Facebook Initial Public Offering: All you need to know
How many of you have a Facebook account? We bet most of you do. Well in the beginning, Facebook started from a simple idea and went through a lot of difficult times. Overcoming obstacles in the right way and incorporating innovative ideas continually is what helps a company grow. That is what Facebook understood, and look at the company today. With a successful IPO and happy users, Facebook has always been able to beat the competition and stay at the top.
Facebook has been the largest in a long time of what we all know as “social networking” websites. Obviously, there are many such websites in the world. But the thing that makes Facebook stay at the top is due to its popularity. According to the last check, Facebook has about 2.23 billion active users on it, and has worked to increase its dominance of social media with smart acquisitions of the photo sharing platform Instagram in 2012 and the messaging platform Whatsapp in 2014.
History of Facebook
Mark Zuckerberg, the owner of Facebook, came up with the idea with his friends while studying at Harvard University in 2004 of creating a website where students can communicate with each other easily. After the website was “a hit” on their campus, they decided to increase its users to nearby universities, and became highly popular within no time.
In 2006, it changed its name from “The Facebook” to just “Facebook” and was put on the web. All anyone needed to open an account on Facebook was a valid email address and be over 13 years old. The moment the website came into the market, its popularity spread fast. The website is now worth billions of dollars and is one of the most recognizable brands in the world.
Why is Facebook so popular?
For young people who have grown up with technology, Facebook was once one of the most popular websites to be on. Even today, every age group has an account on Facebook as it helps you stay connected with people across the spectrum.
It is common for many to find the virtual world more secure. And since Facebook has the most number of users, it is easier for people to reach out to more people. Additionally, people can personalize their profile as per their choice by pictures, videos, music, and comments, and make communicating easy.
Before we can talk about the Facebook IPO, let us first understand what company funding is and what its types are. It is a well-known fact that nearly all companies need a significant amount of cash to start off their business by buying equipment, hiring staff members, and even renting an office space before the business can get off the ground. In addition to this, they also need to adapt and grow to beat the competition in the market. The only way this is possible is with capital.
And as most of us cannot finance these business operations with our own funds, outside company funding is needed. Be it at any stage, almost every company needs some sort of help with funding if they want to move to the next stage.
Here are the main types of fundings options at company has:
- Bootstrapping: Bootstrapping is when the owner adds their personal funds in the company, which is normally from a credit card or their savings.
- Crowdfunding: Here, the company shares its product in the market and adds incentives to the purchases. Through this method, companies are usually able to cover the complete production of the product and even learn the market demand.
- Angel Investors: Also called angels, they are people who invest in companies during the early stages and help the company grow. The amount offered in this type of funding ranges from $10k and $100k.
- Venture Capital Investors: VCs for short usually offer to fund companies after they have grown a bit. It is offered to help the company expand which is also why the amount is usually larger and starts from $500k. They are offered shares in exchange for the funding.
- Accelerator: An accelerator offers a short but essential period of monitoring along with small seed investment for about 3 to 4 months after which the company is on its own.
- Incubators: Incubators offer an environment to entrepreneurs who then can develop their ideas to make a business out of it. These incubators are normally sponsored by universities, governments, or economic development organizations. They do not offer capital but help you connect with their network of investors to whom you can have your project pitched.
Before we can talk about the Facebook IPO, let us understand the steps that lead to this. To be clear, a company has to have many funding rounds before they can enter an IPO. These rounds begin with the very first round of funding which is called the seed funding and the funding rounds afterwards.
After Facebook was incorporated in Florida, it received its first major funding of $500,000 from an American entrepreneur Peter Thiel, who is also a venture capitalist, for about 10.2% of the company’s stake and joined its board.
Series A & B Funding
In 2005, Facebook booked another funding round of $12.7 million from Accel Partners, valuing the company at $98 million. This round was considered to be the next step to grow and is called the Series A funding round. Facebook secured its Series B round of funding of $27.5 million from a group of VC investors that included Greylock Partners and Meritech Capital.
With the Series B round done, Facebook had a high value and it was getting potential acquisition proposals from the likes of Google, Microsoft, and Yahoo. But they rejected these and moved ahead to another funding round later on in 2007 to expand the company.
In the Series C round, Facebook raised about $240 million for a 1.6% stake from Microsoft, valuing the company at $15 billion. The rounds just continued as Facebook kept working on its expansion till it reached its limit of the number of shareholders it can have as a private company. That is when the Facebook IPO took place.
