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The funds pay big commissions to the banks for regularly trading large blocks of stocks or bonds. Those relationships are deep and long-lasting
-- and lucrative for the banks. The funds expect to be rewarded. But Morgan Stanley and Goldman Sachs, the banks expected to guide the Facebook IPO, are in an awkward place: They don't want to tick off 800 million Facebook users
-- but they don't want to tick off Fidelity, either. Most IPOs are underpriced, and the stock usually shoots up the first day. Lucky large investors get the basement price and usually a big payday if they sell on the first day. Smaller investors buy on the open market, after the price has spiked, and pay more. And most early investors do sell. One university research paper found that about 70 percent of the new stock changes hands in the first two days. Groupon introduced 35 million shares, but on the first day its shares were traded almost 50 million times. Ann Sherman, associate professor and IPO expert at DePaul University, raised the possibility that Facebook could set aside a portion of its shares for the small investor and use a lottery system if there is a lot of demand. She says the U.S. is the only country without IPO rules that put traditional investors on an equal footing. "Given that this is such a huge and popular IPO, I've been hoping that Facebook would use this opportunity to try a new method to bring in retail investors
-- a public offer where shares are set aside for only individual investors," Sherman says. But Zuckerberg will also probably be careful how he plays his cards. He doesn't want to anger Facebook users, but his primary goal is to raise money. The recent experience of Groupon's faltering IPO holds tough lessons for young entrepreneurs. After analysts started questioning its accounting, Groupon had to amend its regulatory filing several times. Trying to salvage the IPO, founder Mason shed his trademark jeans and T-shirt and donned a suit. He dropped the irreverent talk and spoke about the company's growth prospects at the IPO "roadshow" to impress investors. Other companies have encountered problems when they went public and tried to reward customers. Upstart Internet phone company Vonage wanted to give customers a chance to buy up to 15 percent of its 31 million shares at its IPO at $17 apiece. But when the shares fell 13 percent on the first day of trading, many of its small investors that had put in orders to buy didn't want to pay the offer price. It gained the dubious title of one of the worst IPOs that year, something Facebook wants to avoid. It's also more expensive to sell shares to many people. When thousands of small investors want to buy in, it becomes a logistical nightmare to make sure each investor gets a prospectus with all the important information. Banks like large investors because it costs about the same to process an order of 50 shares as 50,000. But William Hambrecht, founder and CEO of WR Hambrecht & Co., a firm that runs IPO auctions, says companies that value their customers benefit in the long run. He gives the example of Boston Beer, maker of Samuel Adams, which went public in 1995. Its founder, James Koch, wanted to reward the people who made his company successful: the buyers of Sam Adams. Koch set aside a quarter of his shares for the small investor. The deal was a big success and attracted more interest from his beer drinkers than there were shares available. Some people left out were dissatisfied. Hambrecht says about two-thirds of the investors who bought those shares still owned the stock two years after the IPO. Even today, about a third still own it. Hambrecht says that's because these investors appreciate the company's product. "Our argument has always been that true buyers of your stock ought to be your own customer base," says Hambrecht. "As the great investor Peter Lynch said: Invest in what you know."
[Associated
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