Facebook and Zynga are reportedly charging fees of between $2,500 and $6,000 for sales of company stock as employees leaving both companies around the turn of the year may bring more sellers onto private markets.
Both companies are trying to keep their numbers of shareholders below 500, a critical mark that triggers additional financial disclosures required by the U.S. Securities and Exchange Commission. Those fees would go to cover the administrative costs of ensuring compliance with SEC regulations and to ensure they aren’t inadvertently enlarging the number of shareholders.
Employees leaving in 2011 may exercise their options around the beginning of the year to lock in lower valuations and avoid higher capital gains taxes, according to sources familiar with the matter. This could bring additional liquidity to private secondary markets.
Facebook began imposing a fee of $2,500, Sharespost chief executive Greg Brogger told Bloomberg News. Sharespost is an online secondary market for shares in privately held companies and we’ve reached out to Brogger for further comment. Meanwhile, Zynga is charging between $4,500 and $6,000, according to letters between Zynga’s legal counsel at Ropes & Gray LLP and a former employee.
The new stock sale fees will create an additional cost for former employees selling shares, but the amounts are probably not significant because Facebook’s shareholders tend to sell stock in much larger blocks. Sharespost shows sales listings for anywhere from $75,000 to $2 million in Facebook stock.
Furthermore, the secondary market is already very restricted anyway as the number of eligible sellers is likely in the low hundreds. Only former employees and other current shareholders can sell stock now. Current Facebook employees who joined early enough to own actual shares or options for such stock in the company face termination if they decide to sell them, according to sources familiar with the matter.
Employees who joined later and were awarded Restricted Stock Units, or RSUs for short, can’t sell them because they are bestowed stock only once Facebook goes public, according to sources familiar with the matter. Restricted Stock Units give the grantee the right to receive stock at a future date.
Furthermore, Sharespost limits its sellers to “sophisticated” investors, who must have owned the shares for at least a year and be “sufficiently familiar with the securities underlying the transaction” and “understand and manage the risks associated with such transactions.” Buyers must be accredited, meaning they must have more than $1 million in net worth or have earned $200,000 in annual income for at least two consecutive years.
Because of the way capital gains taxes and Facebook’s options are structured, former employees are incentivized to exercise them as soon as possible or within 90 days of leaving the company, according to sources familiar with the matter. It’s possible that we might see more liquidity in the Sharespost market in the beginning of 2011, when more Facebook employees leave and sell a portion of their holdings to cover tax liabilities.
The most recent contracts on Sharespost, show that Facebook shares sold at between $14.40 and $15.20 with an implied valuation of between $31.9 and $33.7 billion. Zynga’s shares sold at between $16 and $18.50 with an implied valuation of between $5 and $5.7 billion.