Published: Tuesday, May 24, 2011
Netscape IPO offers lesson for LinkedIn
There can be pitfalls in the sudden wealth that comes with IPO windfalls.
LinkedIn's enormously successful initial public offering Thursday may well come to represent the "Netscape moment" of the social-networking era. That IPO, on Aug. 9, 1995, famously touched off the Internet boom.
The parallels so far are striking. Both companies repriced their shares several times in the days leading up to the offering, yet still saw the stock more than double on the first day. Both delivered nine-figure paydays to top executives and minted millionaires throughout the ranks. And both sharply raised expectations for the companies that would come next.
No doubt employees and investors at Facebook, Twitter and Zynga were licking their lips over their own financial prospects as they watched LinkedIn's valuation pass $8 billion, then $9 billion, then $10 billion.
But -- killjoy alert --what's less often recalled than Netscape's defining moment is what happened in the years that followed. Less than three years later, while the dot-com craze was still in full swing, shares had dropped from a peak of $171 to below $15.
This was before stock options had fully vested even for early employees, meaning they couldn't sell all their shares if they wanted to. The company ended up repricing options just to hang onto talent.
Here are some hard-learned lessons the current generation of techies might want to bear in mind.
Lesson 1: The basics of financial planning still apply. Dave Shore, founder of Marin Financial Advisors, worked with many newly rich clients during the dot-com days. Or so they thought.
To make any actual money, employees have to exercise their stock options, meaning buy shares at the price their company set, and then sell them at the current market value. They owe taxes for the gains realized at both stages.
The worst mistake that Shore saw during the late 1990s was people holding off on liquidating shares because they wanted to avoid the capital gains tax that applies for the first 12 months. If the share value rapidly dropped during that period, people were left with a whopping tax bill for exercising options that they no longer had the stock wealth to cover.
Lesson 2: Things can change remarkably fast. In 2001, The San Francisco Chronicle wrote about an early Yahoo employee, whose stake in the company soared to $25 million when the stock hit its 2000 peak. But he hung onto his shares through the disastrous year that followed, driving his net worth down to $500,000. He was forced to sell a multimillion-dollar home at a $100,000 loss.
The then-29-year-old, who asked that his name be withheld, said he fell into a deep depression and considered suicide, a stark reminder that ...
Lesson 3: ... Sudden wealth doesn't mean sudden happiness.
The parallels so far are striking. Both companies repriced their shares several times in the days leading up to the offering, yet still saw the stock more than double on the first day. Both delivered nine-figure paydays to top executives and minted millionaires throughout the ranks. And both sharply raised expectations for the companies that would come next.
No doubt employees and investors at Facebook, Twitter and Zynga were licking their lips over their own financial prospects as they watched LinkedIn's valuation pass $8 billion, then $9 billion, then $10 billion.
But -- killjoy alert --what's less often recalled than Netscape's defining moment is what happened in the years that followed. Less than three years later, while the dot-com craze was still in full swing, shares had dropped from a peak of $171 to below $15.
This was before stock options had fully vested even for early employees, meaning they couldn't sell all their shares if they wanted to. The company ended up repricing options just to hang onto talent.
Here are some hard-learned lessons the current generation of techies might want to bear in mind.
Lesson 1: The basics of financial planning still apply. Dave Shore, founder of Marin Financial Advisors, worked with many newly rich clients during the dot-com days. Or so they thought.
To make any actual money, employees have to exercise their stock options, meaning buy shares at the price their company set, and then sell them at the current market value. They owe taxes for the gains realized at both stages.
The worst mistake that Shore saw during the late 1990s was people holding off on liquidating shares because they wanted to avoid the capital gains tax that applies for the first 12 months. If the share value rapidly dropped during that period, people were left with a whopping tax bill for exercising options that they no longer had the stock wealth to cover.
Lesson 2: Things can change remarkably fast. In 2001, The San Francisco Chronicle wrote about an early Yahoo employee, whose stake in the company soared to $25 million when the stock hit its 2000 peak. But he hung onto his shares through the disastrous year that followed, driving his net worth down to $500,000. He was forced to sell a multimillion-dollar home at a $100,000 loss.
The then-29-year-old, who asked that his name be withheld, said he fell into a deep depression and considered suicide, a stark reminder that ...
Lesson 3: ... Sudden wealth doesn't mean sudden happiness.
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