Silicon Valley has been the incubator of massive fortunes for Mark Zuckerberg and hundreds of others, but unmanaged concentrated positions have gone beyond the point of no return.
Everyone watching Wall Street knows the math by now. Facebook plunged 20% last week, instantly destroying $120 billion of Silicon Valley's $3 trillion in paper wealth and making founder Mark Zuckerberg $15 billion personally poorer.
Sure, the downswing was overdone. The stock will probably recover its equilibrium and all lost ground. The billions will come back sooner or later.
But in the meantime the tide rushing out reveals who in Silicon Valley let their estate plans float out so far that there’s no dignified way to reel them back in.
One way or another, high-tech fortunes are hitting hard limits. Zuckerberg may actually be one of the smarter ones. Right or wrong, at least he’s got a plan.
Always be selling Facebook
Zuckerberg has now earned all the Facebook stock he’ll ever get, unless the corporate board he happens to control unlocks additional shares some day.
For now, he’s exercising old grants and selling about $45 million in stock every single trading day in order to fund his philanthropic foundation. Day in, day out, he carves cash out of Options Mountain.
At this rate, it’s still going to take him another decade to liquidate his Class A position — but from what he’s said in the past, odds are better that he’s going to stop a lot sooner than that.
He might end up with around 50 million shares worth $9 billion today. And then the Class B stock with the real voting power adds another $50 billion to his net worth.
While his charity has plenty of cash to play with, he’s personally still directly exposed to the company’s ups and downs. If Facebook does well, he gets richer. If not, he gets poorer.
Otherwise, there’s not a whole lot left on his balance sheet to cushion the rollercoaster. Should Facebook implode entirely, he drops from being one of the richest people in history to mere multimillionaire status.
He seems okay with that. After all, he’s eager to give at least half of it away before he dies, which means that in the most likely scenario his daughters get to inherit fewer billions.
It all looks like madness by normal planning standards. He owns the shares. He pays tax every time he cashes out stock, then hands the money to the foundation as a taxable gift.
Let’s face it, he blew through the lifetime gift tax limit in minutes. And in the meantime, he’s personally exposed to the fortunes of a company some worry is rapidly passing its prime.
His advisors should’ve been screaming from Day One that the founder shares needed to be given to a trust back when they were still practically worthless. If not, the options should’ve been transferred into a trust along with enough cash to start exercising them.
Holding the stock personally has probably cost Zuckerberg, his foundation and descendants more money than they collectively lost last week.
When you’re looking at “normal” Silicon Valley executives, people only worth $200 million to $1 billion, that drag is enough to constrain lifestyle and dynastic options. You just can’t buy as much yacht or as much mansion, support as many generations to come when the transfers are taxable.
Those executives also get paychecks where Zuckerberg doesn’t. Their whole financial position depends on the company’s health.
If their advisors had put them in a Zuckerberg program, they’d need to reconsider their choices.
But Zuckerberg’s fortune is on a scale where it’s really just numbers. In the worst-case scenario, the company melts down like MySpace and he has to figure out what to do with his life — running the foundation, finding hobbies, getting another job.
Otherwise, it’s just a distinction between levels of too much wealth to easily spend. Does the foundation end up with $25 billion or $50 billion? Do the kids each get $750 million a year for life to spend without ever touching the principal, or something a little more modest?
Zuckerberg is 30 years old and not really thinking in dynastic terms. Maybe some day he’ll regret not clawing back every dime when he had a chance. For now, it’s still all at the paper money stage.
Ellison, Bezos and the Google guys
Besides, when you get a little older, you run out of stuff to buy.
Larry Ellison used to be the bad example, but even his classic concentrated Silicon Valley portfolio has reached its limit.
He held a lot of Oracle stock and had expensive tastes, selling millions of shares over the years to fund his tastes because the next year he’d get granted a lot more.
The problem was that Oracle effectively became his personal ATM account and other shareholders became hostages to his mansion collection. The regular share sales were a drag. Only Larry got richer.
And the sales had to be regular, of course. Ellison, like Zuckerberg, has access to all the insider data. To cash out of any corporate stock at all, the program needs to be automated to eliminate claims that an executive is liquidating ahead of bad news.
Imagine the outrage if Zuckerberg had bundled his selling into the morning before he released that so-so earnings report and the stock crashed. No Silicon Valley founder can let that happen. It’s illegal and it would drive investors away from the company, reducing the value of remaining positions even more drastically.
But Ellison hasn’t sold since 2010. His once-famous automated program is over.
He has enough money coming in from dividends on a staggering 1 billion Oracle shares. In theory he could buy dozens of decent little $50 million villas, year in and year out.
And the kids are covered through lavish trusts. Ellison has no reason to sell one more share of Oracle now. He’ll die with a massive stake in the company and disposing of it without crashing the stock will be the heirs’ problem.
Then there’s Jeff Bezos. Similar story: he owns his 79 million Amazon shares outright, no trust. If he had to liquidate now, it would cost his estate more money than Zuckerberg is worth now and there’d still be around $85 billion to work with.
Like Ellison, Bezos sells. To a casual observer, he pays himself about $1 billion a year.
But he has the lifestyle he likes and no incredibly expensive hobbies beyond the Washington Post and world domination. Odds are high his money gets reinvested in more conventional diversified billionaire assets — probably index funds and Treasury debt.
He comes from Wall Street, not Silicon Valley. He knows the score.
If Amazon were to crumble tomorrow, he’s covered. He’ll recycle the remaining worthless shares and move on.
Until then, he’s got 79 million shares to play with and has been converting that stake into cash at the rate of roughly 1 million shares a year.
And unlike Zuckerberg, he had no philanthropic vision until recently. He left the foundation to his relatives.
What Bezos does is pick a charity and hand it a few Amazon shares to spend as it likes. He’s given away 1 million shares since 2016, blowing through all gift tax limits almost immediately.
A more tax-efficient approach would stretch the power of those gifts a lot farther. He doesn’t seem to care.
The guys who founded Google are the same way. They peel off gifts and what we would consider massive piles of Alphabet stock to pour into their personal portfolios.
They retired years ago. But they're still spending down their options, diversifying their concentrated mountain of equity.
Their heirs may need to finish the job.
