Eight years after the fateful decision by a Harvard sophomore to spend a summer in California working on his new website, that choice is about to pay off in a big way -- not just for Mark Zuckerberg and the roughly 3,000 employees of Facebook, but for Silicon Valley and the rest of the Golden State.
Even as Facebook begins the process -- through a securities filing widely expected Wednesday -- of offering its stock to the public, the wealth being created by the company is already rippling through the local economy, and experts say the IPO will buoy the valley even more in future years. Anticipation of the biggest IPO ever for an Internet company has real estate agents seeing a note of urgency in the local market, Wall Street money managers moving in for a piece of the action, and even state budget analysts factoring in a "Facebook effect" that could top $1 billion.
The Facebook IPO "is a continuation of this little mini-surge we're having right now" in the valley's economy, said Stephen Levy, director of the Center for Continuing Study of the California Economy. Unlike the dot.com boom and bust, Levy said, fast-growing social networking companies such as Facebook, Zynga and LinkedIn "are real companies, many of them with millions of customers."
Wealth managers working with Facebook employees say the IPO could easily mint 500 to 1,000 new millionaires -- perhaps as much as one-third of the company -- with many engineers who joined Facebook in its first few years in line to own $10 million or more in stock. Zuckerberg, who is thought to own almost one-quarter of the company, could end up worth well over $20 billion.
Even though some reports late Tuesday suggested that the IPO could be as little as half the expected $10 billion, Realtors say the buzz around Facebook is already sparking the long moribund housing market. Potential sellers want to know whether they should sell now or wait, and buyers are fervently pushing their agents to get into the Peninsula housing market before the IPO, anticipating rising prices as the newly wealthy compete for the hottest neighborhoods from San Francisco to Palo Alto.
Real estate boom
The IPO could value the company at as much as $100 billion. Although a real estate boom is far from guaranteed -- some agents believe the boost to the market will be limited and will trickle out over time as employees gradually gain the right to sell their stock -- high-end mortgage bankers are staffing up, too, expecting business to surge.
"What we're seeing is just the possibility of a large IPO is creating a real sense of urgency in our market, both for buyers and for sellers," said Omar Kinaan, of Re/Max Distinctive Properties in Menlo Park.
Sniffing a big payday, Wall Street wealth management firms are opening new offices or expanding in the Bay Area to woo not only Facebook engineers, but also employees of LinkedIn, Zynga and other startups that have gone public. And with many of Facebook's engineers and executives working through an extensive interview process to hire the firms that will manage their new wealth, smaller, local wealth management firms are in the fight for new clients, too.
But however successful Facebook's IPO becomes, don't expect a replay of the financial promiscuity of the 1998-2001 boom, say wealth managers and real estate agents working the social network's new millionaires. Like Zuckerberg, who has long driven a well-used Acura and until recently lived in an inconspicuous rented house a few hundred yards from his then-Palo Alto office, the Facebook fortunati are likely to be more savvy, and less showy, with their wealth than the Internet boomers of the 1990s.
While news reports have featured rumors of Facebook employees planning to spend their new riches on things like archeological trips to the South American rain forest or buying flashy cars, many Facebookers appear to have more grounded plans.
"You might call it, 'the Club of Unpretentious Pretentiousness,' " said Miles McCormick, a veteran real estate agent based in downtown Palo Alto who has represented Facebook employees. "Everyone knows they have wealth now, or they are going to get considerably more wealth shortly, but it's much more subtle" than the 2000 boom.
Still, Carole Rodoni, a real estate agent and economist, expects a price explosion in places popular with the young social Internet crowd, such as Pacific Heights, Noe Valley and south of Market area in San Francisco, and Hillsborough, Atherton and Palo Alto.
"In 2000, they didn't care -- it was bigger, better bling," she said. "But these kids today, because of what they've been through (with the dot-com bust) they are very attuned to statistics and numbers. They will buy the home in the right area, but you have to convince them it's going to help them create wealth. They are not going to just give it away, the way the guys did in 2000."
Of course, the purse strings may loosen if one tech tribe butts up against another over a piece of property.
"You get a Yahoo (YHOO) guy against a Facebook guy against a Zynga guy against an Apple (AAPL) guy against a Google (GOOG) guy, then it's not just about the house," Rodoni said. "It's about the egos."
For the rest of us, Facebook's impact on the state's budget, which has a projected $9.2 billion revenue gap through mid-2013, may be the broadest example of the Zuckerberg dividend.
State officials recently declared they will need to adjust revenue projections upward for the 2012-13 fiscal year because of "the Facebook Effect."
But quantifying the benefit is impossible.
"The best that any expert can offer is a somewhat informed guess," Deputy Legislative Analyst Jason Sisney said in an email. "The range of error around any such guess is very, very large. The positive revenue effect for the state could be $300 million, $500 million, $1 billion, $1.5 billion, or something else. No one knows."
Bigger than Google
One model analysts are looking at is Google. A state Department of Finance estimate of the capital gains tax impact of Google's IPO, which raised $1.7 billion, was at least $142 million, and potentially more, in the two years after going public in 2004.
Timing also plays a role in Facebook's economic impact. Employees are expected to have a 90 to 180 day "lockup" period in which they can't sell their stock after the company starts trading publicly. If Facebook starts trading in mid-2012, it could be 2013 before employees can begin to liquidate their holdings.
Most experts agree the economic benefit will filter out gradually, in part because many Facebook employees have already sold some of their shares on the secondary market. Another limiting factor will be whether those who still hold large amounts of Facebook stock decide to stay in the Bay Area.
Michael Spector, CEO of Vista Wealth Management, said several of his clients who were early Facebook employees have already moved to states like Washington, Florida and Texas to avoid California income tax.
"There is a big wave" of wealth, Spector said. "But I've got to tell you that wave of wealth, most of those people did not build their lives here" and may leave.