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LinkedIn IPO Far Exceeds Expected Valuation; May be Boon for Secondary Markets

Insight May 27, 2011

Recently, LinkedIn went public.  LinkedIn is a professional social networking website with over 100 million users, as both alternative and companion to market-dominant Facebook.

Recently, LinkedIn went public on the NYSE as LNKD.  LinkedIn is a professional social networking website that boasts over 100 million users, and has shown incredible user growth as both an alternative and companion to market-dominant Facebook.  The recent addition of LinkedIn Answers has also expanded LinkedIn’s business horizons, encroaching on such Q&A forums as Quora and LawPivot.  I use it.  Most of us here at Rimon Law Group use it.  As far as an online presence is concerned, LinkedIn is almost a foregone conclusion.  

Yet despite LinkedIn’s growing presence, no one could have foreseen the sequence of events, namely valuations, surrounding May 19th.  LinkedIn’s stock was estimated to debut at $ 45/share, but went as high as $ 112/share, before ending the day at $ 94.25/share.  As of yesterday, LinkedIn shares were $ 87/share.  This was the biggest IPO in 7 years since Google in 2004, and pushed LinkedIn’s company valuation to $ 9-11 billion, which is considerably more than the $ 3 billion pundits had estimated a mere week before the IPO. 

So what caused this astronomic jump?  Basic supply and demand from the mere 7.84 million shares available for sale?  Attempting to plunge headfirst into the first public social media web 2.0 company?  The dreaded “B(ubble)” word?  It will be interesting to see how valuations are handled for similar social media companies, a slew of which veritably have IPOs pending as we speak: Twitter, Facebook, Groupon, Pandora, Kayak, Rovio, Yelp, Zynga, and the list goes on.  Half of those companies are currently valued privately above $ 10 billion – what will their stock estimations be? 

Fortunately, in recent years, a disruptive pre-IPO share-purchasing model has been starting to gain popularity to mitigate similar share inflation.  SharesPost and SecondMarket represent two of the largest such companies, which at the root, allow the purchase and trade of private companies.  This is typically a mutually beneficial arrangement: prices are lower for potential shareholders because they don’t exist on the open market, and companies benefit from additional exposure.  To give an idea, here are SecondMarket’s pre-IPO valuations of LinkedIn shares on the secondary market:

April 2010 – $14.50/share
May 2010 – $17
August 2010 – $23
December 2010 – $25
February 2011 – $35
March 2011 – $35

LinkedIn has the distinction of being the first company that was privately traded through such secondary markets to go public, yet it seems clear that this model is likely to be repeated with aforementioned Twitter, Facebook, Groupon, Pandora, etc., as prices and valuations continue to escalate.  In fact, these companies are already being traded on SecondMarket and SharesPost, and SharesPost has over 100 private companies being currently traded.   

The lawyers here at Rimon Law Group specialize in these secondary market transactions – for more information, please contact a member at info@rimonlaw.com.