Facebook Ambushed
I periodically take exception to the laws and regulations the federal government throws up to thwart small businesses…but the real culprit today appears to be state and local government. Here’s just one example:
There is a small town in Central Oregon called Prineville. It is a nice little town in an idyllic setting, with a lot of nice people living there. Unfortunately, it also has an unemployment rate that hovers between 17% and 18%. So, the city and the county got together and developed an “enterprise zone” that offered industrial land with a 15-year moratorium on property taxes.
At the same time, Facebook was looking for a place to locate their new data center, and found that the Prineville location would fit their needs.
Facebook signed an agreement with the county and built the first of four large facilities—which became operational this past summer. The second building was also recently started.
Following Facebook’s lead, three other high tech companies are in the process of negotiating to build in Prineville’s “enterprise zone.” This is the way jobs are created, and it looked like Prineville was going to lick their unemployment problem.
That is…until the Oregon Dept. of Revenue decided that Facebook was a good source of money for the state. As a result, they recently declared Facebook’s data center a “utility,” and therefore it didn’t fall under the auspices of Prineville’s “enterprise zone” agreement (in Oregon the state assesses taxes on “utilities” without any involvement of cities or counties).
The annual minimum tax bill to Facebook will now be $390,000 per year. Sure, that amount is not going to break Facebook, but what does this whole scenario say to their mangagement about building the other three buildings and filling them with servers—and hiring people to run the operation. As Facebook management said in a recent email—”…the state has effectively rewritten the agreement between the county and Facebook.“
An Oregon state senator recently said, “It doesn’t make any sense to me, it’s like being ambushed.”
Worse yet, what about the other companies interested in building in the “enterprise zone?” According to an Oregon state representative; “It repels those other data centers that are circling right now.” Oregon’s reputation as a business partner is now totally shot at this point. Even written agreements cannot be trusted.
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Oregon lawmakers say that this move creates a much greater concern—the taxing of “intangibles,” such as brand loyalty and, what Facebook called in one of their emails, “world-wide goodwill.” Oregon does consider “intangibles” when they calculate the value of a property, and it is this value that taxes are assessed on.
This action in Oregon could certainly increase the “taxing frenzy” of other cities, counties, and states all across the U.S.
Do you think it is fair to tax brand loyalty and goodwill of Facebook? What would you think if your “intangibles” were taxed?
What is the attitude in your city, county, or state regarding support of new (or old) businesses? I would like to hear from anyone who has a comment about their local government’s attitude toward private business.
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Private Equity vs. An IPO
The mood on Wall Street is still not favorable for IPOs. So, what are successful young tech companies—and their investors—to do? How will they cash in on that big payday? Many employees went to work at some of these companies for very low wages plus stock in the company, which they expected to cash in on IPO day. Now, instead of months from startup to IPO, it is taking years.
In the meantime, many employees are holding stock they deem worthless, because there is no market for it…and that doesn’t make happy employees. Someone at the National Venture Capital Association said, “You want entrepreneurs hungry, not starving.”
Also, many Venture Capitalists are not happy with the long wait for payday. They have fund investors they have to keep happy, and they normally do that through the IPO…but not lately.
Well, things are looking up. Large Private Equity firms are stepping in and laying out cash for employee stock, as well as helping some of these tech firms continue their growth. Here are some recent examples of private equity deals that have—at least partially—replaced the IPO for now.
Facebook — Russia’s Digital Sky Technologies kicked in $200 million and promised another $100 million to buy employee shares and give the company some cash to grow on.
Twitter — T. Rowe Price put up $100 million so Twitter could invest in much-needed servers and equipment to keep up with burgeoning traffic.
Yelp — Elevation Partners put $100 million into Yelp, 75% of which will be used to buy employee’s stock.
Zynga — Game developer Zynga took $180 million form DST. A portion of this money was used to buy out employee’s stock.
These are only examples of some of the larger deals that fast growing tech companies are putting together with private equity firms. So, if your company is a potential candidate for an IPO and you—and your investors—are just waiting for the timing to get better (it may be a long wait), you may want to take a look at some partial stock sales to a private equity firm.
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