Facebook Initial Public Offering (IPO)
Facebook Inc went public with its initial public offering on May 18th, 2012. With the peak market capitalization at over $500 billion, the company had one of the largest and most anticipated IPOs in history. It was one of the largest technology IPO in the US. Facebook had offered 421,233,615 shares at a price of $38 per share and raised $16.007 billion through that offering.
But before the Facebook IPO, the company stated that it had a net income of $1 billion in 2011, which was an increase of 65% from 2010. It was also stated that it had 845 million monthly active users and 483 million daily active users as of December 31st, 2011. So, why did they have to go public?
Why did Facebook IPO take place?
There is no secret that Mark Zuckerberg tried to keep Facebook private for a very long time, as he believed that it was the best way to stay nimble and build the business. But at that point, Mark did not have a choice. Facebook had become too big, it had too many shareholders (500 to be exact) and so, the next right step was to make the company public.
Well, thanks to the 1964 Securities and Exchange Commission rule (SEC rule) that says that any private company with more than 500 shareholders of record has to adhere to the same financial disclosure requirements that public companies do. This meant that Facebook would have had to file the detailed quarterly and yearly financial reports and deal with the scrutiny that comes with a powerful company opening its books.
Facebook was aware of this and had done its best to keep the SEC at bay. But when Facebook raised $450 million from Goldman Sachs in 2011, where the company was valued at $50 billion, Goldman Sachs structured the deal in such a way where all Facebook shareholders would be counted as one. This led David Kirkpatrick, author of “The Facebook Effect” to predict that the deal might buy Zuckerberg more time before having to go public.
Along with this, Facebook was also at work with Capitol Hill and it was lobbying Congress on behalf of a bill that would increase the number of shareholder records to 2,000. This bill was even taken in front of the Senate Banking Committee. But before the bill was looked into, Facebook had already crossed 500 shareholders at the end of 2011. So, any change to the rule then was going to be late for the company. Additionally, the company could have adhered to a much stringent disclosure rules without selling shares to the public, but it wasn’t something that could happen practically.
Facebook could lose good employees
The Facebook IPO would help many employees cash out their shares and breathe a sigh of relief. It is common for companies to offer the best employees with stock options where the employees work hard to make the company grow. But with Facebook, it was not that easy as the company had given out different types of non-cash compensation at different times and changed its rules across the years.
To explain better, the first 200 or so employees were given the standard stock options, as per a person on the inside of the company. These stocks obviously vest over time and the employees can exercise them if they wish too. But in 2007, Facebook started issuing restricted stock units (RSUs) and at this time, they received a waiver from the SEC to make sure that they would not be counted in the 500 shareholder-of-record limit.
Just to be clear, RSUs convert into common stock only after the company goes public. And with this, the company IPOs and the employee gets stock based on the market value, minus tax. That was okay, but options were better since the employee could exercise them. Additionally, in 2010, Facebook banned employees from selling their stocks, claiming some legal concerns were there around insider-trading rules. With this, the only way the employees could cash out their vested stock options was if they left the company.
If you’d invested $10,000 in Facebook at its initial public offering, How much money would you have now?
But what if you had invested $10,000 in Facebook during the first Facebook IPO; how much would you have now? Let us assume that you were able to purchase the shares at $38 during the IPO. For $10,000 worth of shares at that time, your investment would be worth $53,540 as of May 14th, 2020, which is eight years later. That is a compound annual growth rate of 23.3%. Impressive, right?
But you would have gotten much better if you waited a little longer to invest in the company that year. Facebook actually went significantly lower in 2012 and hit an all-time low of $17.73 on September 4th, 2012. If you had invested $10,000 at this time, the stock would be worth $116,480 as of May 14th, 2020, which is a 37.6% compound annual growth rate. But do not dishearten yourself, many companies are opening and there might be another huge company that will go public and allow you to purchase its shares. So, keep your eyes and ears open for such a situation.
Different type of investors
Before we talk about the top Facebook shareholders, let us understand a little about shareholders and the types of shareholders available. To begin with, an investor is a person who has invested some capital in a company and has been given shares of the company or some sort of note in return. There are four main kinds of investors that startups have, which include:
- Personal Investors: These are people who are the owners’ close acquaintances, family or friends that help by investing in their business during the initial stages. Some get their money back with interest and some get shares in the company. It all depends on the deal made between the owner and the investor.
- Angel Investors: Angel investors are those who put their money in startups to help them take off and enter the market properly. They get shares in return for the investment made, making them shareholders in the company.
- Venture Capitalist: Also called VCs, they are investors who offer large amounts of investments to help the company grow and expand. At times, they also invest in startups that have a long-term potential to grow. They too get shares in return and become shareholders in the company.
