Facebook Amendment No. 4 To Form S-1

4/24/12
Amendment No. 4 to Registration Statement on Form S1
S-1/A 1 d287954ds1a.htm AMENDMENT NO. 4 TO REGISTRATION STATEMENT ON FORM S-1

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AsfiledwiththeSecuritiesandExchangeCommissiononApril23,2012
RegistrationNo.333179287
UNITEDSTATES SECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
AmendmentNo.4to FormS1 REGISTRATIONSTATEMENT

Under TheSecuritiesActof1933
Facebook,Inc.
(ExactnameofRegistrantasspecifiedinitscharter) Delaware (Stateorotherjurisdictionof incorporationororganization) 7370 (PrimaryStandardIndustrial ClassificationCodeNumber) 201665019 (IRSEmployer IdentificationNo.)
Facebook,Inc. 1601WillowRoad MenloPark,California94025 (650)3087300 (Address,includingzipcode,andtelephonenumber,includingareacode,ofRegistrantsprincipalexecutiveoffices) DavidA.Ebersman ChiefFinancialOfficer Facebook,Inc. 1601WillowRoad MenloPark,California94025 (650)3087300 (Name,address,includingzipcode,andtelephonenumber,includingareacode,ofagentforservice) Pleasesendcopiesofallcommunicationsto: GordonK.Davidson,Esq. JeffreyR.Vetter,Esq. JamesD.Evans,Esq. Fenwick&WestLLP 801CaliforniaStreet MountainView,California94041 (650)9888500 TheodoreW.Ullyot,Esq. DavidW.Kling,Esq. MichaelL.Johnson,Esq. Facebook,Inc. 1601WillowRoad MenloPark,California94025 (650)3087300 WilliamH.Hinman,Jr.,Esq. DanielN.Webb,Esq. SimpsonThacher&BartlettLLP 2550HanoverStreet PaloAlto,California94304 (650)2515000
Approximatedateofcommencementofproposedsaletothepublic:AssoonaspracticableaftertheeffectivedateofthisRegistrationStatement. IfanyofthesecuritiesbeingregisteredonthisFormaretobeofferedonadelayedorcontinuousbasispursuanttoRule415undertheSecuritiesAct,checkthe followingbox: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the SecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering. IfthisFormisaposteffectiveamendmentfiledpursuanttoRule462(c)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistration statementnumberoftheearliereffectiveregistrationstatementforthesameoffering. IfthisFormisaposteffectiveamendmentfiledpursuanttoRule462(d)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistration statementnumberoftheearliereffectiveregistrationstatementforthesameoffering. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitionsoflargeacceleratedfiler,acceleratedfilerandsmallerreportingcompanyinRule12b2oftheExchangeAct.(Checkone): Largeacceleratedfiler Nonacceleratedfiler (Donotcheckifasmallerreportingcompany) Acceleratedfiler Smallerreportingcompany
TheRegistrantherebyamendsthisRegistrationStatementonsuchdateordatesasmaybenecessarytodelayitseffectivedateuntiltheRegistrantshall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the SecuritiesActof1933oruntiltheRegistrationStatementshallbecomeeffectiveonsuchdateastheSecuritiesandExchangeCommission,actingpursuantto saidSection8(a),maydetermine.
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Theinformationinthisprospectusisnotcompleteandmaybechanged.Neitherwenorthesellingstockholdersmaysellthesesecurities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell thesesecuritiesandneitherwenorthesellingstockholdersaresolicitingofferstobuythesesecuritiesinanyjurisdictionwheretheoffer orsaleisnotpermitted.
PROSPECTUS(SubjecttoCompletion)
DatedApril23,2012
Shares
CLASSACOMMONSTOCK
Facebook,Inc.isofferingsharesofitsClassAcommonstockandthesellingstockholdersareoffering sharesofClassAcommonstock.Wewillnotreceiveanyproceedsfromthesaleofsharesbythesellingstockholders.This isourinitialpublicofferingandnopublicmarketcurrentlyexistsforoursharesofClassAcommonstock.Weanticipate thattheinitialpublicofferingpricewillbebetween$and$pershare.
