SAN FRANCISCO—Facebook Inc. will soon become a publicly traded company. But for all intents and purposes it may as well be called Zuckerberg Inc.
Mark Zuckerberg, the company’s 27-year-old founder and chief executive, has a 28-percent ownership stake in Facebook. But according to registration papers filed with the Securities and Exchange Commission, Zuckerberg controls 57 percent of the voting stock, giving him near-absolute sway over one of the world’s most powerful technology companies.
Zuckerberg will even pick who controls Facebook after he dies, according to the 197-page prospectus. Zuckerberg will “control all matters submitted to stockholders for vote, as well as the overall management and direction of our company,” it states.
So anyone looking to place a wager on the future of Facebook is essentially betting on Zuckerberg, said Michael Yoshikami, CEO of wealth management firm YCMNET Advisors.
“Over 50 percent control means it’s basically a private company with side investors,” Yoshikami said. “What Mark really wants, Mark will get.”
According to the SEC filing for the initial public offering, Facebook has a dual-class stock structure that will keep most of the voting power in the hands of the early investors who are Zuckerberg’s allies. A number of them, including co-founder Dustin Moskovitz and early employee Sean Parker, have given Zuckerberg the power to wield their votes.
Initial public offering consultant Lise Buyer, who helped guide Google Inc.’s IPO, said Zuckerberg is not the first or the only tech CEO to exercise such control. He holds nearly as much as the combined voting power of Google co-founders Larry Page and Sergey Brin. Groupon Inc.’s Andrew Mason, Zynga Inc.’s Mark Pincus and LinkedIn Corp.’s Reid Hoffman all hold substantial sway over their companies too.
“As long as fully disclosed to potential shareholders, it’s very appropriate in this rare case, in my opinion,” Buyer said. “Those who don’t feel comfortable trusting an individual 27-year-old with this control, despite his undeniably impressive record to date, don’t need to buy shares.”
Parker, Facebook’s founding president —who was portrayed by Justin Timberlake in the Oscar-winning film The Social Network—helped craft Zuckerberg’s power play in the early days of Facebook. He granted him shares that would not be diluted while the company raised money and handed Zuckerberg enough board seats to retain power.
That corporate structure helped avoid the troubles of another famous Silicon Valley founder, Apple Inc.’s Steve Jobs, who was bounced from his own company at one point. When he died last year, Jobs owned a bigger stake in Walt Disney Co. through the sale of Pixar than he did in Apple, the company through which he transformed people’s use of technology and revolutionized whole industries.
Zuckerberg, who counted Jobs as a mentor, has had the freedom to build Facebook the way he wanted. His tight grip on the company gives Zuckerberg another distinct advantage: He will not be required to appoint independent directors or set up board committees to oversee compensation and other matters.
Corporate governance experts say that should be a red flag to investors, who would be contributing the majority of the capital to Facebook but would hold the minority of the votes.
“Mark Zuckerberg can basically do anything he wishes with his board,” said Charles Elson of the University of Delaware. “The board is no longer an independent monitor of management—it becomes more advisory. For the management, that’s terrific. For investors, that’s not so good.”
Friends say Zuckerberg, who thinks of Facebook as his life’s work, has no intention of relinquishing control. He has done nothing to dilute his stake in the Menlo Park, California, company, taking no money off the table except for his annual salary.
Zuckerberg made $483,333 in 2011, plus a $220,500 bonus for the first half of 2011. He also received travel and security perks, bumping his overall compensation to nearly $1.5 million. Starting in 2013, Zuckerberg will slash his annual salary to $1.
From the high-minded tone he struck in his founder’s letter, Zuckerberg intends to hew to his own vision of Facebook. He sees its role in the world as more about connecting people with their friends than connecting investors with profits.
“Facebook was not originally created to be a company,” Zuckerberg wrote. “It was built to accomplish a social mission—to make the world more open and connected.”
As Facebook mounts what could be the largest IPO to come out of Silicon Valley, investors will be relying heavily on the judgment of its young founder to chart the company’s future as it looks to turn its huge online audience into huge online profits.
Zuckerberg has created a wildly popular social-networking site used the world over. Its user base has soared from 608 million at the end of 2010 to 845 million at the end of 2011. But there are signs that Facebook’s rapid rate of growth is slowing, just as Facebook must make its site a more promising place for advertisers.
Facebook is also a moneymaker. The company Zuckerberg started with friends in his Harvard dorm room has seen its annual revenue jump from $777 million in 2009 to $3.7 billion in 2011. Its profits have jumped too, from $122 million in 2009 to $668 million last year. But Facebook generates just $4.39 in revenue per user, a lower number than many analysts had hoped to see and an amount that some say is not enough to justify a lofty IPO.
Facebook is looking to raise as much as $10 billion and aiming for a market value that could top $100 billion. Investor demand will determine pricing. IPO watchers expect demand to skyrocket.
“I don’t think the world has ever seen a company with the market cap that Facebook is going to have on its first day of trading,” said Lou Kerner, a long time Wall Street analyst who is now an investor.
