Andrew Conru, a geeky mechanical engineer turned porn baron who founded one of the Web's raciest personals site, made out well when Penthouse bought Adult FriendFinder. He even unloaded a $125,000 car on the operation.
The show features rich people lying to poor people and then giving them money, and it's now up on Hulu. All you need to see are the first 11 minutes. Watch Chahal give a tour of his $6.9 million nouveau gauche monstrosity of a penthouse, and fumble around trying to buy groceries. "Buying groceries, it's not that easy," he says. For Yahoo shareholders, watching him give away tiny portions of his fortune will be far too painful. As deserving as the recipients are, they'll wish Chahal was handing their money back to them.
Through the golden heart of every world-changing startup pulses an avaricious get-rich-quick scheme. Larry Page and Sergey Brin, the billionaire-boy cofounders of Google, established this doing-well-by-doing-good myth. But Mark Zuckerberg hasn't been able to make the same magic happen for his employees. In his efforts to make good by them, he may end up quashing a nascent market in Facebook shares.It's not for lack of trying. Silicon Valley's stock-options millionaire make money by getting the right to buy shares at a low price and selling them for a higher one. Facebook's soaring valuation — Microsoft invested $240 million for a tiny stake, in a deal which valued all of Facebook at $15 billion — threatened to undo that equation. How is Facebook supposed to soar past $15 billion in value? So Zuckerberg & Co. turned to issuing restricted stock units, or RSUs, instead. (Restricted stock units are common at large companies like Google and Microsoft, but unusual for a company Facebook's size and age.) The restricted-stock plan has created a new complication: Once it has more than 500 RSU holders, SEC regulations may require Facebook to start publishing its financials, even if it doesn't conduct an initial public offering. Facebook's revenues still aren't pretty enough for public exposure. Facebook's lawyers have sought, and obtained, an exemption. Part of the argument they made is that issuing RSUs won't create a market in Facebook shares. Facebook, unusually for most of Silicon Valley's private companies, has not had many restrictions on what employees and other shareholders could do with the shares they own. Most have rules that force shareholders to offer shares to the company first — a right of first refusal — or outright prohibitions on unauthorized sales. But the letter Facebook sent to the SEC says that even when the stock units convert to common shares, they have limits on their sale: "... the Plan has been structured to preclude any trading of RSUs or any interest therein from developing." Even if Facebook permits an employee convert their stock units to shares and sell them, the company can then prevent the buyer from selling. Employees at Facebook — especially the early ones, whose holdings are now substantial — have been agitating for some time to sell their shares, and there are still, even with the public markets taking a beating, interested buyers. Zuckerberg finally bowed to this pressure and set up a program, now underway, to let employees cash out up to $900,000 in shares. (Note the symbolism of the figure: No one will become a millionaire.) But that may be it. If Facebook extends its stock-sale restrictions to common shares, not just the restricted-stock units, both employees and the investors so eager to snap up their shares will be stuck, until Facebook sells out or goes public. Zuckerberg has made it clear he thinks both of those events are far off — and the 24-year-old CEO still owns 27 percent of the company and more or less controls the board. It's a dicey gamble. The prospect of selling Facebook shares privately must surely have attracted some employees who counted on a relatively quick cash-out. But shutting down the prospect of further stock sales will make sure the Facebookers who remain will be more committed to the company for the long haul. Zuckerberg doesn't have much choice. As long as Facebook employees can find buyers for their shares, they'll be tempted to leave rather than stay at a company going through a tumultous adolescence. Already, the company has had far more turnover, from bottom to top, than Google did. Not a single high-ranking exec left Google for the first six years of its existence. Facebook has lost three of its four cofounders, and numerous people underneath them, from former COO Owen Van Natta on down. No wonder Zuckerberg wants to slam the exit door closed.
Austin-based HomeAway, which operates a network of vacation rental listings, has landed a $250 million round of funding, at a pre-money valuation of $1.15 billion. Technology Crossover Ventures led the round, which you can read about at TechCrunch. HomeAway, which seems to have acquired all its competitors over the past couple of years, didn't even have to lay off the token 20 percent of staff.
Will the CEO of Digg make up his mind on who he wants to be? I once asked him what car he drove, and he took pains to let me know he had a suburban-dad Honda minivan and an environmentalist-standard-issue Toyota Prius. Just a regular guy! But he later complained when I suggested he wasn't a "rock star." I'm thinking Adelson — who commutes from his actual suburban-dad life in upstate New York to his CEO gig in san Francisco — is working on sexing up his image. A tipster says Adelson has just gotten a $109,000 all-electric, obsidian black Tesla Roadster. Which, if you think about it, is exactly the racy kind of vehicle most suburban dads his age might want to buy, if only they could afford it.
