Four challenges for Facebook’s millionaire army
Sunday, May 20, 2012/
So Facebook has finally floated and everyone is fabulously rich.
And by everyone, we don’t just mean Mark Zuckerberg and the gang of high-flying company founders and investors who now own stakes in a public company worth billions of dollars.
The company’s 3,500 employees are sitting on about $US10 billion of the equity. It has been estimated that somewhere around 1,000 of those will become millionaires (on paper at least) after their previous holdings – which were in something called restricted stock units – converted to actual shares as a result of the IPO.
While Mark Zuckerberg will be the biggest winner from the float with a stake worth around $US19 billion, his use of shares to lure employees has ensured everyone can share in the hype machine that Facebook has become.
In the early days, everyone from coders to the graffiti artist who decorated Facebook’s first office were paid in some form of stock, so tight was cash.
But even when the company was established and primed for an IPO, stock remained a key remuneration weapon.
According to a story from CNN last week, an average package for a software engineer joining the company in late 2009 would have included around 10,000 RSUs. A year later, Facebook did a five-for-one share split, so the engineer would have held 50,000 shares. Based on the IPO price of $US38, that stake would now be worth something like $US1.8 million.
It should be party time, but it’s not that simple. As the old saying goes, more money equals more problems.
Here are four key challenges that Facebook’s millionaire army faces:
One problem with getting big chunks of money is that the tax man always wants his take too. So it was no surprise that Facebook co-founder Eduardo Saverin decided to renounce his American citizenship, apparently to reduce his exposure to the US tax regulator, the IRS. But as several reports have mentioned, Saverin’s decision will only reduce his future tax bills – he won’t be able to dodge the massive bill heading his way after the float.
Because Facebook shareholdings are held in restricted stock units, they attract big tax bills. The IRS treats RSUs as income when they vest, meaning Saverin – and every employee stock holder – will need to pay as much as 45% tax on the entire value of their stock at IPO time. The tax take on the $US10 billion equity held by Facebook’s employees could be as high as $US4 billion. Ouch.
2. Wealth management
It’s worth remembering that the majority of Facebook employees coming into money are still young, so it will be essential that they manage their money well and make it last. And that means getting a good wealth adviser.
According to reports, the biggest winners from the float – including Zuckerberg, investor Sean Parker and Facebook’s chief operating officer Sheryl Sandberg – are clients of a top-flight wealth management firm called Iconiq Capital, run by three former Goldman Sachs employees, Divesh Makan, Chad Boeding and Michael Anders.
If you’re not a billionaire then you’re probably not going to be on the radar of Iconiq. But Goldman, Morgan Stanley and the usual suspects of the private banking and wealth management world will be rushing to scoop up Facebook clients.
What will the Facebook millionaire army need help with? Tax planning and investment advice are probably on top of the list, but other issues might include estate planning and structuring gifts to family, friends and others.