Facebook's $15 billion employee-option problem

When we at Vator.tv ask people for their opinion on how much money a startup entrepreneur should raise, they usually fall into two camps.

Investment bankers and more-seasoned executives tend to give advice along the lines of 'you should take all the investment capital you can get.'  We've heard that from Michael Moe, CEO of ThinkEquity Partners, and from Dan'l Lewin, Microsoft's group vice president and Silicon Valley point man.

First-time entrepreneurs, on the other hand, sometimes see money as a distraction, and therefore an obstacle to success. Plaxo's Todd Masonis was among those who've told us that.

Those who are cautious about taking money are understandably reluctant to give away more of their equity than they feel they need to early in a startup's life.

But that's not the only way accepting too much capital can pose challenges for a startup -- something Facebook is now finding out.

At first glance, it's hard to see a downside in Facebook taking $240 million from Microsoft in exchange for about 2% of the company.

But the $15 billion valuation that deal bestowed on the social-networking site is going to make it more difficult for the startup to recruit top engineering talent, according to two veteran Silicon Valley entrepreneurs who shared a panel at the recent Venture Summit West conference hosted by AlwaysOn Network.

"Facebook options just went way up in value," said Andy Bechtolsheim, a former executive of Sun Microsystems and Cisco Systems who was also an early investor in Google.

"It hurts the employees. Even if Facebook goes public at $30 billion, no one (hired after the Microsoft deal) is going to get 10x. They're going to get 2x" for pre-IPO shares.

There are many other high-profile startups that will be able to offer engineers and other executives a better deal, Bechtolsheim said. 

However, there is a solution to the problem, according to Ron Conway, the former PeopleSoft CEO who was familiar with the Microsoft deal because of his role as an adviser to Facebook. 

"Facebook will have to adopt a restricted stock plan to keep and motivate people," said Conway, who has put  money into hundreds of startups as an angel investor.