Facebook's CFO Exits: Enter, the Questions

Facebook is replacing its chief financial officer, Gideon Yu.

Facebook spokesman Larry Yu confirmed to BusinessWeek that CFO Yu will be leaving the company. Now the big questions are: Why is he out? And who will replace him?

In a statement, Facebook said the company "will be looking for someone with public company experience" and that the fast-growing social network has retained recruiter Spencer Stuart to lead the search for a new CFO.

"Gideon has played an important role in helping us achieve our financial success, building a strong finance team, and establishing the core financial operations of our company," said Facebook in its statement. "We are grateful to Gideon for his contributions to Facebook and what we are trying to accomplish. Despite the poor economic climate, we are pleased that our financial performance is strong and we are well positioned for the next stage of our growth."

"no current plans to go public"

Facebook's statement that it is looking for a CFO with more experience in running the financial operations of a public company has led to speculation that the company would accelerate its plans to sell shares in a public offering. But in another statement released to BusinessWeek, spokesman Yu said the company had "no current plans to go public."

"There are numerous benefits to operating as a private company, especially in this difficult economic environment," said Yu. "But we've always considered the possibility of becoming a public company at some point."

That raises a further question: If Facebook did not need to hire a new CFO to take the company public in the near term, why is Yu leaving now?

Facebook's Sinking Valuation

One reason may have to do with Facebook's finances. Yu's departure comes as he was in the process of trying to raise money for the fast-growing startup—one of his primary responsibilities as CFO. Over the last few months, Facebook has been trying to raise as much as $100 million in debt financing to pay for rising technology costs. Although Yu has played an instrumental role in helping Facebook secure more than $500 million in debt and equity financing in the past, he was unable to line up any significant amount of money in the latest round of financing.

Facebook may have a hard time raising money for reasons that go beyond the credit crisis that's affecting so many U. S. corporations. The startup received a rich $15 billion valuation when Microsoft (MSFT) took a stake in October 2007. Today it would be difficult, if not impossible, to find an investor willing to give Facebook a similar valuation, given the steep drop in equity markets over the last year.

"Facebook's valuation dropping like a lead balloon severely hurt the company's ability to raise the capital it needs," said Andy Beal, editor of the blog Marketing Pilgrim. "I suspect that this double whammy contributed to Yu's departure."

Facebook has been pursuing an aggressive strategy, emphasizing growth in users over profitability. At the end of February, the company hit 275 million visitors worldwide, up from 100 million last February, according to the research firm comScore (SCOR). The company's revenues, estimated at from $250 million to $300 million last year, are growing, though almost certainly not as fast as its user count. The divergence can hurt profitability because Facebook's expenses—in the form of higher costs for computer servers, storage, electricity, and Internet bandwidth—mount with the number of users.

How to price a successor's options?

Now that Yu is leaving the company, yet another big question is who will replace the outgoing executive. The ideal candidate would be someone who has taken a high-profile startup public before—particularly an Internet company. An obvious top choice would be Georges Reyes, the former chief financial officer of Google (GOOG). Reyes retired from Google last August after the company took 10 months to find his replacement, Patrick Pichette.

Filling the CFO spot at Facebook may be harder than it might seem at first blush. The company's valuation is a big issue. Given the steep drop in the value of the company's shares, it would be difficult for a new executive to make much money from Facebook stock options in the foreseeable future. "The share price on the options is quite high," says an executive at a San Francisco startup who knows several executives at Facebook. "You generally want a huge spread between what the company is worth and the option exercise price."

Over the last two years, Facebook has lost a number of talented executives, an unusual trend for such a hot startup. Among those who have left are Matt Cohler, vice-president of product management; Dustin Moskovitz and Chris Hughes, co-founders; Adam D'Angelo, chief technology officer; Owen Van Natta, chief operating officer; Jeff Hammerbacher, engineering manager; and Benjamin Ling, platform director.

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