PALO ALTO, Calif.—Most everyone in Silicon Valley and on Wall Street agrees: The eventual IPO of social-networking site Facebook could make its founder the world’s richest twenty-something.
Yet Chief Executive Mark Zuckerberg, now 25, seems intent on deferring that multibillion dollar payday.
He’s huddled with executives like Intel CEO Paul Otellini and Oracle Corp. President Charles Phillips—the goal being to extract wisdom about how to better run his independent company. He set up a dual-class voting structure that would make him less beholden to any public shareholders. And last year, when staffers began itching for richer rewards, he devised a way for them to cash in some of their Facebook stock—without pushing the IPO button.
“We’re going to go public eventually, because that’s the contract that we have with our investors and our employees,” Mr. Zuckerberg said during a recent interview. But, he added, “we are definitely in no rush.”
Despite hopes in the investment community that Facebook could herald a revival in the Silicon Valley IPO market, Mr. Zuckerberg has made it clear that he won’t be dictated to.
At the same time, his delayed-gratification approach offers some insights into what a publicly traded Facebook might eventually look like. It also highlights some of the challenges Mr. Zuckerberg is apt to face in balancing public ownership with his zeal for tight creative and financial control.
Zuck, as he’s known to most, lives in a modest house in Palo Alto and often walks to the office. Employees say he’s a demanding boss—one who loves to engage in debate but isn’t big on lavishing individual praise. According to one engineer, who wrote an internal memo called “Working with Zuck,” it is unwise to “expect acknowledgment for your role in moving the discussion forward; getting the product right should be its own reward.”
To the young CEO, Facebook, with its 400 million-plus users, is more than just another tech cog in the cultural landscape. The company’s promise, he believes, has to do with facilitating people’s ability to share almost any and everything with anyone, at any time—via Web sites, mobile phones, even videogames.
In an era of obsessive communication, “this push towards things becoming more open is probably the most powerful and transformative social change” barring an event such as war, he says. “We may be the company that really leads this movement….It’s not clear that anyone else is going to manage it correctly.”
Mr. Zuckerberg fits into a long queue of tech barons with grand ambitions. Apple Inc. Chief Executive Steve Jobs in the early 1980s proclaimed that the Macintosh would revolutionize computing. Google Inc.’s founders boasted that its search engine would “organize all the world’s information.”
But unlike some of his predecessors, Mr. Zuckerberg doesn’t need huge cash reserves to build factories, a global distribution system or even a massive marketing machine. “If you don’t need that capital, then all the pressures are different, and the motivations [to go public] are not there in the same way,” Mr. Zuckerberg says.
The mission has modulated over time. At Harvard, where Mr. Zuckerberg founded the company from a dorm room in 2004 before dropping out, he saw Facebook as a way for Ivy League buddies to socialize. Photo and message swapping—along with the ability to connect with others by “friending” them—was just the beginning. Today, Facebook is busy working on a tool to let users share information about their physical whereabouts via the site. Other features, like allowing people to pay online vendors with some sort of proprietary currency, are in the test phases.
A micromanager, Mr. Zuckerberg has cut down on his meeting obligations and now delegates to senior-level staffers so that he can spend more time mulling Facebook’s broader, strategic game plan. (Among other things, he’s ruminated what the company would do if it had a trillion dollars at its disposal.) He still has the final word on most product decisions and readily abandons concepts a year or more in the making.
“A lot of companies can go off course because of corporate pressures,” says Mr. Zuckerberg. “I don’t know what we are going to be building five years from now. I don’t know what we are going to be building three years from now.”
That luxury, of being light on one’s corporate feet, is partly what he fears he may have to sacrifice with an initial public offering. Rather than nurture long-term goals, he worries that his staffers might become “focused on an announcement, and how that plays out and whether the stock price goes up,” he says.
Mr. Zuckerberg’s hard-charging ways date back to his childhood. At his Ardsley, N.Y., high school, he excelled in the classics. He transferred to Phillips Exeter Academy where he immersed himself in Latin. In college, he was known for reciting lines from epic poems such as “The Iliad.” His mother called him “Princely,” say people familiar with his upbringing.
In the company’s early days, Mr. Zuckerberg had an artist paint a mural evoking children taking over the world with laptops. He ended meetings by pumping his fist in the air and leading employees in a chant of “domination.” The ritual was in jest, say people familiar with the matter, and he dropped it after executives said it made him seem silly and that competitors might cite it as evidence of monopolistic goals. (Among Facebook’s rivals in social networking is MySpace, a unit of News Corp., owner of The Wall Street Journal.)
More recently, Mr. Zuckerberg—who himself is the subject of a forthcoming feature film—has used movie lines to cue employees that they are engaged in something greater than getting rich.
At a meeting last spring, Mr. Zuckerberg quoted from the movie “Troy” before hundreds of employees crammed into the steamy basement of a Sheraton hotel in Palo Alto. He recounted the scene where a messenger tells Achilles how scared he would be to confront the giant Thessalonian, whom Achilles was preparing to battle. “That’s why no one will remember your name!” Zuckerberg shouted.
When potential hires ask why they should join Facebook, Mr. Zuckerberg said, “Tell them: because people will remember your name.”
The company has had its fair share of management gaffes. Late last year, Facebook came under public fire for redesigning its privacy controls in a way that caused users to make more of their account data public.
