Silicon Valley Headhunters Will Raid Facebook for Talent
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mr. Zuckerberg has long exhorted employees not to pay attention to the stock price, instead pushing them to focus on developing the social network. But in a companywide meeting earlier this month, he conceded that it may be “painful” to watch as investors continue to retreat from Facebook’s stock, according to people familiar with the meeting. (The Wall St. Journal)
Brain drain was one of the principal drivers behind Microsoft’s “lost decade” (MSFT) following the collapse of the stock during the dotcom crash. If Facebook's (NASDAQ: FB) stock continues to get pummeled by Wall St., the Social Network may start losing talent to rivals like Yahoo (NASDAQ: YHOO) , Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG).
Underwater Options
Every employee that has joined Facebook over the past 18 months (about half of the social network's current work force) received a special form of stock options, known as restricted stock units or RSUs. RSUs are non-tradable contracts which unlock shares after a certain future event; in this case, six months after the IPO. The reason Facebook did this is because it had to: At the time, SEC regulations held that privately held companies with 500 or more shareholders and more than $10 million in total assets to file financial reports just like public companies do, and Facebook was rapidly approaching its bag limit.
In 2010, the price of the RSUs was $24.10 a share. After that the price went up, which means the later you joined the company, the longer you have to wait for your RSUs to be in-the-money. If you're willing to take the financial hit, you can sell the RSUs when they vest. Facebook's average entry level employment package in 2009 included between 10,000 and 15,000 RSUs. Employees who joined Facebook before 2010 benefitted from a 5-for-1 stock split, which means pre-2010 entry-level hold between 50,000-75,000 RSUs.
A major selling point of the RSUs was that the employees didn't have to pay for them to be exercised. The down side is that RSUs are taxed as ordinary income. Here's where it gets ugly: The IRS taxes RSUs at their full market value when they vest (about 6 months post-IPO).
Now imagine you work at Facebook. The first thing you do in the morning and the last thing you do at night is look at the stock price. The stock price is the reason you still live in an apartment with two other people. To add insult to injury, the unbridled greed of the same people now exhorting you to ignore the stock price is the reason the stock price is crashing through the floor.
The next time a headhunter from Apple or an exciting new start up like Pinterest calls, do you pick up the phone or keep hacking? There is no right answer.
So Long, It's Been Fun!
All else being equal, the most talented employees are the ones most in demand by Silicon Valley headhunters.
According to Wall St. Cheat Sheet:
Facebook has been successfully taking employees from other companies while holding onto their own. For every 15 people who left Google for Facebook, Google was only able to take one employee from Facebook. Microsoft lost 30 employees to Facebook for everyone it was able to bring over from the social networking company.
From Venturebeat:
Director of Platform Partnerships Ethan Beard, Platform Marketing Director Katie Mitic, and Mobile Platform Marketing Manager Jonathan Matus all announced their pending departures separately on their respective Facebook timelines (see the updates here: Beard, Mitic and Matus). Each of them said they’d had good experiences at the company.
Beard has been in charge of developing relationships with top app developers, and has served more than four years at the company. He’s therefore likely vested most of his stock options (or RSUs, see update below), with four years being the customary amount of time for options to fully vest at Silicon Valley companies like Facebook.
Here’s therefore clearly incentivized to go find the next big fish.
It’s the departure of the other two execs that Facebook may be forced to worry about more.
Mitic and Matus have worked on the marketing side of platform, with Matus focusing on mobile. Matus’ LinkedIn Profile shows he’s a mentor at Startfast Venture Accelerators. However, Mitic has been at Facebook only two years, and Matus for just longer than a year. While they may not have fully vested their stock options, it’s possible they’re betting Facebook’s stock will not rise so significantly over the next year or two that they’ll be leaving serious cash on the table. Indeed, anyone who arrived in 2010 was already getting stock options that were priced in line with Facebook’s private value at the time, in the tens of billions of dollars.
The IPO Trap
Worse, the usual fixes -like a stock buyback or a secondary offering- don't apply in Facebook's case.
Why? The failed IPO.
Facebook can't eliminate the stock overhang without a secondary offering to the same institutional investors it burned with the first stock offering, especially when the stock is -40% off its IPO price. The company can't initiate a buy back with a sky high P/E without alienating investors with long positions in the stock in order to allow its employees to rapidly exit their positions.
That means that everyone who wants to sell Facebook will have to do so in the market. This, in turn, will add further downward pressure on the stock price...and addition relocation pressure on Facebook's best and brightest.
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Facebook, Google, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