We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertibleatanytimeintooneshareofClassAcommonstock.TheholdersofouroutstandingsharesofClassBcommon stockwillholdapproximately%ofthevotingpowerofouroutstandingcapitalstockfollowingthisoffering,andour founder,Chairman,andCEO,MarkZuckerberg,willholdorhavetheabilitytocontrolapproximately%ofthevoting powerofouroutstandingcapitalstockfollowingthisoffering.
WehaveappliedtolistourClassAcommonstockontheNASDAQGlobalSelectMarketunderthesymbolFB. WeareacontrolledcompanyunderthecorporategovernancerulesforNASDAQlistedcompanies,andourboardof directorshasdeterminednottohaveanindependentnominatingfunctionandinsteadtohavethefullboardofdirectorsbe directlyresponsiblefornominatingmembersofourboard.
InvestinginourClassAcommonstockinvolvesrisks.SeeRiskFactorsbeginningonpage12.
PRICE$ASHARE
Underwriting Discountsand Commissions Proceedsto Selling Stockholders
Priceto Public
Proceedsto Facebook
Pershare Total
$ $
$ $
$ $
$ $
Weandthesellingstockholdershavegrantedtheunderwriterstherighttopurchaseuptoanadditionalsharesof ClassAcommonstocktocoveroverallotments. The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determinedifthisprospectusistruthfulorcomplete.Anyrepresentationtothecontraryisacriminaloffense. TheunderwritersexpecttodeliverthesharesofClassAcommonstocktopurchaserson,2012.
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MORGANSTANLEY
BofAMERRILLLYNCH CITIGROUP
J.P.MORGAN
BARCLAYSCAPITAL CREDITSUISSE
GOLDMAN,SACHS&CO.
ALLEN&COMPANYLLC DEUTSCHEBANKSECURITIES WELLSFARGOSECURITIES
RBCCAPITALMARKETS ,2012
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Page Page
ProspectusSummary RiskFactors SpecialNoteRegardingForwardLooking Statements IndustryDataandUserMetrics UseofProceeds DividendPolicy Capitalization Dilution SelectedConsolidatedFinancialData ManagementsDiscussionandAnalysisof FinancialConditionandResultsofOperations LetterfromMarkZuckerberg Business
1 12 34 35 36 36 37 40 42 45 79 83
Management ExecutiveCompensation RelatedPartyTransactions PrincipalandSellingStockholders DescriptionofCapitalStock SharesEligibleforFutureSale MaterialU.S.FederalTaxConsiderationsforNon U.S.HoldersofClassACommonStock Underwriting LegalMatters Experts WhereYouCanFindAdditionalInformation IndextoConsolidatedFinancialStatements
107 115 136 139 143 150 153 157 163 163 163 F1
Neitherwe,northesellingstockholders,northeunderwriters,haveauthorizedanyonetoprovideanyinformationorto makeanyrepresentationsotherthanthosecontainedinthisprospectusorinanyfreewritingprospectuseswehaveprepared. Wetakenoresponsibilityfor,andcanprovidenoassuranceastothereliabilityof,anyotherinformationthatothersmay giveyou.Weandthesellingstockholdersareofferingtosell,andseekingofferstobuy,sharesofourClassAcommonstock onlyinjurisdictionswhereoffersandsalesarepermitted.Theinformationinthisprospectusisaccurateonlyasofthedateof thisprospectus,regardlessofthetimeofdeliveryofthisprospectusoranysaleofsharesofourClassAcommonstock.Our business,financialcondition,resultsofoperations,andprospectsmayhavechangedsincethatdate. Theinformationinthispreliminaryprospectusisnotcompleteandissubjecttochange.Nopersonshouldrelyonthe informationcontainedinthisdocumentforanypurposeotherthanparticipatinginourproposedinitialpublicoffering,and onlythepreliminaryprospectusdated,2012,isauthorizedbyustobeusedinconnectionwithourproposed initialpublicoffering.Thepreliminaryprospectuswillonlybedistributedbyusandtheunderwritersnamedhereinandno otherpersonhasbeenauthorizedbyustousethisdocumenttoofferorsellanyofoursecurities. Until,2012(25daysafterthecommencementofourinitialpublicoffering),alldealersthatbuy,sell,or tradesharesofourClassAcommonstock,whetherornotparticipatinginourinitialpublicoffering,mayberequiredto deliveraprospectus.Thisdeliveryrequirementisinadditiontotheobligationofdealerstodeliveraprospectuswhen actingasunderwritersandwithrespecttotheirunsoldallotmentsorsubscriptions. For investors outside the United States: Neither we, nor the selling stockholders, nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction whereactionforthatpurposeisrequired,otherthanintheUnitedStates.PersonsoutsidetheUnitedStateswhocomeinto possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the sharesofourClassAcommonstockandthedistributionofthisprospectusoutsideoftheUnitedStates. i