- Others (Peer-to-Peer lending): These lenders are individuals or groups that offer capital to small business owners. You will need to apply for the loan and if they find your company eligible, they will approve it.
To know more about the different types of investors, check out our article here.
Shareholders of Facebook
Now that you are clear about the kinds of shareholders a company can have, let us talk about the largest Facebook shareholders. Facebook has both firms and individuals as shareholders. As a public company, Facebook has some large players as shareholders of the company.
Here are some of the top individual Facebook shareholders:
#1 Mark Zuckerberg – Net worth: $78.7 billion
Mark started Facebook at Harvard in 2004, when he was 19 years old and made the company public in 2012. Even after all this, he still owns about 15% of the company’s stocks. As the Cofounder, Chairman and CEO of Facebook, Zuckerberg stands as the company’s largest shareholder. In December 2015, Zuckerberg and his wife, Priscilla Chan, pledged to give away 99% of their Facebook stake over their lifetimes.
#2 Dustin Moskovitz – Net worth: $13 billion
Moskovitz also helped Zuckerberg to launch Facebook in 2004. Most of his net worth lies in his estimated 6% stake in Facebook. But where voting is concerned, he allows Mark to vote his Facebook shares. After he left Facebook in 2008, he co-founded Asana, which is a workflow software company.
#3 Eduardo Saverin – Net worth: $11.9 billion
Saverin had co-founded Facebook with Mark Zuckerberg in 2004. He is now a venture capitalist and still gets most of his wealth from the 5% stake in Facebook. He is a Brazilian native and is now a Singaporean resident since he renounced his US citizenship in 2012. In 2016, he also launched the venture fund B Capital, with BCG and Bain Capital veteran Raj Ganguly.
#4 Jan Koum – Net worth: $10.4 billion
Koum co-founded WhatsApp which is the world’s biggest mobile messaging service in 2009. Facebook bought the startup for $22 billion in cash and stock in 2014. Koum agreed to sell WhatsApp to Facebook in an abandoned building where he once collected food stamps as a teenager. In 2018, he resigned as CEO of WhatsApp and had announced that he would leave Facebook’s board as well.
#5 Sheryl Sandberg – Net worth: $1.7 billion
Sheryl is the Chief Operating Officer at Facebook and has been the COO since 2008. She has led the company from $56 million loss to $22.1 billion in profits in 2018. She had also defended Facebook in the wake of the Cambridge Analytica scandal and ongoing data privacy risks for its two billion users. Additionally, her focus on positioning Facebook as a platform for small business advertising helped increase the ad revenue by 38% during 2018.
With this clear, let us look into the firms that are Facebook shareholders as well. These include:
#1 Vanguard Group Inc.
Vanguard is one of the world’s largest investment management companies that has about 425 low-cost traditional funds and exchange-traded funds (ETFs). The firm has about $6.2 trillion in global assets under management. Vanguard’s funds hold approximately 184.0 million shares of Facebook with a combined market value of about $37.7 billion.
#2 BlackRock Inc.
BlackRock is one of the world’s leading asset and investment management firms. They have an approx of $6.47 trillion in AUM. They also offer a wide range of mutual funds, closed-end funds, and iShares ETFs. BlackRock’s funds hold about 158.2 million shares of Facebook with a combined market value of $32.3 billion.
#3 FMR LLC
FMR is another one of the nation’s largest financial services companies. They are known to offer financial planning, brokerage, retirement options, management, and wealth management services. The company owns the investment management firm named Fidelity Investments, which has a total AUM of approximately $2.5 trillion. FMR’s funds hold approximately 123.6 million shares of Facebook with a combined market value of $26.1 billion.
#4 T. Rowe Price Associates Inc.
T. Rowe Price is an investment management company that offers asset allocation, fixed income, equities, portfolio management, and financial advisory services. The firm holds approximately $1.2 trillion in AUM. Rowe Price’s funds hold about 107.8 million shares of Facebook totaling a combined market value of $22.1 billion.
This article is mainly for educational purposes and all the data shared here was collected from various external sources. It just helps you understand more about the Facebook IPO, and what an IPO does for your company and how you can work hard to make your company reach that level. But as you start small, remember to keep track of all the shares in your company. This will help you make smarter decisions about your company’s finances and when you are about to take up funding.
The best way to keep a track of it is through Eqvista. You can easily issue shares online through the application and add shareholder profiles here. Use Eqvista to not just manage the shares in your company but also the different shareholders in your company. Check out the application here or contact us today to know more!