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marcamillion

Some quick back-of-the-envelope math for how much the co-founders walked away with.

Assuming the first round of $500K was @ $2.5M valuation, giving those investors 20%. So the founders are left with 80%.

Further assume the 2nd round of $7M @ $20M valuation, giving those investors 35%. So the founders are left with 45%.

Further assume the 3rd round of $40M @ $500M valuation, giving those investors 8%. So the founders are left with 37%.

Also assume that the employee stock options pool is worth 10% of equity. Founders left with 27%.

There are two founders, according to Crunchbase [1], so assuming a 50% split for each founder, each founder has 13.5%.

At $1B, each founder walks away with a cool $135M in cash + Facebook stock (which is likely to appreciate significantly in a few months) - which is likely another reason they chose to go with FB as opposed to Google.

Not bad for 2 years worth of work.

[1] - http://www.crunchbase.com/company/instagram

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I'm not sure that your numbers account for share dilution. Let's assume the employee stock pool is 10% before any funding is raised so the founders start with 90% and the employees 10%. Assuming your numbers above are correct, the founders are left with 72% after the first round of investment (500k at 2.5m = 20%) and the employees are left with 8% (think 72 + 8 + 20 = 100). The second round of investment takes 35% of the company, leaving the founders with 46.8%, employees with 5.2%, first investors with 13% and the new investors with 35% (46.8 + 5.2 + 13 + 35 = 100). The third round of investment takes 8% of the company leaving the founders with 43.056%, the employees with 4.784%, the first investors with 11.96%, the second investors with 32.2 and the new investors with 8% (43.056 + 4.784 + 11.96 + 32.2 = 100).

If my math is correct, the founders may have ended up with more like $430,560,000 between them ($215,280,000 each assuming 50/50).

You may be correct.

I was just doing some rough calculations to show an approximate 'low-figure' of their take.

It is very possible and likely that they took away much more (because all of the variables could have changed).

For instance, that first $500K round could have been convertible debt which would have converted in the $20M round. If that's the case, then those investors ended up with 2.5% instead of 20%. That drastically changes the math and gives the founders more equity and a better outcome.

According to wired, Kevin Systrom owned 40%, while mike owned 10%. http://www.wired.com/epicenter/2012/04/facebook-buys-instagr...

Those figures are from 2011 though. I assume they would have gotten diluted from the final round last week.

You are not accounting for liquidation preference correctly. When someone gets a 1x liquidation preference first they get their money back, then they get an equal portion to what is left. So in the case of the 3rd round, first they got their $40M back, but they retained 8% of the pool. Same with the 7M etc. Call it $50M off the billion right off the bat, leaving 950 million. Doesn't really dent the number (reduction of 5% for the founders, so they each walk away with $128M, but that is still 7 million less). Also, this assumes no advisors got shares or board members got shares and that really early hires got no shares outside of the ESOP, which is unlikely). I would guess they probably each walked away with $100M after everything was said and done.

Aren't you describing participating preferred stock? That's not a universal deal term, and Instagram didn't seem to have much trouble raising.

Yes, what they are describing is participating preferred, not liquidation preference.

According to VentureBeat, the CEO made off with $400M. http://venturebeat.com/2012/04/09/instagram-ceo-just-made-40...

Why do you think the FB stock is likely to appreciate significantly in a few months? If you really believe this, I assume you've just invested a significant chunk of your net worth into FB stocks?

Well.....FB is the poster-child of tech exuberance right now. Everybody uses Facebook. Many of those users will likely want to buy the stock - not for any sophisticated investment thesis. But because they want to own what they use.

That will likely push up demand for the stock in the short-term, thereby the price.

Aside from that, we have never seen a service have 800M users and still growing at the rate that FB is growing and have the stickiness that it has. So there is no telling how big it can get - which is why the valuation is so high.

There is no doubt that over the long term, FB will figure out a way to print money. It's just a matter of time.

Sorry if I came off crass, my point is that people throw 'stock tips' like this around without care and it's generally bad advice and you have to understand some people reading it may act on it.

Someone could read what you wrote and buy stock when your actual reasoning is simply because you think the public are going to get excited and buy the Facebook stock because they use it, along with the big assumptions that a) this wont already be reflected in the price and that b) these people who are buying the stock will have a meaningful impact on a $100b cap company with a 'significant' increase in price.

These are not the best assumptions and reasons to state that it's highly likely that FB stock will significantly increase. Every time I hear someone say something like this I have to ask how much of their own wealth they've stuck out on the line because more often than not it's nothing.

You didn't come off crass...not to me anyway.

I wasn't giving a stock tip. Just stating what I see as the most obvious conclusion.

That being said, if I had a net worth of any significant value that wasn't illiquid, I would probably buy FB stock on IPO and hold it for a few years. I can't see why you wouldn't want to.

They have not really monetized, they have 800M+ users and they are already doing $1B/profit per year. Imagine when they really figure out how to make money.

One good reason not to is that a 100/1 PE ratio is very high if your assuming $1b profit and a $100b cap. In comparison Google has a P/E of 20, and Microsoft 11.

Those reasons you have given are basically a gamble on the assumptions that:

- Facebook can earn a lot more money (5x - 20x more)

- Facebook hasn't done it yet because they haven't figured it out

- They will figure it out within 3 years (your exit window)

It does seem like an overly simplified argument. I don't think monetising Facebook to the levels you think possible in a 3 year window is as easy as people think, and it might not actually be possible.

You're also ignoring the possibility that this gamble isn't already priced into the stock.

Yes, but is any of that not already priced into the stock? The folks who have been buying and selling huge chunks of FB stock for the last few years have done a lot of thinking about that sort of thing.

I understand when a startup, like Instagram acquiring eyeballs and saying: "we really don't have a business model, but when somebody will acquire us - they surely will figure this out".

But when Facebook saying "we didn't really started to monetize our 800M eyeballs, we just waiting for IPO and will figure it's later" - it's sounds silly.

They never said that. It's just their actions. They generate enough cash to sustain themselves and they can grow. They are doing it properly and taking their time.

Just like Twitter is.

You may poo poo it all day, doesn't change the fact that over the long run it works.

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