Facebook Got Its IPO Exactly Right

With engineering precision, Facebook’s stock price basically stayed the same on the day of its initial public offering, rising $0.23 per share. Why is that significant? It means Facebook got the most money possible for its existing investors. People should stop worrying about whether Co-Founder and Chief Executive Officer Mark Zuckerberg will take care of his new public investors. Instead, they should look forward to a repeat performance that will reward them too.

IPOs are priced to get the most money possible for existing investors. That is exactly what Facebook accomplished. The drama you see around the IPO is because there is often a jump in stock price that happens when public markets start valuing a company higher then it values itself. The price jump allows first-day public market investors to make a profit on paper immediately.

If Facebook had jumped to a higher stock price — say, a 100 percent gain — it would have meant that the company left lots of “money on the table.” That kind of miscalculation should not have been expected from a company like Facebook. And Zuckerberg has been really clear that he is not going to let short-term stock market drama dictate his decisions about how to run the company.

Investment banks and the media want the stock price to skyrocket after any IPO starts trading. A jump in price shows how successfully they hyped the offering, and that exuberant investors are rushing in as part of their IPO spectacle. Also, the investment funds that bought Facebook stock directly from the banks at the initial IPO price are rewarded — either with profits on paper or by day-trading their hot commodity at the higher price. But remember: Private investors that invested in Facebook early and that were finally able to cash out on the day of the IPO would have realized zero gain from a big jump in price. And that is where the stock price ended — zero percent higher.

I think Facebook is worth $200 billion. Surprised? When I wrote that Facebook was worth $50 billion in 2009, people thought I was crazy. But amazing increases in company value are still likely — Zuckerberg will probably even figure out how to make Facebook double in value.

Zuckerberg just took care of his private investors who got him to IPO. We have every reason to believe he will continue the trend and take care of public market investors, as well — despite any short term dips in price the past week that have caused so much drama in the media.

So Investors: Don’t worry, just sit back and enjoy the ride!

Guest writer Will McGrouther is chief executive officer of ExecutiveRecruitingLA.

Image courtesy of Shutterstock.

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