In Praise of Control
The Facebook IPO filing is a Rorschach test for analysts and commentators.
If you care about valuation models, you’ll drill down into advertising dollars and the disproportionate contribution of Zynga – 12% of revenue, which includes both processing fees from virtual currency and advertising.
If you’re interested in wealth distribution, you’ll pay a lot of attention to the 900 millionaires being created as we speak. And quite a few billionaires.
If statistics do it for you, you’ll be drawn to dramatic numbers like Facebook’s 840 million members, higher than the population of the entire United States. Or the estimated market cap of $80-$100 billion, similar to McDonald’s, even though Facebook only employs around 3,000 people. Which translates to an average revenue of $1.2MM per person.
I’m intrigued by all of that. But what interests me most is the fact that Mark Zuckerberg is about to be worth $28 billion – and still maintain operational control of the company. That’s because while he owns 28.4% of the company outright, his agreements with other shareholders to vote their stock grant him 56.9% of the voting power. (Each of his shares has 10 times greater voting power than ordinary shares.)
This operational control of the company goes beyond just ownership. As The Washington Post puts it:
Of course, corporate governance types are all up in arms about this. But I see it differently. As someone who has been concerned about maintaining control of my company from the beginning, I completely understand and empathize with what Zuckerberg and his financial gurus have structured. My partners and I control over 50% of Conduit; I wouldn’t have it any other way, and I don’t think we could have achieved what we did otherwise.
The business landscape is littered with the corpses of companies that went public, and whose founders were subjected to the short-term, quarter-to-quarter thinking that Wall Street demands. These visionary leaders, who think in terms of years and not in terms of the time between earnings calls, become frustrated by forces that put pressure on the wrong metrics. So they leave, or their boards force them out. (Steve Jobs is one of the most spectacular examples.)
Zuckerberg didn’t want that to happen to him, or to Facebook. And he’s entitled to that. If investment banks were unhappy with Facebook’s structure, they wouldn’t be swarming around the honey pot, vying for a spot nearest to the rim. If investors were unhappy with it, they wouldn’t buy the stock. It’s that simple.
Facebook’s organizational structure, with Zuckerberg running it in an unrivaled way – and the Board having no real influence – is just another data point for those institutions or individuals thinking of buying the stock. Just as they need to consider whether Facebook can grow ad revenue fast enough, or what the competitive marketplace in China and India looks like.
There’s no doubt that, long term, Facebook will need to grow its profits rapidly to justify its projected IPO valuation. I’m not here to debate whether or not that is possible, probable, or likely to happen. But I will say that the likelihood of Facebook continuing to grow, to innovate, and to satisfy and delight its users will be far greater if Mark Zuckerberg not only remains in control, but isn’t distracted with the usual time-consuming procedures and practices that a conventional ownership and Board structure would dictate. He had a clear vision for his company – as he set forth with powerful simplicity in his letter to shareholders – which he can now execute.
In fact, he can continue to execute it after he’s dead and buried. Because according to an unusual provision that’s gotten a lot of attention, if Zuckerberg is in control of the company at the time of his death, his control would be transferred to his successor.
I wonder who that friend would be?