Investors Forced to Ask, ‘How Much Is Facebook Really Worth?”

via NY Times

There has been some speculation recently about what is being called an “internal Facebook” valuation – a value the company has assigned to its own common stock that is dramatically lower than the $15 billion valuation set so publicly last year by Microsoft’s investment.

According to the transcript of a June 13 case management conference in the lawsuit settled last week between Facebook and ConnectU—one of the few documents in the case not under seal— that number is one-quarter the Microsoft valuation, or $3.75 billion.

Here’s the relevant section from Page 3 of the document, under the section titled “Defendant ConnectU’s position:”
The Term Sheet and Settlement Agreement is also unenforceable because it was procured by Facebook’s fraud. Indeed, based on a formal valuation resolution approved by Facebook’s Board of Directors but concealed from ConnectU, the stock portion of the purported agreement is worth only one-quarter of its apparent value based on Facebook’s public press releases.

As we first reported on Bits, that discrepancy was at the heart of ConnectU’s last-minute, unsuccessful legal wrangling to get out of its signed settlement. Lawyers for ConnectU settled for a number of shares, not a total number of dollars. Then they got a hold of that “formal valuation resolution” they are referring to above—a fair market value of common shares that the company was required to provide under IRS Section 409(A), which requires companies to appraise the options they give their employees.
But that does not necessarily mean Facebook’s fair market value is a comparatively puny $3.75 billion.

Microsoft bought preferred shares, loaded with all sorts of special rights that we can only surmise (like the right to sell first in any liquidation). It also ponied up at a higher valuation for the strategically vital purpose of blocking Google from hooking up with Facebook.

The common stock Facebook gives to employees has no special rights, so those shares are worth less. The real valuation of Facebook is probably somewhere between $15 billion and $3.75 billion, and depends on all sorts of information we do not have, including the ratio of common stock to the various classes of preferred shares and other securities.

As the saying goes, valuing private companies is both art and science. The lesson: until the initial public offering or buyout, we are largely wandering in the dark when it comes to trying to pin the valuation tail on Facebook.

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