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Jay Gould

Earlier this month I wrote an article on Business Insider explaining how I believed Groupon may have used Google as its BATNA (best alternative to a negotiated agreement) to create more liquidity, and it appears they may have done just that.

According to the SEC Form D filing by Groupon, they just closed on $500 million of a $950 million round they are raising.  Interestingly, the filing also states that existing shareholders will receive $344 million in liquidity in this round.  While the filing is not 100% clear what portion, if any, of the $344 million is founders liquidity, I assume both the founders and existing investors are receiving liquidity in this round.

Under Item 16 of the Form D filing, which is the Use of Proceeds section, it asks the Company to provide the amount of the gross proceeds of the offering that has been or is proposed to be used for payments to any of the persons required to be named as executive offers, directors or promoters in response to Item 3 in the Form D filing.  Groupon listed that they will use $355,547,138, and gave the following clarification for the use of proceeds:

A portion of the gross proceeds will be used to pay for shares repurchased by the Issuer in a tender offer for shares held by, among others, certain of the persons named in response to Item 3 above and/or their respective affiliates.

According to Fred Wilson of Union Square Ventures, entrepreneurs often have to hold out longer than VCs in order to get a good exit, and he explains that if that’s the case, its entirely reasonable to provide some founders liquidity to them.  Fred goes on to explain:

I’ve also seen entrepreneurs choose to sell the company prematurely because they want to take some money off the table. If offered the opportunity to take a bit off the table and swing for the fences, many would prefer to do that“.

That appears to be the case with Groupon.  Perhaps Google’s $6 billion offer to acquire Groupon was premature, and in order to swing for the fences, I think its reasonable to provide founders liquidity.  Remaining private and utilizing the secondary markets for some liquidity in return for the that risk is the best case scenario for Groupon in my opinion.  They remain in control of their business and its direction, they maintain their entrepreneurial spirit, there’s less scrutiny from the SEC and they take some cash off the table.  Not a bad!

Additionally, it appears Groupon may have used a broker to source this deal, as Item 15 “Sales and Commission & Finder’s Fees Expenses” is checked off with $7,500,000 listed as a Finder’s Fee for the raise.  It’s unclear if the Finder’s Fee is for the entire $950M or just the recent $500M for this portion of the round.  We’re seeing more brokers involved in secondary transactions, helping to bring more liquidity to the secondary markets.  I think this is great for accredited investors interested in investing in high growth technology companies that they would otherwise not have been exposed to.  Generally these companies have been reserved for the institutional venture capital investors.  These brokers are helping the market by creating more liquidity and more favorable terms to the founders, their shareholders and employees by increasing the demand for their shares.  Its great for all parties.

Well played Groupon.  Well played.

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If search is any indication of what people want, they want Facebook more than twice as much as Google and Yahoo according to Google Trends.

I also compared the most popular social media companies to Facebook on Google Trends, to see if perhaps social media properties skew higher than the old Internet titans.  They don’t.

I was curious how Google compared to the old titans, and interesting, Yahoo and Google are neck and neck.

To be fair, these results are based on Google search results, so I’m not quite sure why someone would go to Google to search the keyword term “Google”, but it was fun to pulling the data.

To learn more about how Google Trends are calculated, click here.

Jay Gould maintains a long position in shares of Facebook (private).

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On December 31, 2009 Steven Bertoni of Forbes wrote an article entitled “How Much is Facebook Worth“, where he said “firms are pooling clients’ money to buy privately held Facebook shares — and probably overpaying.”  At the time of this article, the implied valuation of Facebook was around $11 billion according to SecondMarket and SharesPost, which stated that the Facebook stock was trading at $25 per share.

If you are an accredited investor and were a reader of this Forbes article one year ago, this advice, from one of the most credible sources on stock market analysis, may have cost you a lot of money.  However, if you were a reader of SecondShares $50 billion valuation of Facebook just a few months later, you may have been able to save face.

