When most of us think about selling shares of stock, we think about making a profit. Sure there are broker commissions and taxes, but most investors still sell to make money. In recent years a market has emerged for the exchange of shares of stock in private companies, and as a result, privately-held companies like Facebook and Zynga, a games developer, are now levying fees on employees who sell their shares. Facebook recently announced a $2,500 fee per sale, while Zynga raised its fee $1,500 to $6,000 per sale.
Although trading in this type of stock can be attractive to current and former company employees, as well as outside investors, the benefits to those parties is in conflict with the goals of the company. Exchanges of private stock have both short and long-term financial implications for the company issuing the shares, including steep administrative costs and increased governmental involvement.
As the volumes of IPOs and merger and acquisition activity have dwindled in recent years, investors are seeking other ways to get returns on investments. Given the explosive growth of Facebook and widespread popularity of Zynga games such as FarmVille and Mafia Wars, it seems likely that an IPO for either company could be quite lucrative for investors. By purchasing the stock before it becomes publicly traded, investors may be able to realize a lower purchase price than the traditional market would offer, therefore realizing additional profit.
However, this situation creates an immediate financial loss to the company. SecondMarket, an exchange specializing in trades of private stock, reports that its average sale is valued at $2 million – for example, after buying shares from a number of employees, a single high-volume sale can be made. SecondMarket’s fee for this sale is between 3% and 5%, $60,000 to $100,000, a cost borne by the company. Over $150 million in Facebook stock has been sold through SecondMarket since April 2009, meaning that Facebook has paid between $4.5 million and $7.5 million in SecondMarket fees.
Additionally, as more employees sell their stock, the overall number of shareholders is likely to increase, and once a company’s stock has more than 500 shareholders, the SEC must be officially notified. This invokes a series of reporting requirements, which may cause a company to release valuable financial information that could affect a planned IPO. Disclosure of this information has the potential to drive investors away from an IPO, resulting in further loss to the company.
Although the imposition of these fees can detract from the value of the stock to the employee, it could be argued that they are necessary to protect the business, especially in the technology sector. The dot-com boom of the 90’s is unlikely to repeat itself, and smaller profits and ROI have become more commonplace. Companies need to protect their short-term profits against costly administrative fees for these sales, and ensure success of potential IPOs by keeping information confidential for as long as possible. In this model the employee fees serve as a short-term offset to the fees required by ecxhanges such as SecondMarket, and provide a long-term incentive to avoid sales of private stock in any context.
SOURCES
CNNMoney
BusinessWeek
Silicon Valley Business Journal