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12 September 2012 By Rob Cox

Mark Zuckerberg has now acknowledged that the disastrous halving of the social network’s market value since going public “doesn’t help” employee morale. But it may be more problematic than that. The decline – and the company’s eventual response – may be a self-reinforcing problem for the multi-billionaire Harvard dropout.

Like most of Silicon Valley’s hot companies, Facebook doles out equity to employees. In theory, this helps to create an esprit de corps and align the interests of workers, managers and investors. And it can make lots of employees rich. But a slumping stock can have the opposite effect.

Consider a few numbers. Since its bungled debut on the Nasdaq at $38 a share, Facebook’s stock price has fallen as low as $17.55. The last time Facebook traded at such levels was as a private company, in November 2010, when SecondMarket began conducting weekly semi-private auctions of the stock. From then, the shares kept on rising, to as high as $42.72, before the company’s initial public offering was priced on May 17.

In November 2010, Facebook had about 1,700 employees. Today it has around 4,000. That means nearly 60 percent of its workforce arrived since the stock last traded at recent lows. The implication is that any equity those folks received has fallen in value. Even based on Wednesday morning’s market price above $20 a share, buoyed by an after-hours public appearance Tuesday by Zuckerberg, his first since the IPO, some of those employees could have lost as much as about 50 percent on their shares.

It could be worse. Had Facebook granted options at prices ranging up to the IPO level, those would be intrinsically worth nothing, not just less, and Zuckerberg could be dealing with mutiny rather than just grumpiness. In that respect, handing out stock has avoided the one-sided nature of option-based compensation.

But he still faces a dilemma. If Facebook does nothing for employees who are less well-off than they expected, rivals will find it easier to poach top talent, potentially slowing the company’s adaptation to a fast-changing market. Yet if Zuckerberg makes up for losses with more generous awards in the future, the cost could eat into margins and dilute other shareholders. Either way, it’s hard to see how to turn the situation into a thumbs-up from investors.


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