Keep in mind, Forbes Magazine describes itself on its website as “Business News, Financial News, Stock Market Analysis – online source for the latest business and financial news and analysis. Covering personal finance, lifestyle, technology and stock markets”.  It doesn’t state that they cover “secondary private company stocks”.  I feel its a bit irresponsible for a brand like Forbes to tell their readers that investors are “probably overpaying” for a stock, without providing any real research or market analysis to support that opinion.

In the article Bertoni went on to say, “of course trying to value Facebook is as difficult as hiding from your former high school sweetheart online“.  First, I’m not quite sure Bertoni actually tried to value Facebook with any real market research or analysis, other than according to him, extrapolating its value “for fun” with the same multiple that Google had in its 2004 public offering, which was 15.7, to Facebook’s then estimated revenues of $300 to $500 million.  Second, considering Facebook is where your high school sweetheart would likely find you online, shouldn’t that have been one of the indicators to Bertoni that perhaps he’s not qualified to understand the value of Facebook.  ;-)  Okay, he left that one open.

But seriously, Bertoni’s skepticism continued with, “despite the big run-up (in stock price) in six months, little has changed about the business of Facebook“.   Sigh.  He even cited Facebook’s 350 million membership count, as well as their revenues of $300 to $500 million.  Yet, he felt their business had little change?  Really?

Well, its been twelve months since the Forbes article begged the question, “How Much Is Facebook Worth?”, so let’s take at Facebook’s continued trajectory to see if its overpriced today, “for fun”.

Facebook has gone through a 5 to 1 stock split and its stock is currently trading on the secondary market, among sophisticated accredited investors, at an implied valuation of around $50 billion.  They now have over 500 million members, or they’ve gained nearly another 200 million members in the last year.   Their estimated revenue for 2010 is now $1.2 billion, and they are at the earliest stages of deploying their monetization strategies.  In fact, according to VentureBeat, Facebook is about to get very serious about its revenue.  Facebook just leased two floors on Madison Avenue, with the potential to expand up to 150,000 square feet or 600 people, nearly all of which would likely be in sales.

Fifty percent of their 500 million members logon to Facebook every day, and they spend over 700 billion minutes per month on Facebook. The average member has 130 friends, connected to 80 community pages, groups and events and creates 90 pieces of content per month, which in total is more than 30 billion pieces of content (web links, news stories, blog posts, notes, photo albums, etc.) shared every month on Facebook.  Additionally, there are more than one million developers and entrepreneurs running a business on Facebook from over 180 countries, which over 70% of Facebook users interact with every month.  In fact, companies such as Zynga, RockYou, Slide and more have built sustainable businesses that have created billions of dollars in shareholder value on top of Facebook’s platform, just as companies such as Intuit (INTU) and Adobe (ADBE) have created billions of dollars in shareholder value on top of Microsoft’s platform.  Its no wonder Microsoft was the first to fully understand the future value of Facebook when it invested $240 million in Facebook at a $15 billion valuation or 1.6% of the company.

I will slightly agree with Bertoni regarding his supply and demand argument (that Facebook shares are for sale, and everyone wants Facebook bragging rights), but that doesn’t necessarily mean that the investors are overpaying for their Facebook shares in the secondary markets.  Remember, the secondary markets are illiquid, they’re not for traders, they’re for investors, like Microsoft’s investment.  So the question isn’t whether or not your share price is ‘exactly’ where you’d like it to be today, its whether or not you believe it will be worth more in the future, and with Facebook’s growth trajectory, vision and track record, I think we know the answer to that.

The question I’d really like to know is whether Forbes believes Facebook’s stock is overpriced today.

Jay Gould maintains a long position in shares of Facebook (private).

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As we’ve said before, the need for growth companies to be acquired or chase that rubber chicken laced road show circuit to go public through an IPO aren’t private companies only option anymore.  While the world can only speculate as to what Groupon will ultimately do, one thing is for sure, they have done wonders in creating shareholder value and increasing their private market value in their very public negotiations with Google.

