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Lessons from 1990s dot-com bust still ring true now for social media

LinkedIn's enormously successful initial public offering Thursday may well come to represent the "Netscape moment" of the social-networking era. That IPO, on Aug. 9, 1995, famously touched off the Internet boom.

The parallels so far are striking. Both companies repriced their shares several times in the days leading up to the offering, yet still saw the stock more than double on the first day. Both delivered nine-figure paydays to top executives and minted millionaires throughout the ranks. And both sharply raised expectations for the companies that would come next.

No doubt employees and investors at Facebook, Twitter and Zynga were licking their lips over their own financial prospects as they watched LinkedIn's valuation pass $8 billion, then $9 billion, then $10 billion.

But — killjoy alert — what's less often recalled than Net­scape's defining moment is what happened in the years that followed. Less than three years later, while the dot-com craze was still in full swing, shares had dropped from a peak of $171 to below $15.

This was before stock options had fully vested even for early employees, meaning they couldn't sell all their shares if they wanted to.

Here are some hard-learned lessons the current generation of techies might want to bear in mind.

Lesson 1: To make any actual money, employees have to exercise their stock options, meaning buy shares at the price their company set, and then sell them at the current market value. They owe taxes for the gains realized at both stages.

The worst mistake that Dave Shore, founder of Marin Financial Advisors, saw during the late 1990s was people holding off on liquidating shares because they wanted to avoid the capital gains tax that applies for the first 12 months. If the share value rapidly dropped during that period, people were left with a whopping tax bill for exercising options that they no longer had the stock wealth to cover.

Lesson 2: Things can change remarkably fast. In 2001, the San Francisco Chronicle wrote about an early Yahoo employee whose stake in the company soared to $25 million when the stock hit its 2000 peak. But he hung on to his shares through the disastrous year that followed, driving his net worth down to $500,000.

Lesson 3: Sudden wealth doesn't mean happiness. Psychologist Stephen Goldbart is co-director of the Money, Meaning and Choices Institute in Kentfield, Calif., which coined the term "sudden wealth syndrome" to describe a phenomenon encountered during the late 1990s.

It carries real-life consequences and manifests itself in two ways, Goldbart said. Some people go overboard, losing sight of practical spending limits, making bad investments and winding up in debt. Others carry a deep sense of guilt about their good fortune.

Lesson 4: Don't obsess about wealth, Goldbart also said. Pets.com was one of the most spectacular dot-com flameouts, going from IPO to out of business in less than a year. The online retailer's former chief executive, Julie Wainwright, says workers should resist the temptation to obsessively check their stock and tally up their paper wealth. "Employees need to focus on building the company, not on what their net worth is," she said.

Lessons from 1990s dot-com bust still ring true now for social media 05/23/11 [Last modified: Monday, May 23, 2011 10:19pm]
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