Antivirus software company Kaspersky Lab plans to sell 20 percent of the company for $100 million to investors in a private placement next year, according to Russian newspaper Kommersant. Oh, this is juicy: Founder Eugene Kaspersky owns 50 percent of the company. His ex-wife, Natalya Kaspersky, owns 30 percent. [Quintura]
The great Facebook cashout now has a date: November 1. Former and current employees recently received an email from Facebook's stock administrator updating them on plans to let employees sell some of their shares, even though the company is still private. Details of the plan are expected in mid-October; one ex-employee characterized it as a "buyback." That suggests that the company itself is going to buy shares from employees, and then sell them to an outside buyer. The limits previously outlined by CEO Mark Zuckerberg in an email to employees — 20 percent of an employee's vested shares, or $900,000, whichever is less — remain unchanged. The plan has an advantage over letting employees make ad hoc sales to wealthy investors, in that Facebook gets to choose who it has a shareholder. One thing's not clear: How will Facebook force employees, especially ex-employees, to stick with the plan?Facebook's corporate charter has a relatively unusual provision for employee stock sales. The company has a right of first refusal over employees' shares, meaning that it has the right to match any price offered by a buyer; most companies have tighter restrictions. Employees have been told that sales outside the program will have "career-limiting effects"; promotions, raises, and new stock-option grants may be taken away from those who sell anyway. But Facebook has no such hold on ex-employees. And the offers in the market are tempting. Facebook's program will let shareholders sell at $8.90 a share, which represents a company valuation of $4 billion; some buyers are offering $11 a share. If too many transactions go through at the higher price, Facebook may have to revalue its shares, which will have untoward tax implications for the company and other employees. It's not clear what Facebook can do, short of rewriting its corporate bylaws. But the company program does have one thing going for it: It will be formal, organized, and predictable. For geeks who'd rather optimize code than their own financial returns, letting their managers handle their money may seem easier.
The whispers have started: How much money did Kevin Rose make personally by selling shares in Digg's latest round of VC funding? The talk that Rose has sold shares is driven by equal parts envy and admiration. To understand the reaction, it helps to realize that the notion of an entrepreneur selling his own shares directly to investors before a public offering — getting out of the company just as other investors were getting in — used to be taboo in Silicon Valley. But that was before Wall Street's IPO machine broke down, and before merger activity dried up. Rose is at the vanguard of a seismic shift in how the Valley pays off its entrepreneurs.Rose, whose stake in Digg was famously estimated by BusinessWeek as worth $60 million, may be a unique case. More driven entrepreneurs must be frustrated by Rose, the fun-loving rock climber, on-screen beer drinker, and legendary lothario. His company's rise has seemed effortlessly successful, driven more by the former TV host's fan following than Digg's innovations. But Rose has gotten good business advice, chiefly from Digg CEO Jay Adelson, a longtime friend. Adelson feels he gave up too much control to investors at his previous company, Equinix; he strove to protect Rose from the same fate, an effort which Sarah Lacy chronicles in her recent book, Once You're Lucky, Twice You're Good. As a result, Rose still holds a substantial stake in Digg. Rose is already believed to have taken $1 million in a previous financing. It's not clear how much he's taken in this round, if any — but it stretches credulity to think he hasn't cashed out to some extent. Here's why: Normally, a company raising $28.7 million in a third round of financing, as Digg just did, would be giving up a substantial chunk to outside investors. But when the founder controls as much as Rose does, the math doesn't work. Former Digg engineer Owen Byrne, who complains that he hasn't had access to Digg's financials in some time, speculates that the round involved massive dilution — the reduction in value suffered by existing shareholders when new shares are issued. But Byrne has this exactly wrong: Allowing the VCs to put in enough money to make the investment worth their time, at a high valuation, would require substantial dilution, which would disadvantage employees and early investors. Much simpler to transfer shares directly from one large shareholder — Rose — to another. What's the effect? Already, employees at Facebook have been agitating to sell their shares, and the company is creating an internal market to let them do so. Rose, as another high-profile example, will put further pressure on startups' management to let their workers cash out. This seems dangerous: Digg, with its high traffic and Microsoft ad deal, has achieved some success — but it's hard to envision it lasting long as an independent concern. What will the boards of even less developed startups tell their founders, when they want to sell, too — that they're just not as cool as Kevin Rose?
