By James Kwak
I must admit that I find Facebook’s impending glory a bit awkward, as it touches on two themes I have written about previously. One is that I just don’t like Facebook. And, I confess, I don’t really understand it. I sort of understand why people like it, but I don’t really understand why it’s going to be the most valuable technology company on the planet in a few years. I don’t understand why anyone would ever click on an ad within Facebook (or why anyone would even see them, since you could just use AdBlock), since I don’t understand why you would want your shopping choices to be dictated by who is willing to spend the most money for your attention. (When I want to buy something, I prefer using organic Google search results, since at least they aren’t affected by ad spending.) Maybe I’m just too old.
At the same time, it’s pretty clear by now that Facebook does whatever it is that it does pretty well. $1 billion in annual profits is impressive, and it’s also considered a pretty good place to work. And who is the CEO of Facebook? A twenty-seven-year-old kid with no other work experience. So while, as a customer (“user,” in software industry parlance), I’m less than thrilled, I can’t deny that Zuckerberg is doing something right as a CEO. Which is further evidence that the myth of the experienced CEO and the cult of the generalist manager are just a myth and a cult, as I’ve written about before. According to Reuters, Zuckerberg will soon be the fourth-richest person in America, after Bill Gates, Warren Buffett, and Larry Ellison. Which means that, like Gates and Ellison, it’s a good thing he never let anyone convince him that his company needed an experienced CEO.



Stock or Cash?
By James Kwak
I’m sure many of you saw the article featuring David Choe, the artist who painted the walls of Facebook’s first offices and received stock that now could be worth $200 million. Nice story. I was thinking, though: why was Facebook paying its vendors with stock?
I understand what you pay your early employees with stock: (a) you have to in Silicon Valley and (b) you want their fortunes aligned with those of the company. Outside board members also will often demand stock. But in most circumstances, you should pay your vendors with cash.
Giving a vendor stock instead of cash is equivalent to raising capital from that vendor—at the existing valuation. When you’re an early-stage startup, you want to raise as little money as possible, at as high a valuation as possible—because the whole point of the startup is that it should be getting much more valuable over time. There are tactical considerations, like not letting your bank balance get too low (because then your VCs will have too much negotiating power). But in general, you want to delay raising more capital until you reach some milestone that will boost your valuation significantly.
Obviously, things turned out just fine for Facebook. But it doesn’t seem like the smartest business move.
→ 6 Comments
Posted in Commentary
Tagged facebook, startups, technology