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Private Company Stock Smarts

Stock tickerA couple of privately-held social networking companies are taking the unusual but interesting and, I'd argue, smart step of letting their employees sell some stock now, rather than later. The move should go a long way to avoid the problem of key worker attrition while boosting loyalty.

Eric Eldon at VentureBeat reported that Facebook would let employees sell 20 percent of their fully vested stock options, using the company's internal market valuation of $4 billion, starting this fall.

Facebook isn't commenting. But this is a nice early windfall for Facebook employees, assuming my sources are correct. Other "liquidity events," like an initial public offering or a purchase of the company itself, are looking unlikely. Facebook has said it's not planning to IPO anytime soon, and it has rebuffed multiple purchase offers over the years -- instead raising hundreds of millions of dollars as it seeks to become a big business.
A key part of compensation in high tech is stock options, and eventually they do start to vest. If there's no liquid market for the stock, employees can feel like they are working for a lot less than they expected -- and that's literally true. It doesn't matter how big the check is if you have to keep it in a desk drawer.

According to the story, some former Facebook employees have already sold some of their stock at about this value. Because they are no longer under the restraint of Facebook's board of directors, they don't need permission. Losing employees that you want to have around because they can't sell some stock is pretty silly.

LinkedIn is apparently doing the same, only at a $500 million valuation. (Neither company is commenting.) Given the market doldrums, it, too, is unlikely to get a premium price in an acquisition, and certainly going public is not going to be easy at the moment. There may be a secondary benefit to the move. By letting some of their stock actually trade, even if not an exchange, I'd think the companies could boost their own valuations. After all, it's tough to maintain a market valuation, which is important in financing and raising money, if no one is proving the number by buying stock at that price. But when employees can sell at the specified price, then it's much easier to say that a company really is worth what it claims.

Of course, all that depends on others actually being willing to buy the stock. If your company doesn't have the visibility of a Facebook or LinkedIn, then this tactic may not work.

Stock ticker image via Wikimedia Commons