Featured: Mark Zuckerberg, CEO, Facebook
Originally published: Feb. 10, 2012
Wouldn't it be nice to own so much of a hot stock that each time it went up a dime, you'd be $53 million richer?
That's the position Facebook founder Mark Zuckerberg will be in when his company goes public, perhaps in May.
Zuckerberg owns 533.8 million Facebook shares, including 120 million options that he's eligible to cash out. If Facebook hits the market at the anticipated $100 billion in total worth, his stake is worth about $28 billion.
The position is so large that each time his stock moves up a dime, he'll make as much as 1,080 typical U.S. households to earn in a full year. This stunning moneymaking ability makes Zuckerberg my latest "One Percenter of the Week."
Yes, one could argue that Zuckerberg, who invented Facebook and managed it into a company grossing more than $4 billion a year, deserves every penny. And some will say any criticism is simply envy. But studies show there's an ongoing hollowing-out of the middle class in the U.S., and a growing divide between the wealthy and the rest of us. Long term, that's not good for any nation or economy.
Zuckerberg's $28 billion windfall is a case study in the concentration of power and wealth. This 27-year-old wunderkind will hold 28% of the company's market value and all the decision-making power, which already has some investors nervous.
2 big issues
This illustrates at least two key issues in the debate over the 1% versus the rest of us:
The first is taxes.
If you were troubled by the revelation that presidential contender Mitt Romney pays less than 15% of his income in taxes, you'll be flabbergasted by this: Zuckerberg's IPO payday may go largely untaxed.
True, Zuckerberg would trigger a tax bill of more than $2 billion if he exercises his 120 million stock options, one reason he plans to sell $5 billion in stock. But that could be the last tax bill he ever faces. Assuming he holds off selling any more shares, his tax would be zero, because shareholders pay taxes only on realized stock gains. (If he sells, he'd pay at capital gains rates -- Romney's rates.)
How could he enjoy his wealth without selling shares? He could pledge the stock as collateral against big loans and spend that money, a tactic used by Oracle ( ORCL ) CEO Lawrence Ellison, says David Miller, a tax expert and partner at Cadwalader, Wickersham & Taft.
He could keep those loans outstanding until he died, at which point his estate would have to pay them off. When he passes the stock on to a spouse, there would be no tax bill. She would pay tax only on the appreciation in those shares from the time he died until she sold the stock. This year's $23 billion windfall (after the $5 billion expected sale), and anything the stock gains over his lifetime, would never be taxed.
Meanwhile, Zuckerberg's CEO cash salary is being dropped to just $1 a year. While that's basically a ruse – read " The myth of the $1 CEO " -- it means that he'll avoid even more taxes, since there will be virtually no salary to tax. He might have to pay tax on some perks, though boards sometimes opt to pay those tax bills for CEOs. (For more, see “ Facebook billionaire’s tax bill: Zero? ”)
The second issue is power.
The super-wealthy don't have to let anyone tell them what to do -- –and in this case, that includes shareholders.
Through his own holdings and alliances, Zuckerberg will control the voting power of 1 million Facebook shares, 57% of the stock. Under the terms of the IPO, he also names Facebook's board of directors. This is unusual. Boards are normally elected by shareholders to look out for their interests -- in part by keeping an eye on CEOs.
"It's not a good thing because shareholders have absolutely no say," says David Rudow, a tech sector analyst for Thrivent Asset Management.
This has already raised red flags. The California State Teachers' Retirement System, a huge pension fund which owns Facebook shares bought in the private market, says it is protesting to the company.
This certainly gives potential IPO buyers something to worry about. Of course, it's possible Facebook will keep going and growing with one guy calling all the shots; so far, it's working. But be aware: If you buy Facebook shares, you're betting it always will.
