Facebook’s IPO Motive: Keeping Employees, Not Compliance

Many people have believed that Facebook’s initial public offering is due in 2012 since the company announced its giant funding round from Goldman Sachs at the start of this year. At that point, the company said in a press release that it ”expected to pass 500 shareholders at some point in 2011, and therefore expects to start filing public financial reports no later than April 30, 2012.”

Public filings don’t necessarily mean a company has to make its stock available for public purchase, but most usually do anyway.

But our understanding is that it will be going public sometime next year for a different reason: rewarding its large roster of talented employees, who have been waiting years to cash in. Compliance isn’t the primary motive.

Purely from a financial perspective, the pressure for an IPO has been building internally, even as chief executive Mark Zuckerberg and other leaders have downplayed the  idea. (In fact, for a while I was wondering if maybe Facebook just wouldn’t IPO, or at least not for years, something others who follow the company closely, like David Kirkpatrick, have also speculated about.)

After distributing standard stock option plans to employees in its early years, Facebook switched to restricted stock units in late 2008. Instead of vesting into stock that employees owned like options had, RSUs could only be sold after an IPO. Meanwhile, Facebook restricted current employees from selling any stock they owned, although it couldn’t stop former employees from doing so. Instead, as a stop-gap liquidity measure, it allowed employees to sell a small portion of their options in late 2008 through 2009. Newer employees who got RSUs haven’t had the same opportunities.

But over the last couple months, I’ve heard from sources close to the company that it could file as soon as early next year, and no later than the end of next year, which matches widespread reports that have come out already. That Zuckerberg has started setting expectations along these lines with employees, as Business Insider hears today, is not too surprising.

Facebook has worked hard to recruit or acquire some of the top engineers and product leaders in the world, even as most of its early core employees have left for early retirement or to start their own companies. Between the flush funding environment and trendy image of doing startups these days, along with big offers from rivals like Google and Twitter, a vague promise of a big exit has become a harder sell.

So despite fears that an IPO would introduce the pressure for short-term profits instead of long-term value or spoil employees to the point that they lose the edge they have today, delays have gotten harder for Zuckerberg and Facebook to justify. The 500-shareholder rule is often cited as the main rationale for why the company will go public next year. But between Facebook’s ability to file public documents without going public, and a new bill working its way through Congress that would raise the minimum requirement to 2000 shareholders, it actually isn’t as big of a concern.

In any case, an IPO is going to be one of the company’s biggest tests. Can it maintain its talent pool and grow revenue like Google, Amazon, Apple and other top tech companies have been able to do? Can it maintain its vision for being the social layer across everything in the world? We’re about to find out.