Want a piece of Facebook, Twitter, or Zynga? It’ll cost you — even more than you think.
As trading in private shares on the secondary market heats up, Silicon Valley’s hottest private companies are charging fees for the privilege. Bloomberg reports that Facebook is charging $2,500 per transaction. CNBC confirms that, and notes that Twitter is, too. Zynga recently raised its fee from $4,500 to $6,000, according to emails obtained by Bloomberg.
All this appears legal. Unlike the primary market, where companies issue new shares directly to investors, secondary markets involve the buying and selling of existing shares, much like the public stock markets. It’s long been possible, but it’s getting simpler, more open, and less controversial than it used to be.
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In the secondary market, the companies are acting as their own transfer agents, the intermediary who handles record-keeping and information-distribution for buyers and sellers of shares. In the public markets, transfer agents charge small fees, and the price is driven down by competition: Publicly traded companies generally want to encourage trading in their shares.
And that’s the difference: By charging a high fee, Facebook, Zynga, and Twitter are trying to discourage trading.
Until they go public — an eventual outcome expected for all three companies by most observers — they need to keep the number of people who own their shares down. If they hit the limit — generally 500 shareholders, though some employee stock-owners don’t count — prematurely, SEC regulations could require them to report financial statements like a publicly traded companies, at which point they’ll have most of the disadvantages of being a public company without the benefits. As it stands, these companies have an increasing administrative burden tracking their shares, which they’re trying to cover with the fee.
So far, so fair. No need to weep for the people who are currently trading in these shares. Regulations already require them to be accredited investors, with income of more than $200,000 or a net worth of more than $1 million. (As former VentureBeat contributor Paul Boutin recently noted in Wired, this means that the average Twitterhead has no chance of profiting from that company’s explosive growth.) The average transaction on SecondMarket, an exchange that facilitates private stock sales, is $2 million. SecondMarket and its primary competitor, SharesPost, cover the administrative fee.
Who loses? Midlevel employees at these companies, mostly. They’re left waiting for a liquidity event that may be years away. They may want to cash in some shares that they own free and clear, earned as part of their compensation and properly exercised, so they can buy a car or take a vacation. At that scale of transaction, $2,500 to $6,000 is a hefty chunk of the transaction. Imagine if your broker charged you that much to sell shares.
They’re stuck in sanctioned employee stock-sale programs, where the company generally doesn’t charge a fee but limits the number of shares that can be sold, sets the price, and dictates the buyer — generally a friendly investor like Mail.ru’s DST Global unit, which has bought shares on the secondary market from Facebook, Groupon, and Zynga employees and founders.
Secondary markets have brought a lot of benefits to tech companies faced with frozen IPO markets, offering at least partial exits to people whose wealth might only exist on paper. Mark Zuckerberg’s $100 million donation to the Newark school system, for example, was made possible because there’s secondary trading in Facebook shares.
Something feels wrong about these fees, though. They hardly discourage the wealthy from getting wealthier off private stock sales. But they do hit the tech sector’s middle class. In meritocratic Silicon Valley, should there really be two sets of rules — one for the wealthy and another for the rank and file?