We need more gushy "Internet rich dudes, they're just like us!" star profiles, don't we? The problem is, in the Valley, too few are willing to flaunt their success. Take this piece of fiction about Jim Buckmaster, Craigslist's CEO, in the Times of London: "He lives in a modest, rented apartment not far from the company’s global headquarters, a rickety 19th century house tucked between a pizza restaurant and a junk shop in San Francisco." If a "modest apartment" is a freestanding house — a rarity in San Francisco — which can accommodate 40 people for Thanksgiving, then sure. The article also repeats an old canard about how Newmark doesn't have a place to park his car — when he's had parking behind the house he owns for years.The humility of billionaires! No, the real "nerd values" on display are the ones responsible for this wealth. Like the $16 million Buckmaster and founder Craig Newmark got in brokering a deal to let eBay buy a 28 percent stake in their company. Yet they still make a point of posing as heroes of the ultraliberal working class, second-hand Prius and all. Worse yet, people continue to buy it. And not just gullible reporters parachuting in from London, either. Larry from Minneapolis writes in a comment:
Total compensation for venture capitalists and other private-equity managers was up 32.3 percent in 2007 over 2006, a new study reports. How can this be? Private equity is just as bogged down as the public markets by the credit crunch. For the Sand Hill Road contingent, there wasn't a single tech IPO in the second quarter. Acquisitions were down too. If VCs don't unload their companies on someone — public investors, or larger companies — their limited-partner investors don't see returns. So why the raises?Because, at least in the short term, private equity fund managers and VCs compensation isn't directly tied performance. What's really fattening their wallets are management fees of 1.5 to 2 percent on the money they've been given to invest. But don't grab a torch and pitchfork and zoom down 280 just quite yet. Headhunter Jonathan Goldstein told the Wall Street Journal that he doesn't expect the free ride to last:
If the Valley was like Hollywood, Hansup Yoon's story would have been the feel-good coming-of-age movie during Oscar season. Seriously, the kid makes a web forum and is able to make more money off Zune than Microsoft? Where's Sorkin on this? Lawrence, today's featured commenter, explains to those drinking the hatorade:
Turning a profit with your startup can't be all that hard. Just ask 15-year-old Hansup Yoon. He created a community discussion site called ZuneBoards in 2006 using free MyBBoard software, got 60,000 users, earned $1,000 a month from Google ads for a couple years, and then sold it for $62,000 this summer. "It is so easy to make money on the Internet," Yoon told the Boston Herald. "I only spent 30 minutes online a day on ZuneBoards."
21-year-old billionaires in the making? To tell the truth, the youngest Forbes has come up with in the past decade was Elon Musk at 27. That was back in 1998, with only $22 million. Musk's face is more lined, but he still isn't a billionaire, even after cashing out from PayPal's sale to eBay. Forbes at least has some standards — only reason I can imagine Zuckerberg isn't in the piece is because his share of Facebook's valuation is still mostly theoretical. As for Bebo's Michael and Xochi Birch? They're back to their birthday announcement and e-card concern BirthdayAlarm.com, not content with a cabin in the hills at all. (Photo by Ryan Anson/Bloomberg News/Landov)
Don't feel too sorry for Ben Ling, the star product marketer who leapt from Google to Facebook back to Google in less than a year. Facebook COO Sheryl Sandberg — herself a Google alum — has threatened not to let Ling keep the shares he earned to date. It was a petty move that goes against Valley standards of on how to treat departing employees, not to mention Facebook's own practice in such matters. But it's not like the loss will sting Ling. Google SVP Jonathan Rosenberg, who's said to be a big fan of Ling and recruited him heavily to come back to the search engine, is taking care of Ling with a "multimillion-dollar signing bonus," according to one tipster.
News Corp.'s online arm, Fox Interactive Media, has struggled to attract online talent while paying them like a startup would. (News Corp. shares just don't cut it.) The solution for the unit, which includes MySpace and a passel of lesser-known websites: a long-term incentive plan, or LTIP, which offers a sort of phantom equity to executives in the division. In the last few weeks, the numbers for the most recent fiscal year which ended June 30 were distributed, and they were "disastrously low," says a tipster. "Most executives were already looking to leave," he says. "They hated FIM and the only reason they were staying was because of promises made about the LTIP." True, FIM hasn't quite made its aggressively optimistic numbers. But executives believe the real reason their bonuses are so low is MySpace CEO Chris DeWolfe's fat contract.DeWolfe and his MySpace cohort, Tom Anderson, renewed their contracts last fall with News Corp. last year for $15 million apiece, spread over two years. Paying that amount has, FIM executives believe, left nothing for them. "They're pissed," says our tipster. Then again, do these puffed-up Fox executives deserve much more than they're getting? Pop quiz: Name a Fox Interactive property other than MySpace.