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PROSPECTUSSUMMARY Thissummaryhighlightsinformationcontainedingreaterdetailelsewhereinthisprospectus.Thissummaryisnot complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Class A common stock. You should carefullyconsider,amongotherthings,ourconsolidatedfinancialstatementsandtherelatednotesandthesections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operationsincludedelsewhereinthisprospectus. FACEBOOK,INC. Ourmissionistomaketheworldmoreopenandconnected. People use Facebook to stay connected with their friends and family, to discover what is going on in the world aroundthem,andtoshareandexpresswhatmatterstothemtothepeopletheycareabout. DeveloperscanusetheFacebookPlatformtobuildapplications(apps)andwebsitesthatintegratewithFacebookto reachourglobalnetworkofusersandtobuildproductsthataremorepersonalized,social,andengaging. Advertisers can engage with more than 900 million monthly active users (MAUs) on Facebook or subsets of our usersbasedoninformationtheyhavechosentosharewithussuchastheirage,location,gender,orinterests.Weoffer advertisersauniquecombinationofreach,relevance,socialcontext,andengagementtoenhancethevalueoftheirads. Webelievethatweareattheforefrontofenablingfaster,easier,andrichercommunicationbetweenpeopleandthat Facebookhasbecomeanintegralpartofmanyofourusersdailylives.Wehaveexperiencedrapidgrowthinthenumber ofusersandtheirengagement.
Wehad901millionMAUsasofMarch31,2012,anincreaseof33%ascomparedto680millionMAUsasof March31,2011. Wehad526milliondailyactiveusers(DAUs)onaverageinMarch2012,anincreaseof41%ascomparedto 372millionDAUsinMarch2011. Wehad488millionMAUswhousedFacebookmobileproductsinMarch2012. Thereweremorethan125billionfriendconnectionsonFacebookasofMarch31,2012. Ourusersgeneratedanaverageof3.2billionLikesandCommentsperdayduringthefirstquarterof2012. 1
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ForadescriptionofhowwecalculateourMAUsandDAUsandfactorsthatcanaffectthesemetrics,seeIndustry DataandUserMetricsandManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations TrendsinOurUserMetrics. HowWeCreateValueforUsers Ourtoppriorityistobuildusefulandengagingproductsthatenableyouto: ConnectwithYourFriends.Withmorethan900millionMAUsworldwide,ourusersareincreasinglyableto findandstayconnectedwiththeirfriends,family,andcolleaguesonFacebook. DiscoverandLearn.WebelievethatuserscometoFacebooktodiscoverandlearnmoreaboutwhatisgoing onintheworldaroundthem,particularlyinthelivesoftheirfriendsandfamilyandwithpublicfiguresand organizationsthatinterestthem. Express Yourself. We enable our users to share and publish their opinions, ideas, photos, and activities to audiences ranging from their closest friends to our 900 million users, giving every user a voice within the Facebookcommunity. ControlWhatYouShare.ThroughFacebooksprivacyandsharingsettings,ouruserscancontrolwhatthey shareandwithwhomtheyshareit. ExperienceFacebookAcrosstheWeb. Through apps and websites built by developers using the Facebook Platform,ouruserscaninteractwiththeirFacebookfriendswhileplayinggames,listeningtomusic,watching movies,readingnews,andengaginginotheractivities. Stay Connected with Your Friends on Mobile Devices. Through the combination of our mobile sites, smartphoneapps,andfeaturephoneproducts,userscanbringFacebookwiththemonmobiledeviceswherever theygo.
