Mark Zuckerberg is directly responsible for his employees’ low morale as Facebook fortunes are cut in half. And there’s nothing they can do.
Sometimes leadership is all about choosing between legacies. At moments like this, Mark Zuckerberg is following his family interests and everyone at his ailing corporation can see.
Don’t get me wrong. I’m a fan of Facebook’s long-term reach and short-term bounce potential. But it’s hard to recommend it when it’s working off close to a 50% haircut in the last six months.
Turning that kind of trend around takes hard work and sacrifice. They’re hiring a staggering amount of people to enforce client data rules. The freewheeling fat profit margin days are over.
But that Silicon Valley army needs to be motivated to declare victory. Knowing that the boss is selling as much stock as they’ll earn collectively doesn’t help.
Zuckerberg needs to choose between his family legacy and his tax strategy on one hand and his company on the other.
Bad optics on the 10b5-1
Zuckerberg vowed three years ago to donate 99% of his Class A stake in Facebook to charity.
Since then, he’s moved the stock into the Chan Zuckerberg Foundation and peripheral entities he still controls.
The problem of course is that unless a company pays dividends, you’ve got to sell the shares to fund other agendas.
Normally the liquidation is measured because the entities also receive cash. It’s not clear that’s the case here.
What we know is that the foundation has been ruthlessly following an automated 10b5-1 plan to unload the stock in the current year.
That process is going on now. It’s “only” 0.5% of the Class A float but it sends a negative signal when the boss sold above $200 when employee restrictions keep their shares locked up here below $120.
Granted, free equity is still a great motivator at any price. However, Facebook isn’t the only prestige name to work for in Silicon Valley. They compete for talent that could field tempting offers elsewhere.
I’m thinking of the long twilight of Yahoo in particular. The stock was no motivator. The platform declined to the point of irrelevance.
It’s not hard to imagine a similar fate for Facebook if it can’t stay on the high-tech frontier.
But attracting visionaries means paying visionary salaries. In Silicon Valley, that means sharing the really transformative wealth these companies create: the stock.
While people get that Zuckerberg has other priorities and needs to diversify away from Facebook in order to pursue them, it still stings to see the boss cash out on the dip.
Selling highlights the gap between his family interests and the company. It gets him and his entities the best tax treatment and the strongest long-term portfolio position. We all get that.
The message it sends is that he’s willing to sacrifice everyone else’s interests in order to cash out efficiently. That’s not a good look.
And in an equity-obsessed culture, everyone can see.
Not a huge sacrifice
If Facebook can’t motivate its people, the company is doomed to a Yahoo-like fate, ultimately cut up for parts at maybe 5% of its peak valuation.
Pausing the 10b5-1 program until the stock recovers is risky, don’t get me wrong. There’s always the chance the company that dropped from $200 will hit $40 before rebounding.
But with the foundation still sitting on 13 million shares, its interests are now aligned with making that rebound happen.
That might mean building confidence among Facebook staff who’ve seen their paper worth cut in half. It might mean letting Wall Street know Zuckerberg sees better days ahead.
One way or another, this is not the time for the program to keep robotically dumping close to $1 billion in stock a month no matter what the market is doing.
Arguably a truly confident shareholder would take its cash and buy the stock back at a 40% discount or even borrow to give nervous Facebook employees a chance to exit.
Maybe Zuckerberg’s people haven’t thought about those kinds of true leadership postures.
After all, he’s covered either way. He’s still drawing down grants and sitting on a true mountain of the Class B shares that control the company.
At Facebook, you’re always going to be a hostage to those Class B shares. They aren’t really liquid. They’ve got no easy market value.
When Zuckerberg sells $1 billion of the Class A stock, it only makes a dent in the optics. For him, it’s all free money.
For his executives, that’s a world-class fortune, the culmination of a lifetime of hard work and huge luck.
And their piece is a lot lower. Facebook only hands out $1 billion in stock per quarter among all employees.
Even Sheryl Sandberg, who actually runs the day-to-day operations, only has 1.5 million Class A shares to fall back on if that day job doesn’t work out.
Sandberg has lost about $150 million in paper wealth since July. Unlike Zuckerberg, who’s still easily worth 300 times that much, she probably considers that real money.
Think about her mood the next time you see her testify to Congress. She’ll retire rich but she’ll never get into the billionaire lists at this rate.
Move the gloom down the ranks
Now multiply her mood by everyone else at the company.
Facebook has already started paying more cash relative to equity. Payroll is up 35% from last year but stock grants haven’t really budged.
That tells me two things. First, Facebook stock is no longer the big incentive it once was. People are grabbing cash instead, and that’s going to be an immediate drag on the margins.
Second, the company no longer cares so much about rewarding its producers with a long-term stake. Equity as a share of compensation has dropped from about 30% of the overall package to 15% today.
They’re hiring a lot of work-for-hire salary types instead of those visionaries that will lead the way forward.
That’s a clear signal they think the business is approaching maturity. They’ve already grabbed all the easy money in sight and now it’s a matter of managing cash flow.
Again, not the kind of signal you want to send in an industry shareholders buy into because the returns are theoretically infinite.
Someone who gets an option on 4,000 shares will never be ultra-rich unless the stock ultimately soars 1,000%. Those people aren’t motivated to superhuman effort. They just aren’t.
Likewise, an outside investor wants that 10X return. That’s the Silicon Valley dream. If Facebook no longer supports that dream, where would you rather go?
Zuckerberg is set even if the stock drops to $10. He’s free to think about a utopian personal future and his advisors are obligated to get him the best personal outcome in terms of taxes and diversification.
The people who work for him determine whether Facebook thrives when Zuckerberg is gone. In the here and now, he can choose his personal future or he can give the company a hand.