Perhaps Google was Groupons’ BATNA (best alternative to a negotiated agreement) to the secondary market?  Just eight months ago Groupon raised $135 million on a $1.3 billion valuation from DST, which at the time was intended to be used to buyback equity from Groupon’s then 90+ employees as well as their early investors.  Today, Groupon reportedly has 1,000 plus employees, and their revenues are north of $2 billion annually.  With that kind of trajectory, did Groupon know their downside of walking from Google, or better yet, use Google to pump their valuation up for a new secondary sale of their private company stock, which will provide less dilution, preserve more control and protect their unique culture?

Again, one can only speculate.

The reality is, we just don’t know why Groupon would go public if the private market is providing a higher valuation for their shares and maintains more control for the founders that clearly seem to know what they are doing.  We believe that with $2 billion in annual revenue, Groupon is already a “real-live business.” Further, we believe that Groupon can comfortably take its “fuck you money” off the table without having to negotiate further with any public company, Google included. Groupon could sell less shares to the private market than the public market, for less dilution, less scrutiny, less regulation while providing sufficient liquidity to its founders, investors and employees.

So perhaps a congratulations is in order for Groupon.

Jay Gould maintains a long position in shares of Facebook (private). This post was edited by Bill Auslander.

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I had a conversation with Scott Rafer on Skype Sunday night, where I requested a video interview of him on SecondShares so he could express his views on the secondary sale of private company stock in companies like Facebook, Twitter and Zynga, as well as the recent angel investment “bubble”. Scott declined to be interviewed by SecondShares, expressing his concern that we are “legitimizing” the private secondary shares market, which he feels strongly against.

Apparently there appears to be a growing sentiment among a select few within the startup community that the secondary markets should be avoided like the plague.  This post is in response to a post written by Scott attacking us (but not naming us) and the secondary market for private company stocks, and is intended to clarify our mission and the value of the secondary market for private company stock, since its apparently not yet clear to some rather influential and smart individuals within the startup community like Scott.

Interestingly, after our ten minute conversation on Skype, Scott responded by writing a blog post that started with “There’s No Insult Intended…”, yet in his blog post he said:

“…as is clear, Google is forever. I’m not going to voluntarily have my name indexed alongside his domain.”

SecondShares hopes to provide a platform for all parties to articulate their views on the secondary market for private company stock, and we had hoped Scott would accept our invitation to participate and provide his views.

In Scott’s post he incorrectly described SecondShares as:

“His blog covers solely the market for private stock sales. He only succeeds if it becomes a legitimate market. I am very concerned that we’re just seeing the start of a giant wave of these crappy deals and that they will total many billions of dollars in the coming years. His domain, his logo, and 90% of the articles on the site are legitimizers of this poorly considered macro reaction to the over-regulated mess we call the IPO process.”

Scott is either misinformed or unaware, but to clarify, SecondShares provides news, commentary, and Wall Street style analysis on private internet companies.  We do not solely exist to report on private stock sales of internet companies.  In fact, we don’t even know when the second market transactions occur.

Scott states that his concern is to not “legitimize” the secondary market, however, he addresses it on his blog. The reality of this emerging market is that Scott and many others ought to act to legitimize this market whether it be on our SecondShares site or not.

The public market’s decade long bear market burn of value in the US public equity market needs a new way to channel value creation because a chart of the S&P over the last decade demonstrates that the US public equity market is broken!

History has demonstrated that the birth of many markets has been marked by a chorus of discrediting and undermining commentary by many including the entrenched players at risk.  The case in point today is the secondary sale of private company stock, also known as the second market.  Some, like Scott, within the startup community are articulating their concerns.

“I’m concerned about the inevitable ripoff artists who will start shell companies solely to sell their shares on SecondMarket (or wherever). They’ll have documented some silly plan about rolling up small social game publishers, Groupon clones, or whatnot.”