Privacy advocates rallied and Facebook rolled back some changes, but regulators in the U.S., Canada and Europe are still watchful. Last week, Facebook acknowledged a “small number of users” had received private messages intended for other members. In a statement, it said privacy tools are “a core feature of Facebook and a focus of our ongoing innovation.”
“Facebook is in the phase where some founders get themselves into trouble by being too sure of themselves, says Jeffrey Sonnenfeld, a professor at the Yale School of Management, who has advised a number of Silicon Valley founders. The company “is at a crossroads where we have to see if Mark can build a team strong enough to challenge him,” he says.
Some of the CEO’s admirers, such as former Facebook employee and venture capitalist Matt Cohler, say he is a natural leader with “a clarity of purpose that is remarkable.”
Mr. Zuckerberg has passed up several opportunities to sell and make a killing. These include a $1 billion offer from Yahoo Inc. in 2006 and an overture from Microsoft Corp. that was worth a possible $8 billion or more, according to people familiar with the matter. Mr. Zuckerberg declines to comment on the talks, beyond saying: “It always sounds a lot more concrete than it actually is.”
A spokesman for Microsoft and a Yahoo spokeswoman declined to comment on the offers. In October 2007, Microsoft invested $240 million for a 1.6% stake plus some exclusive ad rights.
By early 2008, Mr. Zuckerberg began to take steps to help prepare the company to go public. He expanded his management team, hiring Google executive Sheryl Sandberg as his No. 2 in March of that year. He sought new perspectives by inviting Netscape co-founder Marc Andreessen and Washington Post Co. Chairman Donald Graham to join his board. He kept voting control over their seats, however.
“The company is definitely set up in a way where myself and the other founders have a lot of control over it,” he says. Investors who signed on, he adds, “understood that they fundamentally weren’t going to be able to push us in a direction that we wouldn’t want to go.”
Any IPO timing is squarely in Mr. Zuckerberg’s hands. He owns more than a quarter of Facebook’s stock and controls votes for three of five board seats, say people familiar with the matter. A Facebook spokesman declined to comment on the board structure or Mr. Zuckerberg’s ownership.
There’s little pressure from Facebook’s existing shareholders—mostly venture capitalists who say they are pleased with its positive growth trend. Facebook executives have discussed how revenues for 2010 could hit between $1.2 to $2 billion, say people familiar with the matter. In 2009, the company said it was generating positive cash flow, more than enough to pay its 1,200 employees and overhead.
Mindful, though, of the inevitability of an IPO, Mr. Zuckerberg has consulted with several Silicon Valley wise men. Over lunches and milkshakes with people like former Netscape CFO Peter Currie, Mr. Zuckerberg has gobbled up advice, entering thoughts into what he calls “the list” on his BlackBerry—a long to-do list of items for the future.
To distract employees from the buzz of an IPO, he pressed them to focus on building a bigger company. He led a toga party to celebrate Facebook’s 100-million-user mark. He bought a gong for the office, which employees bang when they launch new products.
In late 2007, he and the board changed the types of shares granted to employees, significantly lessening the pressure on the company to go public and giving him more control over the timing of such an event.
The switch, which the board agreed to, was to pay employees in restricted-stock units instead of options. Holders of RSUs can’t become shareholders until the company goes public; options holders have more flexible exercise rights.
The move allowed Facebook to stay under 500 shareholders, the point at which the Securities and Exchange Commission requires companies to disclose more financial information. Mr. Zuckerberg says that skirting the 500-shareholders rule “crossed our minds,” but that the decision was also good for employees because of technicalities that made it cheaper for them to acquire their shares.
The ranks, though, were still anxious for a payday. Some began to seek private buyers of their shares, complicating the company’s internal valuation for employee stock options. Their moves aggravated Mr. Zuckerberg, who often bragged to employees that he had a special capacity for delayed gratification, according to people he spoke with. He hammered home this idea to his management team at an offsite meeting, recounting a story about how he was good at waiting for things as a teenager.
By early 2009, he had changed his own boyish look. Mr. Zuckerberg, who once sported sandals to major meetings, traded his daily uniform of a T-shirt and jeans for a button-down shirt and tie. “This is a serious year,” he told employees, explaining how similar attire somehow gave prep-school students more gravitas.
He eventually found a solution to allow employees to cash out in mid-2009: Russian investors Digital Sky Technology bought roughly $100 million in shares from employees and invested $200 million directly, giving DST a 3.5% stake.
—David Wayne Osedach
By opening the door to a single investor, he avoided increasing Facebook’s shareholder base. The move also pacified employees, who splurged on new homes, cars and lavish vacations.
At least one board member, venture capitalist and PayPal co-founder Peter Thiel, had been against raising more money, according to people familiar with the matter, arguing the company should be disciplined and turn a bigger profit with what it had.
But Mr. Zuckerberg pushed and Mr. Thiel acquiesced—as long as the terms were favorable. DST agreed to a whopping $10 billion valuation, barely diluting shareholders like Mr. Zuckerberg.
In February, Jim Breyer, a board member and an early Facebook investor, told a German audience of techies that Facebook wouldn’t be going public in 2010.
Later that month, Mr. Zuckerberg, having grown weary of the topic, said in an interview, “As a practice, we aren’t going to comment on it.”
Meanwhile, the CEO has another, albeit modest, plan to help mollify employees. He promised to buy them a bigger gong.
Write to Jessica E. Vascellaro at email@example.com