Chapter 8

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Unformatted text preview: y, the mo re co ntro l these investo rs can exert (earlier investments are riskier, so VCs can demand mo re f avo rable terms). VCs usually have deep entrepreneurial experience and a wealth o f co ntacts, and can o f ten o f f er impo rtant guidance and advice, but stro ng investo r gro ups can o ust a f irm’s f o under and o ther executives if they’re dissatisf ied with the f irm’s perf o rmance. At Facebo o k, ho wever, the f irm’s extrao rdinary gro wth lef t po tential investo rs salivating to back a f irm perceived as being less risky but carrying the po tential o f a huge upside. Early backers ceded co ntro l—at a time when Facebo o k’s bo ard had o nly f ive directo rs, Zuckerberg appo inted three o f them. When Facebo o k f iled to go public, Zuckerberg’s o wnership stake sto o d at twenty-eight percent, but Facebo o k created two classes o f shares, ensuring that Zuckerberg maintains a majo rity o f vo ting rights in the public co mpany and virtually guaranteeing that his co ntro l o f the f irm co ntinues, regardless o f what investo rs say. Maintaining this kind o f co ntro l is unusual (altho ugh no t unprecedented—Go o gle’s f o unders have a similar o wnership and vo ting structure).S. Denning, “Is Go o gle’s Share-Split Evil?” Fo rbes, April 13, 2012. Zuckerberg’s inf luence is a testament to the speed with which Facebo o k expanded. When investo rs’ demand to get in o n ‘the next big thing’ remains high, a f irm’s o wner can extract extrao rdinary terms f o r the privilege o f co ming alo ng f o r the ride. As Slate puts it, Facebo o k is “co nducting an experiment in co rpo rate dictato rship nearly witho ut precedent f o r such a large and high-pro f ile co mpany.” All hail Empero r Zuckerberg!M. Yglesias, “All Hail, Empero r Zuckerberg,” Slate, Feb. 3, 2012. Why Study Facebook? Lo o king at the “f lavo r o f the mo nth” and trying to distinguish the reality f ro m the hype is a critical managerial skill. In Facebo o k’s case, there...
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This document was uploaded on 01/31/2014.

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