New Tech Millionaires Skirt Wealth Mistakes of Early Dotcommers

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Mark Zuckerberg

They say they want to change the world. But they also want to preserve their wealth.

The freshly minted tech millionaires and billionaires of Silicon Valley, including those benefitting from Facebook’s initial public offering today, are selling stock earlier and in larger numbers than previous generations of tech tycoons.

The sales are aimed at helping the new generation of tech insiders avoid the wealth destruction of the dot-com bust in the late 1990s, when many holders saw their fortunes vanish with the market crash.

Fully 57 percent of the shares offered in Facebook’s IPO will be from existing shareholders rather than from new shares issued by the company. In Google’s IPO in 2004, existing holders represented only 28 percent of the sales.

Facebook CEO and Founder Mark Zuckerberg is selling shares worth more than $1 billion, though his stake in the company will still be worth more than $19 billion. Other early investors in the company – including executives, directors and earlier investors – will net more than $9 billion from the $16 billion sale.

Facebook also altered the lockup period – traditionally a six-month period during which insiders are prevented from selling stock – to allow more stock sales after just three months.

Executives and early investors in LinkedIn and Zynga are also taking money off the table more quickly. Shortly after its IPO, Zynga did a secondary offering that allowed company insiders to sell more than $593 million in shares before the official lockup period ended. The company itself did not receive any proceeds from the secondary sale.

Insiders at Groupon were able to cash out well before the IPO, netting $570 million from a round of private financing.

This new “sell early” philosophy stands in stark contrast to the dot-com bubble IPOs of the 1990s. At that time, many executives, venture capital firms and insiders avoided early stock sales and tied their personal fortunes entirely to their companies. Selling was sometimes seen as a no-confidence vote in the company, and the Valley’s overly exuberant culture put its faith in technological change and potential growth over the market.

When Yahoo went public in 1996, all of the 2.6 million shares sold were new issues from the company rather than shareholders. When Netscape went public in 1995, the company sold 5.7 million shares – none of which came from existing shareholders.

Of course, today’s tech tycoons and investors still have a lot of wealth tied up in their companies. Virtually all of Mark Zuckerberg’s proceeds will go to paying taxes rather than raising personal cash. And many Facebook’s employees and early shareholders are barred from selling shares for at least six months.

The three founders of Groupon, including its CEO Andrew Mason, announced that they’re not planning to sell any of their stock when their lockup expires on June 1. The statement may be aimed at avoiding the fate of LinkedIn, which saw its shares fall after employees and other early equity holders unloaded their shares en masse.

Yet wealth-management experts say the sales show that today’s tech titans and venture capitalists are undergoing a fundamental shift when it comes to managing their wealth. They’re still betting big on their companies – but they are also taking cash off the table just to be safe.

“This new group is much more educated and thoughtful about how to manage and protect their wealth,” said Lee Hausner, an adviser to wealthy families and a senior managing director with California-based First Foundation Advisors. “They learned from the dot-com crowd that everything that goes up can come down. So they’re selling and diversifying.”

-By CNBC's Robert Frank
Follow Robert Frank on Twitter: @robtfrank