I'm sure that the Facebook IPO will spawn at least as many legal articles as the Google IPO.  (In fact, I began blogging as a guest blogger on Gordon's Venturpreneur site that summer of 2004 specifically to blog about the Google IPO.)  The new piece of meat that has been thrown to academic lions is a negative report by the ISS entitled "Tragedy of the Dual Class Commons."  The ISS does not seem to like the corporate governance structure of the Facebook IPO.

Like Google (and Zynga, LinkedIn and Groupon), Facebook has a dual-class structure, which ensures that the founders (in this case, founder) have voting control even after the IPO.  ISS seems very skeptical of this method of disenfranchising shareholders, even though shareholders understand this situation before purchasing the shares.  Of course, the interesting question is whether shareholders demand a discount for dual class common.  I looked on SSRN and found several dual-class common papers, but it seemed from the abstracts that investors don't actually require much of a discount.  Of course Google was oversubscribed by retail investors and the share price has done very well, but we don't have a basket of firms like Google without dual class common to compare Google to over time.But it will be interesting to analyze whether investors will be turned off by how little "voice" they are getting in the FB IPO.  As even the ISS admits:

While good corporate governance practices, by increasing board and management accountability, can provide a robust framework to drive shareholder value, this IPO event itself presents a Hobson’s choice: accept governance structures which diminish shareholder rights and board accountability, or miss out on what appears to be one of the hottest business models of the internet age.

But Facebook has adopted more corporate governance belts and suspenders to preserve Zuckerberg's control than even seem rational.  In its registration statement, Google lists as many risk factors the fact that its corporate governance structure is as pro-management as you can possibly imagine (except maybe Carlyle).  Even though Facebook considers itself a "controlled company" for listing purposes, it seems almost paranoid that it will lose control.  In case you haven't seen them, here are a few:

• any transaction that would result in a change in control of our company will require the approval of a majority of our outstanding Class B common stock voting as a separate class;

• we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock; 

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, certain amendments to our restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

• only our chairman, our chief executive officer, our president, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

• advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

• our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval;

• certain litigation against us can only be brought in Delaware ; and

• Our board of directors will not initially be classified. Our restated certificate of incorporation and restated bylaws provide that when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, our board of directors will be classified into three classes of directors each of which will hold office for a three-year term. In addition, thereafter, directors may only be removed from the board of directors for cause. The existence of a classified board could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror.

Moreover, FB has not opted out of Section 203 of the Delaware code, which would effectively bar most hostile takeovers.  And, for the sake of completeness, FB as a controlled company is exempt from either NASDAQ or NYSE listing requirements regarding independent directors, which means that FB does not have to have any independent directors, either on the whole board or on a nominating committee or audit committee.  These are all things that might give the ISS or other "good governance" monitors some pause.  Particularly because the public float is going to be so low, as low as 5% of the shares available.  So, if you are only offering such a small percentage, and your founder has the majority of the shares, why do you need so many anti-takeover provisions?  Does Zuckerberg worry that his (nonindependent, insider) board may turn against him a la Adlerstein v. Wertheimer?

If I were teaching Corporations, and I was trying to show students how a founder could raise capital, diversify her economic interest, but retain total control, the FB IPO would be the hypothetical way to go.

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Yesterday I told my Corporate Tax class that we could teach a whole course on the tax implications of the Facebook IPO.  I wasn't kidding.  Here are a few of the interesting issues that highlight current debates in the taxation of corporations and their shareholders.  (Gregg Polsky has also covered some of these on The Faculty Lounge.)

