. I'd rather sell 1% of my
holding for $100,000 than sell 10% of my holding for $100,000.
Nah, I heard $17billion, but it's all imaginary money in
Because he will have a much bigger secondary market
to sell his shares and potentially turn his imaginary
money into REAL money; I heard the IPO will take him
from $17billion to $28billion, and that's the difference
between the number of people (companies) who have $17billion
to buy him out and the entire American (and global)
investing public, who actually have much more in aggregate
Whaaa? This looks like "ShortPee/Tenenbaum" math...
I don't know, but I bet it doesn't smell good...
No, the company will get the proceeds of the IPO,
and the venture capitalists. In theory, he gets nothing
except they might let him continue to work there and
draw a salary/bonuses a while longer...
This is like saying that you were worth $1million because
your house was worth $1million...BEFORE the real-estate
crash. Hell, for that matter, I said that I have worked
for companies that had IPOs, many people in those companies
were worth $millions in stock options, but then managed
to wind up getting nothing and actually owing the Federal
government hundreds of $thousands of dollars in unpaid
taxes because of the tech crash and their stupid greed...
Just because you're "worth" something today doesn't
mean you'll ever get the money. Get it?
Do you think that's because it's simple, logical, and
based on reality?
No, that's not what I said, but that is how the media
is reporting it in their reprints of Facebook press releases.
They also have "reported" that a grafitti artist who painted
a mural at Facebook headquarters will make $200million on
the IPO because he was paid in Facebook stock. Of course,
only the terminally stupid would believe such a thing, but
there it is, try crunching THAT number...
What percentage? It's whatever percentage of the company
they are selling in the IPO. Essentially the IPO process
tries to find what sucke--er, investors are willing to pay
for the company. Then they "price" the offering at that
price for that percentage of the company. I think they
are selling about 10% of the company, but I'm not sure
because I don't really care...
Well, sure, and I could sell 10% of my navel lint for $1trillion
if only somebody would buy it for that price. They are now in
the process of finding out how MUCH they can get for 10% of the
company (or whatever). If they could get $50billion they'd take
that, but there aren't THAT many sucke--er, investors...
I don't have to think about it, I know exactly what it
is and how it works. You obviously don't, and it seems
like a lot of your misinformation comes directly from
those very same press releases they use to bamboozle so
many sucke--er, investors...
"bob wald" would like to sell his GCOG stock for $100trillion
a share but that ain't gonna happen and if you don't understand
simple supply and demand (and fear and greed) which drive the
financial markets it's a lost cause to understand IPOs where
the very self-same forces are manipulated to bring in as
much money as POSSIBLE to the start-up investors in a company
(POSSIBLE, see that word? POSSIBLE, see it again, let it sink
in, don't forget it)...
William Ernest Reid (I'm PO'd I didn't paint graffiti all
Hello once again sir.
I'm just now figuring out something regarding that graffiti artist. My
working guess is this: He was given call options on Facebook stock. So
perhaps his $200M is the nominal value of these call options. What's
more important is the strike price of them. If the strike price were
$50, then he'd have the option to by $200M worth of stocks for $200M,
and this is a net wash (no profit will be made and no money will be
I appreciate your time to educate me but I'm not that bright.
That wouldn't be my "working guess", I already said my "working
guess" is the whole story is bushwa.
However, if there is any truth to it, I took it to mean
they actually just directly gave him "stock", NOT stock
options. I myself have just been given "stock" in companies
I've worked for before they "went public" (and in some cases
they never did so the "stock" really wasn't worth much
but I did sell it back to them for some money).
In other cases I was given what are called "Incentive
Stock Options" (ISO) which is probably what you are thinking
of. These are NOT the same as the traded call/put options,
they are the subject of special laws and a contract between
you and the company regarding their vesting and exercise
and are not publically traded.
But who knows? I do know (because I've seen) secretaries
become multi-$millionaires after a hot IPO when they exercised
the ISO options they got, so why not a graffiti artist?
