Facebook Director’s Share Sale Lacks Precedent

Early investor Peter Thiel's $1 billion sale is unusual for Silicon Valley.

Peter Thiel’s decision to sell almost all of his stake in Facebook Inc. so soon after company’s initial public offering has few precedents in Silicon Valley, where venture capitalists typically hold shares longer.

Thiel, a Facebook director and its first outside investor, divested 72 percent of his remaining shares three months after it went public. Of the 40 biggest U.S. technology IPOs since the end of 2010, only Facebook and its underwriters let some backers sell so soon, with every other company adopting a so-called lock-up period about twice that long.

While venture capitalists commonly sell their stakes after helping startups reach the public markets, they usually whittle their holdings over a period of quarters or even years. That’s to avoid flooding the market with too much new stock, which can drive down the shares, and to show continuing support for the company. Thiel’s timing was particularly precarious, because Facebook was already down about 50 percent from the IPO.

“With the benefit of hindsight, you could say that the underwriters probably regret agreeing to an early release of the shares,” said Ted Hollifield, a partner at Alston & Bird LLP in Menlo Park, California, and an expert in venture capital. “The stock still seems to be searching for an actual trading range and you would ideally like to see that take place before there’s additional selling pressure.”

Facebook rose 1.5 percent yesterday to $19.44 in Nasdaq Stock Market trading. The shares have dropped 49 percent since first being sold for $38 apiece on May 17. The company said in July that sales growth slowed and its profit margins narrowed, two months after telling investors that revenue growth wasn’t keeping up with user growth on mobile devices amid more mobile adoption.

Early Investor

Thiel first invested $500,000 in Facebook in 2004, when the website was limited to college students, a scene that was depicted in “The Social Network,” the fictionalized history of the company. He has made more than $1 billion from his early bets on Facebook, and put a plan in place at the time of the IPO to sell most of his stake when the lock-up expired.

Board members adopt selling plans in part to avoid potential insider trading allegations. Still, it’s surprising for an investor and board member to set up a plan that involves selling so much so quickly, said Sam Hamadeh, chief executive officer of PrivCo LLC, a New York-based research firm that specializes in private companies’ financial data. John Doerr, who led Kleiner Perkins Caufield & Byers’s early investment in Google Inc., has been incrementally selling shares since the Internet search company’s 2004 IPO.

First Opportunity

LinkedIn Corp.’s biggest venture backers, Sequoia Capital and Greylock Partners, still held half their shares in the professional social network 11 months after the company’s May 2011 IPO, according to regulatory filings.

Eight months after Zynga Inc.’s IPO, top venture investor Kleiner Perkins hasn’t reported selling any of its 21 million shares. Groupon Inc.’s biggest venture backer, New Enterprise Associates, hasn’t disclosed any sales in the nine months since the daily deal site’s offering.

Including the shares Thiel sold in the Facebook IPO, he has now unloaded more than 80 percent of his pre-IPO stake.

“It’s a bit stunning that at the earliest opportunity it was sold and the volume that was sold,” said Hamadeh. “Their job is to liquidate, but typically it’s a little more gradual.”

Thiel wasn’t alone in selling Facebook stock early. Accel Partners, the venture firm that bought a $12.2 million stake in 2005, sold in the IPO and then distributed more shares to its investors last week. The firm has unloaded more than half the 201.4 million shares it owned prior to the offering.

Harvesting Gains

In some instances, underwriters reserve the right to release some shares before the lock-up expires. In Zillow Inc.’s IPO, holders were allowed to sell a quarter of their shares after 90 days if certain conditions were met in the stock performance.

Like the partners at Accel, Thiel can’t be faulted for locking in gains from a highly speculative bet, said James Cox, a securities law professor at Duke University in Durham, North Carolina.

“We do expect early investors like him to harvest their gains,” Cox told Bloomberg Television’s “Money Moves” on Aug. 21. “That’s what provides the seed capital for companies like Facebook to get going.”

In this case, it looks bad, because of all the publicity around Facebook and the poor performance of the shares, he said. For retail investors to step in, they’ve “got to be pretty optimistic and perhaps more optimistic than the insiders who are selling,” he said.

Broad Investments

Jeremiah Hall, a spokesman for Thiel, declined to comment. Rich Wong, a partner at Palo Alto, California-based Accel, didn’t respond to a request for comment. Ashley Zandy, a spokeswoman at Facebook in Menlo Park, declined to comment.

Fred Wilson, a partner at Union Square Ventures in New York and early Zynga investor, defended Thiel and Accel in an Aug. 21 blog post. He said venture capitalists are measured by how much money they return to their investors, so sitting on billions of dollars of stock is risky. Furthermore, they’re “terrible public market investors,” and many have a policy of getting out of public stocks as soon as possible, he wrote.

Thiel, who co-founded PayPal Inc. and made millions from its 2002 sale to EBay Inc., is a partner at Founders Fund in San Francisco. His investments include data and security software maker Palantir Technologies Inc., Yammer Inc., which was acquired last month by Microsoft Corp., and Space Exploration Technologies Corp., which in May became the first company to dock a craft at the International Space Station.

Even if Thiel is selling Facebook stock to focus more on early-stage investments, the size of the deal causes some concern, said Martin Pyykkonen, an equity analyst covering Internet companies at Wedge Partners Corp. in Greenwood Village, Colorado.

“It raises a little bit of skepticism in terms of his opinion” of Facebook, said Pyykkonen. “He’s made some smart investments as a VC and a guy in the valley over the years. His opinion on that would be a very credible one.”

 

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