Mark Zuckerberg's stock:  CEO Zuckerberg holds almost 414 million shares of stock.  At the time of the IPO, he owes no taxes on that stock until a recognition event, such as sale.  When and how did he acquire this stock?  Most likely, much of it is "founder's stock."  This is friend of the Glom Vic Fleischer's territory (See Taxing Founder's Stock).  Zuckerberg probably contributed the algorithms and code for Facebook in return for stock as a nontaxable event either as a contribution to a corporation by a control group or (as Vic explains), making an election to have the stock distribution a taxable event, with the valuation of the stock as equal to the contribution.  Even though the stock is more accurately described as consideration for Zuckerberg's labor, it will be taxed at some point as capital gains, which is now 15% and considerably less than the ordinary income rate.  Gregg argues that this isn't that bad because the corporation doesn't get a deduction for it, so no deduction plus 15% is better than 35% deduction and 35% taxation, if you look at it from the point of view of the public fisc.  I think Vic is looking at it from the point of view of regular folks who contribute labor for stock versus founders.  Interesting debate.

Zuckerberg's and others stock options:  From reports in the media, it seems that the stock options that Zuckerberg holds (and probably others) are nonqualifying stock options.  The S-1 describes a 2005 stock option plan that issued incentive stock options, but stock options issued before then or under a different plan don't seem to be qualifying options.  Should holders of nonqualifying stock options exercise those options at or after the IPO, they will encounter a taxable event regardless of whether they sell the stock.  Zuckerberg has over 120 million stock options giving as compensation, which he plans to exercise.  His exercise price is 6 cents.  So, at something like $30/share,that's about $3.6 billion (say it like Mike Myers) of taxable ordinary income (the spread between exercise price and price at conversion).  Zuckerberg's tax bill (federal and California) may well be one of the biggest tax bills ever.  Apparently, he plans to sell enough shares to pay his taxes, which may reach $2 billion.  Other holders will also face the same dilemma of having a tax bill even if they don't have any additional cash on hand.  Those who exercise qualifying ISOs will not have a current tax liability if they do not sell.  (I have now wandered away from things I know about, so I will stop.)

But, for each option that is exercised that is taxable as compensation, Facebook gets a deduction, even though no cash is (or has ever) gone out of the company for that expense.  So, Facebook calculates that it will have tax refunds for awhile given the billions of dollars in compensation expense it will enjoy.

Restricted Stock Units:  Starting in 2008, Facebook began granting service providers RSUs instead ot stock options, probably to avoid the 500 shareholder threshold for registration under 12(g) of the Securities Exchange Act.  These RSUs are scheduled to vest six months after the IPO.  The recipients will be taxed at ordinary rates for the difference between the FMV of the stock at the time and the price paid for the grant (if any). (Though, recipients could make an 83(b) election at the time of the grant when valuation is both less and less clear, but this may be a risky move.)  Finally, Facebook has to withhold cash for that.  Facebook has listed this as a risk factor in its S-1:   

We anticipate that we will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs following our initial public offering and the manner in which we fund that expenditure may have an adverse effect.

Whew.  That's enough.

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That's the question Huffington Post asks.  Bloomberg observes the same.  This though 58% of Facebook's users are women and its COO, Sheryl Sandberg, has commented on gender equity issues before (as Christine observed).

Just today I sat in on a discussion about the dearth of women on boards.  Some thought maybe the issue was passe, already solved.  We've come a ways, after all: according to Catalyst 15.7%. of board seats were held by women in 2010. 

OK, that doesn't really sound so good, does it? 

But by my calculations, 15.7% of 7 (the number of Facebook directors) is 1.099, and that's 1.099 more women directors than Facebook has.

Really?  The blockbuster IPO of 2012 doesn't see fit to put anyone but 7 white guys on its board? Really? 

I realize may sound angry, but I really don't mean to.  I'm more incredulous.  This is a the social media company, whose professed mission is "to make the world more open and connected."  Mark Zuckerberg is already serving as both Chairman and CEO and using dual class common to keep control, both of which are corporate governance best practices no-nos.   Basically they translate into 1) letting you as CEO head up the entity that's supposed to monitor you and 2) selling your company to the public without risking that your could ever be bought out, even if the market thinks you're doing a lousy job.  I would have thought Zuckerberg would at least make a gesture towards boardroom diversity, so that Facebook's vision of the world has some semblance of input from the outside.