Well, yeah, that's how it works, when you exercise your ISO
options you have to pony up the dough to pay the strike price.
Companies I've worked for had special arrangements with
brokers who would front the money for a nominal fee, exercise
the options and get the stock, and then turn around and sell
however much stock it took to cover the cost of the options
and/or how much money the employee wanted to take out of the
exercise that day, and leave the rest of the stock in a brand
spanking-new brokerage account. So the employee just had
to walk down to personnel/accounting and fill out a form
stating they wanted to exercise a certain number of options
and then they got a new brokerage account with money and/or
stock in it. (This irritated me because I already had a
brokerage account and plenty of money in my checking account
for my option exercise, so I had to fight with them to just
exercise my options and have the stock transferred to my
broker where I could sell it.)
And yeah, if the strike (exercise) price is at or below
the current stock price it doesn't make any sense to
exercise the options (duh). I've worked for companies
where my ISO exercise price (which is generally set at the
price around the date of your hire) was like $10/share
and three months later the stock was selling for like $3
so needless to say (unless you're a Tenenbaum) that ISO
grant was worthless (at another company, I was profitable
on my ISO grant, but the great majority of the employees
weren't, because they were hired after me and the stock
went way down after having gone up dramatically in the
few months after I was hired, so management kept lowering
the strike price of everybody's grants who weren't profitable,
thus completely eliminating the "incentive" part of
the ISO grants).
Oh, don't put yourself down, you're posting in misc.invest.stocks,
so you're about 100 times smarter than the average poster here,
and probably 40 years younger to boot...
William Ernest Reid (if you don't believe me, look up "Dumb
Mikey Lubow" Tenenbaum's idiotic post on option pricing from
Oh criminy, just when I thought I had set the puppy
straight, "Pod Creed" has to come along and muddy up
the waters again...
What the hell are you doing quoting my post
when you only actually respond to "95009582.87637326"?
Why not just directly respond to his original post?
From the media, the same place you get all your
This is about the closest you get to a correct statement in your
From the media, the same place you get all your
The media, just like where you get all your
No, you don't know what you're talking about either. The IPO
doesn't change the fact that he held a sizable percentage of a
company with 800 million idiotic losers as "customers". THAT
is "worth" a lot of money, but the trick would be who would
have enough money to buy him out and the other investors
and get a controlling interest...it's not unreasonable to
ascribe a "worth" to a holding in a company, but in the case
of most pre-IPO companies, we don't know exactly how much
revenues and profits they are making, but if a private
investor wanted that information for a bona fide offer
to buy the company out and the original investors were
amenable to being bought out that way, the information
would be supplied, and the "worth" would be more precisely
determined...Zuckerberg is not "worthless" UNTIL the
IPO, but he probably will be "worth" MORE after it...
No it's not true in any sense, what a pig ignorant thing
After I went to the trouble to outline the process,
you turn around and call it a "crude guess"...what a
pig ignorant thing to do...
What an idiot. Google(TM) used a completely different
process for their IPO than most companies. The basic idea
was the same, but the result was arguably different...
Sure, just like I've "fleeced" everybody who bought stock
from me and it went down, SUCKERS!!!! Sheesh...
It's a "sell job" whether the stock goes up or down after
the IPO...you could argue that Google(TM) "left a lot of
money on the table" by not going through the typical road-show
"sell job", but then again there have been MUCH more
dramatic runnups right after IPO for companies that
used the "traditional" IPO process...
Just trying to show some respect for the forum that
gives people like you a voice on this planet...
Ah, I'm just messin' widya, cuz you're funny when
you're mad because you get the same crap thrown back
at you that you dish out...you're not the most
clueless peep on Usenet, but it's best that you
don't operate heavy equipment in real life...
William Ernest Reid (thinking about changing my
name to "Flash Bat" to sound as cool as "Rod Speed")
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