Decision Time For Facebook: Term Sheet Received At $2 Billion Valuation

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Apple, Your Mighty Mouse Sucks. Please Fix It.

Facebook has been pitching for a new round of funding these last few months to bridge itself to an IPO sometime in the future. We’ve known that since October, when (former) CFO Gideon Yu was in Dubai. In December CEO Mark Zuckerberg said the company was open to raising new money but only at the previous $15 billion valuation set by Microsoft.

But we’ve heard more recently that the company has been pitching hard for new cash at a much reduced valuation, hoping for at least $4 billion. And some investors are biting, but perhaps not at that price. A source with knowledge of the possible transaction tells us that General Atlantic may have submitted a term sheet at “around a $2 billion” valuation.

Will Facebook take the expensive new money from General Atlantic? They may be forced to. They’re burning as much as $20 million a month in cash and are dealing with ridiculous growth. They likely have less than two years runway left, and possibly significantly less if they continue to add new users by the tens of millions that are currently flocking there every month.

The cost of taking money at such a low valuation is higher than it appears. In addition to the direct dilution to stockholders from the new money, old investors at the $15 billion valuation may need to be made whole. Venture rounds traditionally include anti-dilution provisions that give investors more stock if the company raises new money at a lower valuation. Those anti-dilution provisions are heavily negotiated and can end up anywhere from full protection (which is very rare) to no protection at all (which is also very rare). It’s likely that there will be some form of additional dilution, possibly a lot of it, from the $375 million Facebook has raised at that valuation.

Update: In our original post we had said that both General Atlantic and Providence Equity Partners had submitted term sheets to Facebook. A new source indicates that the Providence information is incorrect, at least at this time, so we’ve removed them for now.

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