Facebook IPO

By Younkin, Joseph; Lingenfelter, Gabriele | Journal of Critical Incidents, Annual 2014 | Go to article overview

Facebook IPO


Younkin, Joseph, Lingenfelter, Gabriele, Journal of Critical Incidents


As Sandi started her computer, the following quote appeared in the headlines of her browser: "We're going public eventually, because that's the contract that we have with our investors and employees" (htttp://www.greatpersonalities.com/mark-zuckerberg/3htm). She had seen the news about Facebook going public after eight years of existence and wondered why Mark Zuckerberg had decided now to issue an Initial Public Offering (IPO) for his company. Sitting in front of her computer she wondered, "how did Facebook determine its initial offering price and on which stock exchange to trade?"

Mark Zuckerberg

Mark Zuckerberg was born on May 14, 1984. His mother was a psychiatrist and his Dad a dentist. During his high school years he won various prizes in math, astronomy, and physics. Mark began using computers and writing software programs in middle school. His father introduced Mark to programming and Mark soon wrote a program that allowed his Dad's office computer to communicate with all the computers at home. In essence, he had created a primitive version of AOL's Instant Messenger.

By the time he entered Harvard University to study psychology and computer science, he already had gained a reputation for his programming skills. As a sophomore at Harvard he created Course Match to help fellow students pick classes and Facemash which let students vote on the best looking person. As the popularity of Facemash overwhelmed Harvard's network, the college quickly shut it down. The following semester Mark launched Facebook, but was immediately accused by three Harvard seniors of having stolen their idea. They filed a lawsuit against Mark, which he eventually settled for 1.2 million Facebook shares. Mark dropped out of Harvard during his sophomore year to complete his Facebook project.

Decision to "Go Public"

Facebook officially began trading on May 18, 2012, but the decision to "go public" was made months before.

Companies could decide to issue shares to the public and have those shares trade on a particular stock exchange for a variety of reasons. The most popular reason to conduct an IPO was to raise money for the company to grow.

Mark Zuckerberg had a number of reasons not to go public: too much paperwork and regulation, higher costs of producing quarterly financial reports (i.e. auditing fees, man hours), and the volatility of public markets. The main reason Zuckerberg decided to go public was due, in part, to the fact that Facebook had become too big, in terms of the number of private shareholders who owned Facebook shares. A Securities and Exchange Commission (SEC) rule, enacted in 1964, required a private company, with over 500 shareholders, to report its financial statements in a similar manner as a public company. And if Facebook was forced to report its financial statements to the SEC then Zuckerberg decided he might as well take the company public.

Another reason to take Facebook public was to make it easier for early investors in the company to cash out. These early private equity investors provided the cash necessary to grow and expand its operations. Going public would provide liquidity to these investors, thereby making it easier for them to buy and sell shares.

Additionally, Facebook was losing good employees to a rule created by Zuckerberg to prevent them from selling their private shares and stock options in the private-equity secondary markets. Employees could only cash out of their Facebook stock options by quitting the company and then selling them. By going public, the company could retain the best people.

A sudden influx of cash from going public would also allow Zuckerberg to continue to acquire smaller companies for their engineers or new products and to consider buying bigger companies in the future. …

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