Before one casts further dispersions on other legitimate business approaches and strategies such as rollups of synergistic businesses one ought to consult with one of the many wildly successful business managers greats such as Jack Welch formerly of General Electric that was noted for building one of the greatest companies in the world with such a roll up strategy, or the highly successful internet entrepreneur Richard Rosenblatt of Demand Media or even Mark Pincus of Zynga (which has rolled up quite a few application companies.) The list goes on and on.

Given the precarious state of the world’s public equity markets it is quite concerning to us that so many within the startup community are seeking to cast dispersion on a market that is so strategically critical in today’s financial environment and possibly for many years to come.

Though Scott’s contrary logic still evades us, we are the preeminent blog for thoughtful commentary and analysis surrounding private internet companies by acknowledged, seasoned and successful Wall Street professionals.

More ironic is the idea that Scott apparently believes that there can be any legitimate market that can steadfastly avoid the “crappy deals” and “inevitable ripoff artists” that he speaks of in such a way as to believe that they only exist in the realm of a market like the secondary market.

One might consider recent events such as Bernie Madoff’s escapades, pink sheet shell company scams as well as countless public stock manipulations before relegating such activities to the realm of a new market such as the one SecondShares expounds upon. Importantly, it is worthy to note that insult is added to injury in that the public market’s crimes count as its victims those that are not accredited investors, while the inevitable incidents that may occur in the secondary sale of private company stocks do not! Scott’s concerns would be much better placed on a public market of tens of trillions of dollars, rather than the emerging legitimate and the strategically critical secondary market.

While Scott may scoff at the notion of this market being a strategically critical market, the ultimate irony is that the private market that Scott fears to “legitimize” has been his personal choice of venue establishing the value of his companies!  While Scott may say he raised capital and sold equity to “professional investors” (angel investors and venture capitalists) the fact of the matter is that markets have a history of broadening out and the accredited investor qualification of the secondary sale of private equity offers a protection that the public equity markets do not offer. In the end, as we all know, the world is getting flatter and to pretend there isn’t more business intelligence more firmly planted more broadly than it ever was before is to believe the realities of why the second market has the credibility and traction that it does. This is why SecondShares was established to create a reasoned voice of commentary and analysis in a market that is destined to grow in its importance and consequence. Again, we would say that Scott’s concerns would be better placed on a much larger market with less protections around the unsophisticated investors involved in investing in the US public equity markets.

To keep things very simple, in a bear market the gravitational pull of the market is such that it is directed at pulling down the value of publicly traded stocks. Importantly, we believe there is a growing trend to consider that the use of stock to attract and retain key employees as well as the use of a stock based currency to acquire strategically critical assets is mission critical and best not left to chance valuation in a bear market.

The only irony greater than where Scott chooses to blog his views on the secondary market is that he would suggest to others that they leave the critical strategic imperative of how a stock gets valued to be relegated to the whim of a public bear market rather than to an orderly, governmentally blessed and legitimate second market. It’s not likely an accident that there is more value today than ever before being captured in the companies that make up the secondary market.

Perhaps it’s not a mere oversight on the part of all these non-public companies with values in aggregate well north of one hundred billion dollars. We just doubt that that they simply forget how to file an S-4 with the SEC to go public. Ask any of the countless investment bankers chasing Facebook and the many other companies that would be gladly be shown the rubber chicken laced road shows required to go public. They are clearly choosing not to go public. There is a lesson in this for many that think that the road of running a successful company must go through the IPO door.

The strategic imperative of thoughtfully considering how a Board and a management team chooses to have their company valued may in fact best be left to a market that they can believe in; rather than a public equity market noted of late by the SEC for the largest insider trading scandal ever in history and is looking more and more like Japan’s death defying bear market of the past twenty years.

We guess the punchline is …

We were insulted!  ;)

This post was edited in collaboration between Jay Gould & Bill Auslander.

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There is a new single purpose fund on the block, 137 Ventures, which has been setup specifically to purchase stock options directly from Facebook employees. The fund is headed by Justin Fishner-Wolfson, a former principal at Founders Fund, which is an early Facebook investor. 137 Ventures is reportedly raising as much as $100 million to purchase stock options from the Facebook employees.

