Now that Facebook’s public, and its stock has slipped below the IPO price, will it still be a hot place to work?A stagnant stock price can dent employee morale—just ask Microsoft or Yahoo. But Facebook’s stable pre-IPO price and its post-IPO gyrations may have less of an impact than one might think on its appeal as an employer. To understand why, there are three letters you need to know: RSU, or restricted stock units.
With restricted stock units, Facebook can buy the happiness of just about any prospective hire, regardless of what happens with the stock on a day-to-day basis. In fact, Facebook’s been doing that for years, as a private company.
We asked Facebook for comment on this story, but the company’s in a post-IPO quiet period. That’s OK. We can fill you in.
As far back as 2007, Facebook executives realised that the company’s growing number of options-holding employees would push it over the 500-shareholder limit that the SEC imposes on firms that wish to keep their financials private. That’s the limit that forced Google’s wary cofounders, Larry Page and Sergey Brin, to take that company public in 2004.
With Google’s example in mind, Facebook management switched from primarily issuing stock options to granting restricted stock units. Unlike stock options, restricted stock units give employees shares, plain and simple—there’s no strike price, no need to front cash to exercise the options. (There are some less-favourable tax implications, but those are too complex to get into here.)
Holders of RSUs didn’t count against the shareholder limit. They also couldn’t sell the shares underlying their RSUs on the growing secondary markets—only employees who had vested and exercised their options could do that. Oh, and some RSUs were subject to performance targets—meaning managers could take them away.
Facebook also frowned on employees selling shares on secondary markets, period—so even those who owned their shares outright pretty much had to quit if they wanted to sell, outside of a few company-sanctioned stock sales. That was a factor in employees’ departures in recent years, with Facebook valued highly but an IPO still too far off.
There’s one tremendous benefit to Facebook’s reliance on RSUs, though—and that’s the downside protection they give employees. An RSU for a share priced at $38 is worth $34 today. An option for a share with a strike price of $38 is worth $0 today. If you’re worried about a prospective employer’s stock going down or staying stagnant, RSUs are the way to go. (And since we believe a fair value for Facebook shares today is $20, that’s a reasonable worry.)
The vehicle of Facebook’s wealth creation was the 2005 Stock Plan. That plan is now over and gone, replaced by Facebook’s 2012 Equity Incentive Plan.
We read through the new plan. It’s fairly boilerplate stuff—what you would expect from a company that’s morphed from a raw startup to a giant of Silicon Valley. But a few provisions caught our eyes:
- No more billionaires: No employee can receive more than 2.5 million shares a year under the plan, except for new employees, who can get 5 million shares their first year on the job.
- No voting rights: Employees now get Class A shares, not Class B shares. Those carry fewer voting rights (which employees probably don’t care about anyway).
- No more lockups: RSUs issued prior to 2011 are locked up for six months following the IPO. RSUs issued after 2011 aren’t—though those grants have barely had time to vest.
Facebook CEO Mark Zuckerberg has been making it clear to employees since January that they need to keep their heads down and ship code. All things being equal, Facebook’s hacker culture, fast-changing product, and huge user base will keep engineers interested.
And the fact that there’s a real market for Facebook shares—a market that anyone can tap, not just the privileged few who traded in secondary markets—is itself attractive, points out Chris Crawford, COO of compensation consultancy Longnecker & Associates.
Bottom line, according to Crawford: “Despite these little pros and cons on currency, it’s still Facebook, it’s still early, and potential employees will want in on the action!”