CNN has a story today full of outraged Twitter paper millionaires in a leaking-email-anonymous-commenting fit because they can’t sell more than 20% of their Twitter stock.
This is the ugly unintended consequence of the otherwise savvy use of secondary markets pioneered by Facebook: Employees are increasingly becoming mercenary and feel entitled to treat private options as public stock. If allowed, what would be the point of being a private company?
Dick Costolo is sharply nipping this in the bud at Twitter. It’s being portrayed as restrictive, but it’s anything but. In the grand scheme of private companies, he’s still being outrageously pro-employee.
Pre-Facebook no one was allowed to sell private shares– the very idea was antithetical to the foundations of Silicon Valley. Employees get options so they are incentivized to work hard and help build a big company. The idea has long been that everyone– investors, founders, and employees– all make money at the same time. And that time is when a company goes public or gets acquired.
That started to change in the mid-2000s. Facebook pioneered incredibly favorable terms that allowed employees to sell stock, and help orchestrate buy-outs like the DST one in 2009.
There are unquestionably good things about the liquidity landscape changing in the Valley, particularly as IPOs get pushed farther and farther out. I have always been a big fan of partial liquidations for founders. It satisfies a near-term cash crunch and aligns incentives to build something for the long-term. And Facebook’s deft use of secondary markets allowed the company to focus on building a huge business without the distraction of IPO pressure.
But this was always the looming other side of the coin: Coddling a hopelessly mercenary culture that demanded instant liquidity when they wanted it.
From the article:
“But for early Twitter employees — who do hold actual, vested stock — the 20% rule is a frustrating form of golden handcuffs. Some people who would like to leave Twitter feel stuck, according to several current and former employees. Without selling more shares, they don’t have the cash to walk away.”
Fine, let them. For Costolo to succeed he can’t foster a culture of entitlement, he needs to do everything he can to build Twitter into a big public company. Given the recent valuations at which Twitter has raised funding, an acquisition is likely off the table. And building a popular service into a company worth $8 billion isn’t going to be easy.
Twitter may be six years old, but it is nowhere near ready to go public. It’s several years behind where it should be as a business, thanks to years of internal chaos. In fact, it’s absurd that reporters keep asking and should say something that Costolo doesn’t play footsie on the subject. He blatantly says it is not coming any time soon.
That means he needs to control where his equity is going and needs to keep and eye on the 500 shareholder restrictions that would essentially force the company to go public before it is ready. If employees don’t get the logic in what he’s doing, they should leave. Not just Twitter. They should leave Silicon Valley.
What Costolo is imposing isn’t dramatic or draconian. Not only was the idea of selling stock before liquidity unheard of pre-Facebook, most of the large Web companies in the Valley have restrictions on how employees can sell shares of their stock. Facebook, itself, sought to mitigate this by issuing RSUs instead of options. RSUs don’t turn into stock until six months after liquidity. And increasingly, many companies being formed now are locking down all trading of stock, lest they get into the bind.
It has unleashed bigger cultural problems within the company, according to multiple sources. Indeed, Facebook is lucky that its stock has continued to go up. With stock being sold willy-nilly to people who don’t really understand what they are buying, had things gone another way, Facebook could have been open to shareholder litigation.
What Costolo is doing is basic corporate governance. He is protecting the company. The fact that this is considered unreasonable shows how quickly people can become entitled to new things that were once considered a luxury.
It’s another impressive move by Costolo, who took similarly decisive action to get control of his board late last year. When Costolo was named CEO of Twitter, I wondered whether a guy who’s known as a good operator and a funny, nice guy had the vision and fortitude to be a real leader. Particularly, of a company that he didn’t found, that had already gone through the internal pain of ousting two founder-CEOs and was struggling to innovate on its core product. Twitter seemed to be kept alive by the sheer popularity of its product, and I wondered if it might go the way of MySpace at some point.
Privately, as I asked other entrepreneurs and investors in the Valley the Costolo question, I found that other people had the same uncertainty. It was no offense against Costolo. Just that no one had seen him in the CEO role and the Valley’s bias against non-founder CEOs. And with two ousted CEOs in a few years, Twitter was starting to look like one of those companies that had some unexplainable cultural dysfunction that no one could tame.
To put it bluntly: I loved the product, and I personally liked Costolo a great deal. But I wasn’t bullish. In fact, I wrote that Twitter ran the risk of being the only member of the huge Web 2.0 elite crew that also includes LinkedIn, Zynga and Facebook that didn’t build a massive multi-billion dollar company.
Over the last few months, I’ve done a total 180 on this view. Increasingly, the things I hear are convincing me that Costolo is decisive, tough, direct and has his own very strong vision for Twitter. If anyone can get the company to a successful IPO, it’s him.
(Illustration courtesy of Hugh MacLeod.)