FoundationsoftheSocialWeb We believe that the web, including the mobile web, is evolving to become more social and personalized. This evolutioniscreatingmorerewardingexperiencesthatarecenteredonpeople,theirconnections,andtheirinterests.We believethatthefollowingelementsformthefoundationofthesocialweb: AuthenticIdentity. We believe that using your real name, connecting to your real friends, and sharing your genuine interests online create more engaging and meaningful experiences. Representing yourself with your authenticidentityonlineencouragesyoutobehavewiththesamenormsthatfostertrustandrespectinyour dailylifeoffline.AuthenticidentityiscoretotheFacebookexperience,andwebelievethatitiscentraltothe futureoftheweb.Ourtermsofservicerequireyoutouseyourrealnameandweencourageyoutobeyourtrue selfonline,enablingusandPlatformdeveloperstoprovideyouwithmorepersonalizedexperiences. Social Graph. The Social Graph represents the connections between people and their friends and interests. Everypersonorentityisrepresentedbyapointwithinthegraph,andtheaffiliationsbetweenpeopleandtheir friendsandinterestsformbillionsofconnectionsbetweenthepoints.OurmappingoftheSocialGraphenables Facebook and Platform developers to build more engaging user experiences that are based on these connections. SocialDistribution.Overtime,peopleareconsumingandcreatingmorekindsofinformationatafasterpace acrossabroaderrangeofdevices.Thegrowingvolumeofinformationmakesitchallengingtofindmeaningful andtrustedcontentandtoeffectivelymakeyourvoiceheard.Facebookorganizesandprioritizescontentand servesasapowerfulsocialdistributiontooldeliveringtouserswhatwebelievetheywillfindmostcompelling basedontheirfriendsandinterests. 2
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HowWeCreateValueforDevelopersThroughtheFacebookPlatform TheFacebookPlatformisasetofdevelopmenttoolsandapplicationprogramminginterfaces(APIs)thatenables developers to easily integrate with Facebook to create social apps and websites and to reach our 900 million users. Platformdevelopersbuildexperiencesthatallowouruserstoconnectandsharewithfriendswhileengaginginawide rangeofactivities.Platformdevelopersrangefromastudentonhisorhercomputerathometoteamsofprogrammersat leadingwebsites.WearefocusedonthegrowthandsuccessofPlatformdevelopersbyenabling: Personalized and Social Experiences. We enable Platform developers to create better products that are personalized and social and that offer new ways for our users to engage with friends and share experiences across the web and on mobile devices. For example, a Facebook user can visit the Pandora website and immediately begin listening to a personalized radio station that is customized based on the bands the user LikesonFacebook. SocialDistribution.WeenablePlatformdeveloperstoreachourglobaluserbaseanduseoursocialdistribution channelstoincreasetraffictotheirappsandwebsites. Payments.WeprovideanonlinepaymentsinfrastructurethatenablesPlatformdeveloperstoreceivepayments fromourusersinaneasytouse,secure,andtrustedenvironment.
HowWeCreateValueforAdvertisersandMarketers Weofferadvertisersandmarketersauniquecombinationofreach,relevance,socialcontext,andengagement: Reach.Withover900millionMAUs,Facebookofferstheabilitytoreachavastconsumeraudiencewithour advertisingsolutions. Relevance.Advertiserscanspecifythatweshowtheiradstoasubsetofourusersbasedondemographicfactors andspecificintereststhattheyhavechosentosharewithusonFacebookorbyusingtheLikebuttonaround theweb.Weallowadvertiserstoselectrelevantandappropriateaudiencesfortheirads,rangingfrommillions ofusersinthecaseofglobalbrandstohundredsofusersinthecaseofsmaller,localbusinesses. Social Context. We believe that the recommendations of friends have a powerful influence on consumer interestandpurchasedecisions.Weofferadvertiserstheabilitytoincludesocialcontextwiththeirmarketing messages. Social context is information that highlights a friends connections with a particular brand or business,forexample,thatafriendLikedaproductorcheckedinatarestaurant.Webelievethatusersfind marketingmessagesmoreengagingwhentheyincludesocialcontext. Engagement.Webelievethattheshifttoamoresocialwebcreatesnewopportunitiesforbusinessestoengage withinterestedcustomers.AnybrandorbusinesscancreateaFacebookPagetostimulateanongoingdialog withourusers.