137 Ventures has setup a unique strategy for acquiring the stock options from Facebook employees. According to WSJ’s Tomio Geron:

“For borrowers, 137 Ventures is proposing to charge about 12% interest on the loans, as well as a 10% upfront fee. The upfront fee will be paid in stock of the company for which the options are exercised, while the principal and interest apparently will be paid in cash.”

Facebook employees stock options expire 90 days after an employees leaves the company, and considering most employees can’t afford to exercise their options, this fund may provide the fully vested employees the option to cash out their stock at Facebook and move on to a new startup to begin vesting new stock options. Essentially, once an employee is fully vested at Facebook, there’s little upside in staying on board. The loans are needed by employees not only due to the cost of exercising the stock options, but in many cases there are heavy tax burdens as well. Essentially, the Facebook employees are subject to taxes on the difference between the current value of the stock and the price at which the employee exercised the option, which can be rather significant for Facebook stock options today.

As for the limited partners in the fund, 137 Ventures is proposing to charge a management fee of $1 million plus 1% annually. The fund also has a carry of 20% above the net IRR of 25%. The fund is setup for five years, with three possible one-year extensions. Borrowers must use the company stock as collateral on the three-year loan, and the stock must be worth at least two to three times the amount of the loan.

VentureWire interviewed Cyan Banister, an angel investor and the chief executive of model and photography startup Zivity LLC, who said “I’ve personally loaned large sums of money to employees so they can leave Facebook. I’m not in the business of doing this. Clearly if my friends have a need and are stuck there, there’s clearly an opportunity here and (the loans) need to exist.”

A fund like this wouldn’t work for smaller startups, but with companies like Facebook, Zynga, Twitter, Groupon and others, it may just work due to the number of employees and their growing valuations and likely eventual IPO’s towards liquidity. With more than 1,000 Facebook employees and recent secondary transactions for its stock above $40 billion and growing, the market for just Facebook employee stock options is becoming an enormous market in itself. Typical investors like to see a 2 to 3 year horizon for liquidity, but with these high profile startups, the secondary market is already providing their required liquidity. Additionally, Stock Options Funds like this may not work with smaller startups that have fewer employees and lower valuations due to the risk that they may be acquired for a lower valuation that the purchase price of the options. The risk is that the preferred stock in these companies will monetize before the common stock, which is what the employee’s stock options are. However, in growth stage companies like Facebook, Twitter, Zynga and others, this risk is much lower.

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The Dot Com Bubble Is Back – Fred Wilson and John Doerr Discuss

November 18, 2010

Share With 10%+ unemployment, it’s hard for most American’s to imagine, but the dot com bubble is back again. According to many, we are seeing a bubble yet again surrounding internet companies at historic proportions in early stage and late stage investing. The reality is that there has been a lot of wealthy individuals with [...]

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Lou Kerner on Bloomberg TV Discussing Facebook

August 23, 2010

Share In this clip from Bloomberg TV, Lou Kerner, partner at SecondShares and social media analyst at Wedbush Securities, discusses Facebook’s entry into location based services and whether Google will attempt to compete with Facebook in social networking. Lou calls Facebook the “Second Internet”, saying “really sitting as a layer on top of the first [...]

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Lou Kerner Discusses Facebook IPO on Bloomberg Television

August 23, 2010

Share In this clip from Bloomberg TV, Lou Kerner, partner at SecondShares and social media analyst at Wedbush Securities, discusses a Facebook IPO. As Lou says, “I think there is a belief among many in the silicon valley, that going public isn’t an exit, its really an entry and you want to enter that at [...]

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Google Stock Set To “Sell” Due To Facebook – Down 21 Percent in 2010

August 23, 2010

Share SecondShares’ Lou Kerner was on CNBC yesterday after he initiated Google with an ‘underperform,’ making him just the second analyst to put a ‘sell’ on the stock. Kerner put a price target on Google at just $525. According to Kerner, Google is making the vast majority of its revenue on a pay-per-click basis to [...]

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