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How does Mark Zuckerberg earn his money from Facebook? He is worth $17.5 billion now, but the total funding for Facebook is only $2.4 billion? I don't understand this. Is this the money Facebook makes through advertising revenues, or from when they raise venture capital? On what basis is this valuation established?

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A great question, but title is a little off. –  Lazer Oct 4 '11 at 1:48
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@lazer feel free to suggest edits, click "edit" or "improve this post" –  Jeff Atwood Oct 4 '11 at 3:45
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I don't understand why the question is confusing. Isn't the whole point of companies to make more money than was originally invested in them? Amy loans Jo $1000. Using that money, Jo invents a time-machine, which anyone would be happy to buy for $1000,000,000. Investment: $1000. Worth: $1000,000,000 (split somehow between them). Of course, Jo has to actually find a buyer to have that in cash. –  Jack V. Oct 4 '11 at 8:22
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I think this is on-topic for the site. The gist of the question is related to the size of a company which is commonly used to make decisions about investments. –  Alex B Oct 4 '11 at 19:31
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@himanshu - You've asked 6 questions but not "accepted" any answers. With a current 37 voted answer below, it's a good time to start accepting best answer. It encourages members to reply to you, and it's good karma. –  JoeTaxpayer Oct 18 '11 at 19:23
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3 Answers

up vote 7 down vote accepted

What littleadv said is correct. His worth is based on the presumed worth of the total company value (which is much greater than all investment dollars combined because of valuation growth)*.

In other words, his "worth" is based on the potential return for his share of ownership at a rate based on the latest valuation of the company.

He is worth $17.5 billion today, but the total funding for Facebook is only $2.4 billion? I don't understand this.

In private companies, valuations typically come from either speculation/analysts or from investments. Investment valuations are the better gauge, because actual money traded hands for a percentage ownership.

However, just as with public companies on the stock market, there are (at least) two caveats. Just because someone else sold their shares at a given rate, doesn't mean that rate...

  • is still valid (even a short time later)
  • will apply to a very large portion (such as Zuckerberg's) since the potential buyers for a value in the 10 billion+ range is very small.

In both cases, it's possible the value may be much lower or much higher. Some high-value purchases surprise for how high they are, such as Microsoft's acquisition of Skype for $8.5 billion.

The formula for one owner's "worth" based on a given acquisition is:

Valuation = Acquisition amount / Acquisition percent

Worth = Owner's percent × Valuation

According to Wikipedia Zuckerberg owns 24%. In January, Goldman Sach's invested $500 million at a $50 billion valuation.

That is the latest investment and puts Zuckerberg's worth at $12 billion. However, some speculation places a Facebook IPO at a much higher valuation, such as as $100 billion. I don't know what your reference is for $17 billion, but it puts their valuation at $70.8 billion, between the January Goldman valuation and current IPO speculation.


* For instance, Eduardo Saverin originally invested $10,000, which, at his estimated 5% ownership, would now be worth $3-5 billion.

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The net worth is based on an estimate of how much he would get if he relinquished his stake. The total funding is based on how much he has relinquished thus far.

Suppose I have a candy jar with 100 candies. I'm not sure how much these candies are worth, so I start off by selling 10% of the jar for $10. Now I have 90 candies and $10, a total value of $100. Then someone comes along offering $100 for another 10% (of the original jar, or 10 candies), which I accept. Now I have 80 candies and $110. Since I value each candy at $10 now, I calculate my worth as $910. Then I do another deal selling 10% for $1000. Now I have $1110 in cash and 70 candies valued at $100 each. My total worth is now $8110 (cash + remaining candies), while the candy jar has only received $1110 in funding.

Replace candies with equity in The Facebook, Inc. and you get the idea.

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Awesome example, I finally understood this! –  Lazer Oct 4 '11 at 1:47
    
Also +1 for a candy analogy, makes everything so much easier to understand :D –  Sverre Rabbelier Oct 6 '11 at 16:05
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Can't imagine a better answer than this, you nailed it. –  JoeTaxpayer Nov 1 '11 at 19:08
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He is worth $17.5 billion today

Note that he is worth that dollar figure, but he doesn't have that many dollars. That's the worth of his stake in the company (number of shares he owns times the assumed value per share), i.e. assuming its total value being several hundreds of billions, as pundits assume. However, it is not a publicly traded company, so we don't really know much about its financials.

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