OurMarketOpportunity OurAdvertisingMarketOpportunity Advertisersobjectivesrangefrombuildinglongtermbrandawarenesstostimulatinganimmediatepurchase.We offeradvertisingsolutionsthataredesignedtobemoreengagingandrelevantforusersinordertohelpadvertisersbetter achieve their goals. Facebooks combination of reach, relevance, social context, and engagement gives advertisers enhancedopportunitiestogeneratebrandawarenessandaffiliation,whilealsocreatingnewwaystogeneratenearterm demandfortheirproductsfromconsumerslikelytohavepurchase 3
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intent.AccordingtoanIDCreportdatedAugust2011,totalworldwideadvertisingspendingin2010was$588billion. Our addressable market opportunity includes portions of many existing advertising markets, including the traditional offline branded advertising, online display advertising, online performancebased advertising, and mobile advertising markets. Advertisingonthesocialwebisasignificantmarketopportunitythatisstillemergingandevolving.Webelieve thatmostadvertisersarestilllearningandexperimentingwiththebestwaystoleverageFacebooktocreatemoresocial andvaluableads. OurMarketOpportunityforPayments WhenuserspurchasevirtualanddigitalgoodsfromourPlatformdevelopersusingourPaymentsinfrastructure,we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games. According to an InStat report datedNovember2010,theworldwiderevenuegeneratedfromthesaleofvirtualgoodsonsocialnetworkingsites,online worlds, and casual games increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15billionby2014.WecurrentlyrequirePaymentsintegrationingamesonFacebook,andwemayseektoextendthe useofPaymentstoothertypesofappsinthefuture. OurStrategy Weareintheearlydaysofpursuingourmissiontomaketheworldmoreopenandconnected.Wehaveasignificant opportunitytofurtherenhancethevaluewedelivertousers,developers,andadvertisers.Keyelementsofourstrategy are: ExpandOurGlobalUserCommunity.Wecontinuetofocusongrowingouruserbaseacrossallgeographies, including relatively lesspenetrated, large markets such as Brazil, Germany, India, Japan, Russia, and South Korea.Weintendtogrowouruserbasebycontinuingourmarketinganduseracquisitioneffortsandenhancing ourproducts,includingmobileapps,inordertomakeFacebookmoreaccessibleanduseful. BuildGreatSocialProductstoIncreaseEngagement.Weprioritizeproductdevelopmentinvestmentsthatwe believewillcreateengaginginteractionsbetweenourusers,developers,andadvertisersonFacebook,acrossthe web,andonmobiledevices.WecontinuetoinvestsignificantlyinimprovingourcoreproductssuchasNews Feed,Photos,andGroups,developingnewproductssuchasTimelineandTicker,andenablingnewPlatform appsandwebsiteintegrations. Provide Users with the Most Compelling Experience. Facebook users are sharing and receiving more informationacrossabroaderrangeofdevices.Toprovidethemostcompellinguserexperience,wecontinueto developproductsandtechnologiesfocusedonoptimizingoursocialdistributionchannelstodeliverthemost usefulcontenttoeachuserbyanalyzingandorganizingvastamountsofinformationinrealtime. BuildEngagingMobileExperiences.Wearedevotingsubstantialresourcestodevelopingengagingmobile productsandexperiencesforawiderangeofplatforms,includingsmartphonesandfeaturephones.Inaddition, weareworkingacrossthemobileindustrywithoperators,hardwaremanufacturers,operatingsystemproviders, anddeveloperstoimprovetheFacebookexperienceonmobiledevicesandmakeFacebookavailabletomore peoplearoundtheworld.WebelievethatmobileusageofFacebookiscriticaltomaintainingusergrowthand engagementoverthelongterm. EnableDeveloperstoBuildGreatSocialProductsUsingtheFacebookPlatform.ThesuccessofourPlatform developersandthevibrancyofourPlatformecosystemarekeytoincreasinguserengagement. 4
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WecontinuetoinvestintoolsandAPIsthatenhancetheabilityofPlatformdeveloperstodeliverproductsthat aremoresocialandpersonalizedandbetterengageusersonFacebook,acrosstheweb,andonmobiledevices. Additionally,weplantoinvestinenhancingourPaymentsofferingsandinmakingthePaymentsexperience onFacebookasconvenientaspossibleforusersandPlatformdevelopers. ImproveAdProductsforAdvertisersandUsers.Weplantocontinuetoimproveouradproductsinorderto createmorevalueforadvertisersandenhancetheirabilitytomaketheiradvertisingmoresocialandrelevantfor users. Our advertising strategy centers on the belief that ad products that are social, relevant, and well integratedwithothercontentonFacebookcanenhancetheuserexperiencewhileprovidinganattractivereturn foradvertisers.Weintendtoinvestinadditionalproductsforouradvertisersandmarketerswhilecontinuingto balanceourmonetizationobjectiveswithourcommitmenttooptimizingtheuserexperience.
