Wanna Buy Facebook Stock Pre-IPO? — Tips Inside

I sat in on a conference call hosted by Sharespost, a marketplace for privately-held stock, today to learn more about buying stock in private companies. Nearly 100 Sharespost members were on the phone.

Facebook Founder Mark Zuckerberg at South By Southwest 2008

I thought I’d share the basics of how buying privately-held stock works using Facebook (the topic of today’s call) as the example.

The below information is based on knowledge as well as things I learned from today’s call (hosted by Tim Sullivan of Sharespost).

How do you buy Facebook stock when it’s still privately-held?

Some Facebook insiders, such as former employees, have begun to sell their privately-held shares through new private exchanges such as Sharespost, SecondMarket, Cogent Partners and Campbell Luytens.

Who is selling the Facebook stock in this case?

A former Facebook employee is selling 50,000 shares of their Facebook stock, according to Tim Sullivan of Sharespost.

Do you buy Facebook stock directly from the employee?

No. You typically buy membership units in a new fund that buys the Facebook stock for a group of investors and you own your pro-rata % of the fund.

For example, Sharespost in this case is offering membership units in a newly-formed Delaware-based LLC that will hold up to 50,000 of Facebook’s privately-held shares at $20 per share.

Can anyone buy these Membership Units?

No. You have to be an accredited investor and you have to be chosen by the firm (e.g. Sharespost in this case) offering the Membership Units.

There may also be a minimum investment you have to make to be buy Membership Units (e.g. Sharespost is asking that you commit at least $100,000).

Who sets the price of the privately-held Facebook stock?

In this case, Sharespost is setting the price. They have closed an exclusive deal with the former Facebook employee to buy their 50,000 shares at $20 each (a total of $1 million).

What is Facebook’s valuation?

Around $45 billion based on these Sharespost Membership Units.

Can Facebook veto the purchasing of their stock by outsiders.

Yes. Facebook can exercise their right of first refusal (also known as a “rofer” or “rofering”) on stock that their insiders are trying to sell within 30 days of the attempted sale of the Facebook stock.

How often does Facebook “rofer” their stock?

Facebook rofers their purchase of privately held Facebook stock about half the time it’s available, according to Sharespost’s Tim Sullivan. He added that he heard that Facebook rofered stock at $18 per share recently.

When could a buyer of these Facebook Membership units sell their stock?

Owners of the Facebook Membership Units could sell their stocks through Sharespost private marketplace (though it’s not guaranteed that there will be a buyer) or at the point of a Facebook IPO (Initial Public Offering).

note: there will be lock-up restrictions on the exact timing of your sale of the Membership Units/Facebook stock.

What commission does the private marketplace (e.g. Sharespost) take in the transaction.

Sharespost is charging a one0time services fee of 5% and a distribution fee of 3% (of the total size of the round of funds they raise through the private placement).

Is SharesPost affiliated with Facebook.

No.

Does Facebook have audited financials that the public (or prospective buyers of the Membership Units) can see?

No.

What’s Facebook’s estimated revenues or profits.

It’s not publicly disclosed, but there are reports of Facebook’s revenues for 2010 being projected at anywhere from $1.5 billion to $2.4 billion, according to Tim Sullivan.

Is Facebook profitable?

Tim says that there are reports of Facebook being more profitable (on a margin basis) than Google, one of the most profitable publicly-traded Internet companies.

Has Facebook’s stock recently split?

Yes, there was a 5 for 1 split of Facebook shares October 1, 2010, according to Tim Sullivan.

Will Sharespost offer additional Facebook shares for purchase in the future.

Yes. Sharespost expects to offer additional Facebook shares in the future. Other private marketplaces likely will too.