ConnectU cofounders and Olympic rowers Cameron and Tyler Winklevoss beat out Croatia to win their second heat yesterday, advancing to Wednesday's semifinals. Meanwhile, back on the home front, U.S. District Judge James Ware said Monday that ConnectU has until Tuesday to transfer all its stock to Facebook and comply with a settlement to the ConnectU founders' suit alleging that Facebook founder Mark Zuckerberg stole their idea.The news is hardly bad news for the Winklevoss brothers and ConnectU's third cofounder, Divya Narendra. Court papers say the three will get "millions" of dollars in cash as well as stock in a startup too popular with mainstream America's millennial generation to fail. (The Winklevosses were fighting the settlement after they discovered that the Facebook common stock they would receive was worth less than they supposed.) Plus, there's still that shot at gold.
The prospect of Facebook minting new Valley millionaires is too delicious a story to check the facts. For example: Has Mark Zuckerberg, Facebook's CEO, actually sold shares? Sarah Lacy wrote that Zuckerberg sold $1 million in shares early in the company's history. BusinessWeek repeated the notion. Too bad it's not true, as Zuckerberg himself told the company in an email last Friday announcing a plan to let employees sell some of their Facebook shares.This much is true: Zuckerberg came close to selling his shares. But at the last minute, he backed out, and instead accepted a cash bonus of $900,000 from the company. Technically true that that wasn't a stock sale; but it did amount to a liquidity event for Zuckerberg — one that didn't quite make him a millionaire. Hence the seemingly arbitrary limit on employee's stock sales. In November, employees will be allowed to sell either 20 percent of their shares, or $900,000 worth of stock — whichever is less. (The $900,000 limit, seemingly arbitrary, was based directly on the size of Zuckerberg's cash bonus.) Those shares must be sold at the common-stock valuation of $4 billion, not the $15 billion valuation Microsoft paid for in preferred shares. (Preferred stock, because it allows owners to be paid first in the case of a sale, among other rights, is more valuable than common stock, which carries no such privileges.) Those are the rules, at any rate. Facebook will have a tough time enforcing them. There's nothing under the law preventing employees from selling more than $900,000 or more than 20 percent of their holdings, and there are plenty of willing buyers, some of whom may be glad to buy the shares at a valuation higher than the sanctioned $4 billion. (Facebook hopes to prevent sales at a higher valuation to avoid a revaluation of the company that could make it harder to recruit new employees.) What's likely to happen is that employees who break Facebook's rules will see promotions disappear and future stock grants dwindle — which will matter little to the company's earliest employees. How much money is at stake? A startup typically allocates 20 percent of its shares to employee options. Even at the lower $4 billion common-stock valuation, that's $800 million waiting to bust loose from Facebook's coffers. Will Facebook's earliest employees be satisfied with a six-digit payout, knowing that some wealthy investor would be glad to make them multimillionaires? (Photo by AP/Ruttle)
Intel is one of several companies which have quietly converted their pension plans into vehicles for financing wealthy execs' deferred compensation. The majority of the tax-advantaged assets in Intel's pension plan are now dedicated not to providing pensions for the rank and file, but to paying IOUs issued to the chipmaker's most highly paid employees. The financial sleight-of-hand reportedly saved Intel $65 million in taxes in one year alone. Intel maintains that its practices — which in effect get taxpayers to help finance Intel's executive compensation — "feel consistent" with both the spirit and letter of the law that gives tax benefits for providing pensions. Our reaction: There's a Valley company which still offers a pension plan?
At a recent company meeting, management told LinkedIn employees they would soon be allowed to sell as much as 20 percent of their vested options at a $500 million valuation. Word leaked yesterday that Facebook plans to allow its employees to do the same. Both LinkedIn founder Reid Hoffman and Facebook founder Mark Zuckerberg want to take their companies public — and thereby get their employees paid — but it won't happen soon. LinkedIn expects to earn about $100 million in 2008, but VentureBeat reports that bankers want to see that number hit $200 million before bothering to file papers. The public markets aren't hungry enough for anything less. In July, only 56 companies went public, raising $5.6 billion in their IPOs. During the same month last year, 190 companies raised $31.7 billion on their initial foray into the public markets.