SummaryRiskFactors Our business is subject to numerous risks described in the section entitled Risk Factors and elsewhere in this prospectus.Youshouldcarefullyconsidertheserisksbeforemakinganinvestment.Someoftheserisksinclude: If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook,ourrevenue,financialresults,andbusinessmaybesignificantlyharmed We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spendingbyadvertiserswithFacebook,couldseriouslyharmourbusiness Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substituteforuseonpersonalcomputersmaynegativelyaffectourrevenueandfinancialresults Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operatingsystems,networks,andstandardsthatwedonotcontrol WemaynotbesuccessfulinoureffortstogrowandfurthermonetizetheFacebookPlatform Ourbusinessishighlycompetitive,andcompetitionpresentsanongoingthreattothesuccessofourbusiness Improperaccesstoordisclosureofourusersinformation,orviolationofourtermsofserviceorpolicies,could harmourreputationandadverselyaffectourbusiness OurbusinessissubjecttocomplexandevolvingU.S.andforeignlawsandregulationsregardingprivacy,data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation,andcouldharmourbusiness OurCEOhascontroloverkeydecisionmakingasaresultofhiscontrolofamajorityofourvotingstock ThelossofMarkZuckerberg,SherylK.Sandberg,orotherkeypersonnelcouldharmourbusiness We anticipate that we will expend substantial funds in connection with tax withholding and remittance obligations related to the initial settlement of our restricted stock units (RSUs) approximately six months followingourinitialpublicoffering ThemarketpriceofourClassAcommonstockmaybevolatileormaydecline,andyoumaynotbeableto resellyoursharesatorabovetheinitialpublicofferingpriceand Substantial blocks of our total outstanding shares may be sold into the market as lockup periods end, as further described in Shares Eligible for Future Sale. If there are substantial sales of shares of our common stock,thepriceofourClassAcommonstockcoulddecline. 5
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Mr.ZuckerbergsVotingRightsandOurStatusasaControlledCompany Mr. Zuckerberg, who after our initial public offering will control more than % of the voting power of our outstanding capital stock, will have the ability to control the outcome of matters submitted to our stockholders for approval,includingtheelectionofourdirectors,aswellastheoverallmanagementanddirectionofourcompany.Inthe eventofhisdeath,thesharesofourcapitalstockthatMr.Zuckerbergownswillbetransferredtothepersonsorentities thathedesignates. BecauseMr.Zuckerbergcontrolsamajorityofouroutstandingvotingpower,weareacontrolledcompanyunder thecorporategovernancerulesforNASDAQlistedcompanies.Therefore,wearenotrequiredtohaveamajorityofour boardofdirectorsbeindependent,norarewerequiredtohaveacompensationcommitteeoranindependentnominating function.Inlightofourstatusasacontrolledcompany,ourboardofdirectorshasdeterminednottohaveanindependent nominatingfunctionandtohavethefullboardofdirectorsbedirectlyresponsiblefornominatingmembersofourboard. CorporateInformation WewereincorporatedinDelawareinJuly2004.Unlessexpresslyindicatedorthecontextrequiresotherwise,the termsFacebook,company,we,us,andourinthisprospectusrefertoFacebook,Inc.,aDelawarecorporation, and,whereappropriate,itswhollyownedsubsidiaries.ThetermFacebookmayalsorefertoourproducts,regardlessof themannerinwhichtheyareaccessed.Ourprincipalexecutiveofficesarelocatedat1601WillowRoad,MenloPark, California 94025, and our telephone number is (650) 3087300. Our website address is www.facebook.com. The informationonorthatcanbeaccessedthroughourwebsiteisnotpartofthisprospectus. Facebook,theFacebooklogo,FB,theLikeButton,f8,andourotherregisteredorcommonlawtrademarks,service marks,ortradenamesappearinginthisprospectusarethepropertyofFacebook,Inc.Othertrademarks,servicemarks,or tradenamesappearinginthisprospectusarethepropertyoftheirrespectiveowners. 6
