Facebook?

It’s interesting to see the misapplication of math.

What is the limit of a series? When do numbers make sense?

When we filed for an IPO for Passave, we were looking to raise 70M to 80M, in exchange for ~38% of the company.

So the value was 210M (80M/38%), but it was solidly anchored by 38% of the equity.

The same is achievable by 40M/19%. But how about 4M/1.9%?

How about with 1.6%? Sounds familiar?

Justifying a valuation with a very small percentage is flimsy at best.

But what if even that didn’t happen?

Here is another view on the same numbers:

Microsoft gives Facebook 240M in cash.

In return it gets 1.6% equity stake, and the right to serve ads outside the US on Facebook.

How much is each part worth?

Equity = 240M, ad-serving rights = 0, is clearly not it.

But what if ad-serving is worth 230M (in line with MySpace/Google deal), and the equity is worth the remaining 10M? That may give Facebook a valuation of only 10M/1.6% = 625M.

In economic terms the option value of the deal is substantial, making the 1.6% holding a significantly smaller part of the deal, and the truth is somewhere in the middle.

Maybe this is not an investment? Maybe this is an ad deal with what we call ‘a sweetener’?