Entrepreneur

As Facebook lockout ends, new millionaires struggle with new wealth

As the year comes to a close, Facebook’s lockout period is ending, and it all starts this week, with up to 271 million shares possibly hitting the market tomorrow. Over the past few months, Facebook employee-shareholders have been prohibited from selling their stock — a fairly common practice, and one that seemed even more necessary due to the wild trading volumes and highly volatile price fluctuations the stock has seen since its infamous IPO.

But as the lockout ends, employees have more to worry about than stock prices. Many of them will also collect enough cash from their stock sales to inherit a whole new set of concerns, from taxes to diversification of investment.

In a recent phone conversation with Mark Castelin, director and senior investment advisor at investment advisory firm Harris myCFO, we got to talk a bit about what Facebook’s newly minted millionaires can expect.

“One of the reasons the IPO was set for the day it was is that capital gains taxes will be going up at the end of this year,” Castelin began. “So those who liquidate will be able to do so before capital gains go up, and a lot of individuals will be looking at that.”

Also, because of the lockout ending and the anticipated higher trading volumes, Castelin said, “There may be temporary downward pressure [on the share price], but if the fundamentals are good, investors will want to get in.”

Currently, with Hurricane Sandy having temporarily halted trading and with Facebook stock still just beginning its recovery from a long downward spiral, shares are trading at $21.40, down around 2.5 percent for the day and down around 43 percent from Facebook’s May 18 debut price of $38.

Trading volume has spiked in the past several days, shooting up from 30 to 50 million shares daily to more than 220 million shares on October 24 and more than 70 million shares traded daily between then and now.

“At the end of the day, it’s going to be the fundamentals of the company that’s going to drive the stock,” Castelin said.

Naturally, any financial advisor will be telling Facebook employees to diversify their assets — without dumping all their Facebook shares in a single day or week, of course — and Castelin noted that real estate might be on Facebookers’ radars, as well.

“Individuals at that age in their mid-20s to early 30s will really, if they’re using an advisor, actually conclude that it’s a reasonable time to make a real estate investment,” he said.

But especially given the relatively tender years of the average Facebook employee, Castelin doesn’t anticipate all employees’ investments to be quite as staid as a condo here or there.

“It is a very dramatic change in their lifestyle,” Castelin said. “There’s certainly going to be some level of [conspicuous consumption]. Everyone desires to have that lifestyle, to splurge a little bit.”

In other words, brace yourselves, Rolex and BMW dealerships of Silicon Valley.

Another long-anticipated effect of the lockout’s ending is a small boom of early-stage startups.

“Some [employees] will decide they want to quit Facebook … to do their own business,” said Castelin, who added that other startup activity will include angel or seed investments, too.

“Quite a bit of money is going to be flowing into other startups,” he said. “You’ve seen waves of people getting wealth from other people in the community, directly through investments or funding venture capital or private equity firms. … Invest in things that you know. To the extent that these individuals know the people, know the space, they will feel comfortable investing in the space.”

And given Facebook’s connect-the-world-to-improve-the-world bent, we can also expect to see a lot of charitable activity from Facebookers who are divesting.

“Some others are looking at philanthropy, too,” Castelin said. “It’s amazing how many young people are looking at socially conscious investing, green investing, and passing that wealth on to future generations.”

Of course, charitable activities don’t hurt a young millionaire (or several-hundred-thousandaire) suddenly faced with a huge tax bill, either. And taxes are something Castelin noted all Facebooker shareholders should be thinking about.

“The number one thing is to plan what to do with all of that money,” he said, including plans for providing for parents, spouses, and family “in a tax-advantaged way” and using strategies to take advantage of tax laws.

Castelin said Facebookers should have a trusted advisor who is working in their best interests and who isn’t affiliated with a bank or working on commission — and finding that advisor might involve five or six in-person interviews with different firms.

“Be cautious. Don’t think that you have to do anything with your money,” he said. “You’re young and still have plenty of time to make mistakes, and you now have a financial cushion to make some mistakes. … Just don’t put all your eggs in a single basket, and do things incrementally in a very measured, methodical fashion.”

Top image courtesy of Kiselev Andrey Valerevich, Shutterstock


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