Stock Trading in Private Companies

There are a number of social media networking companies that are enjoying tremendous success as private companies i.e. they are not listed on the public stock exchanges. With the success of companies such as Facebook, Twitter, Zynga and LinkedIn, a secondary trading market has developed to engage in the trading of shares of these privately-held companies.

In the past year (2010), several private exchanges have emerged to match up the buying and selling of private shares in these fast-growing companies which have enjoyed hundreds of millions of dollars of revenue. The trading volume has been relatively low but the number of share trading transactions is increasing each month. Wall Street brokerage firms have formed investment pools to buy up shares.

The shares come mainly from former employees at the companies and from venture capital investors who want to take an early exit to capitalize on their stake in the company. Buyers of these shares include wealthy speculators looking for a piece of the action in the next big thing. This buying activity relating to Facebook is mentioned in the Google, Yahoo, Facebook Revenue article.

As these companies take longer to tap the public markets by delaying their IPO (Initial Public Offering), pent up demand is created. This demand has fueled the creation of these secondary market exchanges to engage in trading of shares in these private companies. Examples of these exchanges include:

• SharesPost
• SecondMarket

As of year end 2010, Facebook valuation is $42.4 billion and Twitter valuation is $3.6 billion as implied by the pricing on the private company share exchanges.

Goldman Sachs has a Facebook valuation of $50 billion and is offering ($2 million minimum) investment opportunities to its very wealthy private clients! Note these investment opportunities are not transacted on the secondary market exchanges mentioned above. Instead, the investments are locked in until 2013 before shares can be sold; this is in anticipation of Facebook going public in 2012.

This Goldman Sachs move positions itself well for the eventual Facebook IPO and lends credibility to the Facebook valuation, even if it seems over-hyped and over-anticipated. Goldman Sachs is well-positioned to lead the public offering of Facebook when it happens.

See the related Facebook Valuation History page.

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