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> By creating derivatives of the stock, the investment firms are helping Facebook keep its shareholder count at 499 or less, the maximum number a company can ha

by copper 16y ago

> By creating derivatives of the stock, the investment firms are helping Facebook keep its shareholder count at 499 or less, the maximum number a company can have before it has to disclose results to the public. Out of curiosity, what does this imply for stock options? Are people who exercise them included in this count?

zach 16y ago
Yes, they would be. So as a result, there are not a lot of stock options floating around anymore. They have been replaced by, you guessed it, derivatives.
- copper 16y ago
  Facebook apparently has 1700+ employees, though: does that mean those who joined at the 500+ mark were either not granted options, or are not exercising them? That seems strange to me. Assuming I was given options in a fast-growing company, I'd want to buy them as and when they vested, to have some protection against dilution :)
  - zach 16y ago
    I heard they started issuing restricted stock units instead of options three years ago. They are rights to stock, like a risk-free, cost-free stock option. Now, allegedly, the twist is that they vest when the company becomes public. In any case, the company presumably has a right of first refusal clause on their stock, which means that Facebook can match any stock buyer's offer themselves, or broker a trade to someone else instead. That's only in case of emergencies, though. A lot of other companies did so around that time, since this was following the accounting standards change which required options to be expensed. If you're going to expense options, you might as well expense something more flexible.
  - roel_v 16y ago
    I'm not familiar with SEC regulations, but would putting the options for a pool of employees into a separate LLC or trust be enough to circumvent this 500 people rule? Or would all shareholders/beneficiaries be counted separate?
  - RockyMcNuts 16y ago
    Facebook got an SEC waiver to go over 500 shareholders - http://www.businessweek.com/technology/content/nov2008/tc20081120_566312.htm http://www.businessweek.com/technology/content/nov2008/tc200... The second market in Facebook is definitely pushing the envelope, a role of the SEC is to make sure people don't get ripped off and are treated fairly. Clearly promoters shouldn't be able to sell private unvetted securities to the public without registering and going IPO on a public exchange. But it's also not clear it's in the public interest to have second markets only the well-heeled have access to, and that are not subject to public securities regulation, public price discovery and disclosure through K and Q filings. Maybe it's also not right to force Facebook to choose between going public prematurely and issuing shares/options to employees, but at some point for those shares to be properly valued the stock has to be publicly traded. When they got the exemption they said it was just to give shares to employees, not to create a second market. The rules are getting rewritten (or Wall Street is running rings around them as Kedrosky says).
    - zach 16y ago
      Wow! I missed that; I thought there was still a need to do a lot of wrangling. If they have a blanket exception then that's something else. I fundamentally like the second market idea a lot because I like private companies staying private for as long as they want while still giving employees options for ownership that are at least somewhat liquid. It's really fascinating to see the mechanisms involve creaking at the joints a little, but I think the idea is solid.
- RickHull 16y ago
  > there are not a lot of stock options floating around anymore. > They have been replaced by, you guessed it, derivatives. Stock options are derivatives. I'm not sure what distinction you are making. It seems like the term is being used for scare-mongering rather than serious analytical discussion.
  - zach 16y ago
    Sure, I just meant that they were replaced by a more exotic instrument. That's not a bad thing -- RSUs are way better for employees IMHO. But yes, I am poking fun at the problem solving methodology which says "just make a more complicated derivative."

by copper 16y ago

zach 16y ago

Yes, they would be. So as a result, there are not a lot of stock options floating around anymore. They have been replaced by, you guessed it, derivatives.

copper 16y ago
Facebook apparently has 1700+ employees, though: does that mean those who joined at the 500+ mark were either not granted options, or are not exercising them? That seems strange to me. Assuming I was given options in a fast-growing company, I'd want to buy them as and when they vested, to have some protection against dilution :)
- zach 16y ago
  I heard they started issuing restricted stock units instead of options three years ago. They are rights to stock, like a risk-free, cost-free stock option. Now, allegedly, the twist is that they vest when the company becomes public. In any case, the company presumably has a right of first refusal clause on their stock, which means that Facebook can match any stock buyer's offer themselves, or broker a trade to someone else instead. That's only in case of emergencies, though. A lot of other companies did so around that time, since this was following the accounting standards change which required options to be expensed. If you're going to expense options, you might as well expense something more flexible.
- roel_v 16y ago
  I'm not familiar with SEC regulations, but would putting the options for a pool of employees into a separate LLC or trust be enough to circumvent this 500 people rule? Or would all shareholders/beneficiaries be counted separate?
- RockyMcNuts 16y ago
  Facebook got an SEC waiver to go over 500 shareholders - http://www.businessweek.com/technology/content/nov2008/tc20081120_566312.htm http://www.businessweek.com/technology/content/nov2008/tc200... The second market in Facebook is definitely pushing the envelope, a role of the SEC is to make sure people don't get ripped off and are treated fairly. Clearly promoters shouldn't be able to sell private unvetted securities to the public without registering and going IPO on a public exchange. But it's also not clear it's in the public interest to have second markets only the well-heeled have access to, and that are not subject to public securities regulation, public price discovery and disclosure through K and Q filings. Maybe it's also not right to force Facebook to choose between going public prematurely and issuing shares/options to employees, but at some point for those shares to be properly valued the stock has to be publicly traded. When they got the exemption they said it was just to give shares to employees, not to create a second market. The rules are getting rewritten (or Wall Street is running rings around them as Kedrosky says).
  - zach 16y ago
    Wow! I missed that; I thought there was still a need to do a lot of wrangling. If they have a blanket exception then that's something else. I fundamentally like the second market idea a lot because I like private companies staying private for as long as they want while still giving employees options for ownership that are at least somewhat liquid. It's really fascinating to see the mechanisms involve creaking at the joints a little, but I think the idea is solid.
RickHull 16y ago
> there are not a lot of stock options floating around anymore. > They have been replaced by, you guessed it, derivatives. Stock options are derivatives. I'm not sure what distinction you are making. It seems like the term is being used for scare-mongering rather than serious analytical discussion.
- zach 16y ago
  Sure, I just meant that they were replaced by a more exotic instrument. That's not a bad thing -- RSUs are way better for employees IMHO. But yes, I am poking fun at the problem solving methodology which says "just make a more complicated derivative."