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Get Ready for Facebook Brain Drain

Last month, Russian company Digital Sky Technologies announced that it was buying up to $100 million in Facebook stock from people with vested shares. That roughly translates into the employees who went to work for the company early on and helped make it what it became. And this is probably really bad news for Facebook, although the results may not show immediately.

Given the Silicon Valley culture, it's almost impossible to start a venture without giving shares to the talent that executives crave. Those working for start-ups generally have that entrepreneurial spark, which is why they take the risk and expect a reward. Nothing wrong with that, as it drives the hard work and long hours necessary for success.

Normally the employees have to wait for an IPO to get the cash rewards they've been anticipating, only in today's market, those three letters instead be WNI: We're Not Investing. The fact has concerned VCs, who have sees an initial public offering as a fairly sure way to cash out their position in a company and reap the profits. Instead, the option has largely been acquisition. When Digital Sky offered to buy additional stock, this time from employees, the buyback was quickly oversubscribed, much to the apparent annoyance of Sarah Lacy at BusinessWeek. In a story that called the queuing employees "mercenaries," questioned their wisdom -- and their character -- at not waiting for the big payout that she expects will eventually happen for the company:

What has happened to the startup work ethic in Silicon Valley? Time was, the region was teeming with believers--be it believers in a company or believers in the sometimes naive, lottery-ticket hope that options would make them billionaires. People who work at the most highly valued startup in Silicon Valley and rush to sell for a smaller valuation--just as an IPO is starting to look likely--aren't believers. They are mercenaries. What's next? Giving up options altogether for a bigger paycheck?
She does admit that the founders of companies should be able to cash out "a small portion of their equity" because "slave for years and typically take small salaries." However, it's not as though employees at a start-up live a life of luxury -- and it's not that they get paid well while the founders go hungry. As Caroline McCarthy on CNET put it:
Facebook's salaries, people in the industry tell me, tend to be a little bit lower than those at many of their Valley counterparts. That's understandable: it's one of the hottest companies to work for, and could have a huge IPO down the line, which would mean that a lower salary now would ideally pay off big-time later. But some of those early employees were probably expecting Facebook to have gone public by now. In this kind of economic climate, there's going to be some hand-wringing.
There's also another factor. When you thrive on the adrenaline of starting something new and as that company becomes big and bureaucratic, you long for a situation more to your taste. Or maybe, agreeing in a way with Lacy, you want to be the one who creates the billion-dollar company. You simply aren't going to do it as an employee because you aren't in charge.

The driven employees who were there longest will want to cash out and try starting something themselves. I remember this trend back in the early 1990s when I was at a company that did business with Microsoft constantly. Some of the smartest people were able to cash out, and then they moved on to something new. That's the bad news for Facebook. They employees it may want will be itching for new horizons and more control over their destinies. A lot of them have just received their ticket in the form of selling their options, whether they were at a maximum price or not. This will start a brain- and talent-drain from Facebook and a challenge for management there because, at least to some degree, the service is a fad.

No, I'm not saying that there's nothing to it and that it's going to disappear. But it happened to be in the right place at the right time and caught the wave of consumer fancy. To maintain growth and avoid the long-term decline that MySpace has been facing will require finding new ways to please consumers. And some of its greatest creativity will be leaving just when the company needs that edge most.

Image via stock.xchng user salladhor, site standard license.

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