Nope.

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From the registration statement: Google, Microsoft, and Twitter.

No Pinterest? Still too small to be a threat, but here is some interesting data:

One is Pinterest, which according to Shareaholic’s Referral Traffic Report, is driving more referral traffic than Google Plus, LinkedIn and YouTube combined. Pinterest was responsible for 3.6 percent of referrals, up from 2.5 percent in December and .17 percent in July. Facebook, no big surprise, was responsible for 26.4 percent of referrals.

I finally created a Pinterest account, but, like Christine, I am still struggling to figure it out.

Thanks to Sam Clarke for the tip on the story.

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The Facebook registration statement was filed today. If you were Facebook, how would you grab the attention of investors?

Think big: "Our mission is to make the world more open and connected."

The sales pitch is pretty simple: growth, growth, growth!

The first Risk Factor? "If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed."  

The purpose of the IPO? "The principal purposes of our initial public offering are to create a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our employees, obtain additional capital, and facilitate an orderly distribution of shares for the selling stockholders."

Their strategy in a nutshell: expand and monetize.

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Anticipating Facebook's IPO later this year, I thought it might be fun to look back at Facebook in an earlier time. Below is a video of Mark Zuckerberg speaking to students at Stanford. He observes, "you can't see the profiles of the people at other schools."

That was a design choice: "we realized that the people around you at your school are the people who you are going to want to look up mostly anyway." If they made the base of people who could access a profile too broad, people wouldn't share information, such as their cell phone number, as freely.

Zuckerberg recognizes that the design choice entailed tradeoffs in the utility of the site, but it's fascinating how differently most of us think about those tradeoffs today. It's hard to even remember when Facebook was so limited. Of course, although he doesn't use the word, privacy on Facebook still looms large.

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In 2010 I blogged about David Kirkpatrick's business history, The Facebook Effect. Earlier this week, the California Legislative Analyst's Office invoked Kirkpatrick's title to speculate about tax revenues from a Facebook IPO. From the Overview of the Governor's Budget:

The Facebook Effect. Facebook Inc., a privately held company headquartered in Palo Alto, may proceed with an initial public offering (IPO) of its stock in 2012. Facebook reportedly is considering issuing $10 billion of stock in an IPO that would value the company at over $100 billion. Other companies also are considering IPOs in the coming years. 

In the coming months, the state’s revenue forecasts will need to be adjusted somewhat to account for the possibility of hundreds of millions of dollars of additional revenues related to the Facebook IPO. These revenues could affect the budgetary outlook beginning in 2012-13. We caution that it will be impossible to forecast IPO-related state revenues with any precision, and it is likely that little information about the state revenue gain from the Facebook IPO will be available before investors file tax returns in April 2013. (Even then, due to the confidentiality of individual taxpayer information, we are unlikely to know precisely how much state revenues increased due to Facebook’s IPO.) 

In considering the size of the Facebook IPO effect in the coming months, revenue forecasters will have a difficult task. Our office’s income models are based on historical trends and, therefore, already assume that some level of IPO activity occurs for California companies each year. Moreover, in our recent forecasts, our office has deliberately built in “extra” capital gains (above those generated by our model) in 2010, 2011, and 2012 to try to account for a variety of factors, including the surprisingly strong PIT receipts in some recent months. Finally, Facebook-related capital gains likely will prove to be a relatively small percentage of California’s overall capital gains in 2012. If the stock market as a whole has an unusually strong or weak year, that fact could change forecasted capital gains up or down by much more than the positive Facebook effect.

In case you missed it, the projected size of the IPO is $10 billion, and the expected valuation of Facebook $100 billion! For a sense of perspective, Google sold $1.67 billion in its IPO in 2004, giving Google a valuation of more than $23 billion.

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