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Goldman Sachs' Investment in Facebook Removes Pressure for IPO

Facebook is about to receive a $500 million investment from Goldman Sachs (GS), giving the company a $50 billion valuation, according to the New York Times.

The extra money will allow the company to invest in infrastructure or compete for employees with other Silicon Valley companies, especially Google (GOOG), which has spent freely to keep talent. But another use of the cash infusion is probably more important. Facebook will want to let a number of current employees to cash out their shares, removing a pressure that could push the company into an early IPO.

Any company considering an IPO wants to control the timing as closely as possible. Management wants a market that will bid up the stock price to invest and recent results that make interest likely. Get anything wrong, and the chance of a successful initial offering drops. Demand Media is an example of what can go wrong. Not only did SEC filings shine a harsh light on the company's strategy, but Demand's accounting treatment of its freelance writers as a capital cost that it amortizes over five years makes its history of losing money look even worse.

Normally, a company that wants to file for an IPO waits for the time it thinks best. But Facebook has faced an unusual problem. The stock has been popular on secondary stock markets like, where some share-rich tech employees will sell their interests to cash out in advance of an IPO. In fact, the value implied by what investors are willing to pay for shares has increased Facebook's implied valuation by 50 percent over the last six months.

That private interest in Facebook, Twitter, Groupon, and other hot high tech companies has caught the attention of the SEC. One potential upshot is that Facebook might have 500 or more individual shareholders -- certainly possible if employees had broken up their stock into multiple lots. That would put Facebook beyond the allowable number of investors for a non-public company.

Facebook reportedly prohibited such private stock sales by employees in April 2010. However, given that the company has used stock for some time as a form of compensation, perhaps it is already beyond the limit. If so -- and that is a big if -- Facebook could use part of the cash to buy shares from individuals and reduce the number of investors.