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THEOFFERING ClassAcommonstockoffered Byus Bythesellingstockholders Total shares shares shares
ClassAcommonstocktobeoutstandingaftershares ourinitialpublicoffering ClassBcommonstocktobeoutstandingaftershares ourinitialpublicoffering TotalClassAandClassBcommonstockto shares beoutstandingafterourinitialpublic offering OverallotmentoptionofClassAcommon stockofferedbyusandtheselling stockholders Useofproceeds shares
We estimate that our net proceeds from the sale of the Class A common stockthatweareofferingwillbeapproximately$billion,assumingan initialpublicofferingpriceof$pershare,whichisthemidpointofthe price range on the cover page of this prospectus, and after deducting estimatedunderwritingdiscountsandcommissionsandestimatedoffering expensespayablebyus. Theprincipalpurposesofourinitialpublicofferingaretocreateapublic marketforourClassAcommonstockandtherebyenablefutureaccessto the public equity markets by us and our employees, obtain additional capital, and facilitate an orderly distribution of shares for the selling stockholders. We intend to use the net proceeds to us from our initial publicofferingforworkingcapitalandothergeneralcorporatepurposes howeverwedonothaveanyspecificusesofthenetproceedsplanned.We may use some of the net proceeds to us to satisfy a portion of the anticipated tax withholding and remittance obligations related to the initial settlement of our outstanding RSUs, which will become due approximately six months following the completion of our initial public offering. Additionally, we may use a portion of the proceeds to us for acquisitionsofcomplementarybusinesses,technologies,orotherassets. We will not receive any proceeds from the sale of shares of Class A commonstockbythesellingstockholders.MarkZuckerberg,ourfounder, Chairman,andCEO,willofferandsellsharesinourinitialpublic offering. We expect that substantially all of the net proceeds Mr. Zuckerberg will receive upon such sale will be used to satisfy taxes that he will incur upon his exercise of an outstanding stock option to purchase 120,000,000 shares of our Class B common stock. See Use of Proceeds. 7
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Votingrights
SharesofClassAcommonstockareentitledtoonevotepershare. SharesofClassBcommonstockareentitledtotenvotespershare. Holders of our Class A common stock and Class B common stock will generallyvotetogetherasasingleclass,unlessotherwiserequiredbylaw. Mr.Zuckerberg,whoafterourinitialpublicofferingwillcontrolmorethan %ofthevotingpowerofouroutstandingcapitalstock,willhavethe abilitytocontroltheoutcomeofmatterssubmittedtoourstockholdersfor approval, including the election of our directors. See Description of CapitalStock.
ProposedNASDAQGlobalSelectMarket symbol
FB
ThenumberofsharesofClassAandClassBcommonstocktobeoutstandingafterourinitialpublicofferingis based on 117,549,393 shares of our Class A common stock and 1,780,535,644 shares of our Class B common stock outstanding as of March 31, 2012, and reflects the exercise by Mr. Zuckerberg of an outstanding stock option to purchase120,000,000sharesofourClassBcommonstockandtheautomaticconversionofofthosesharesinto anequivalentnumberofsharesofClassAcommonstockupontheirsaleinourinitialpublicoffering,andexcludes: 116,756,442sharesofClassBcommonstockissuableupontheexerciseofoptionsoutstandingasofMarch31, 2012underour2005StockPlan,withaweightedaverageexercisepriceofapproximately$0.94pershare 378,429,048 shares of Class B common stock subject to RSUs outstanding as of March 31, 2012 under our 2005StockPlan 40,000sharesofClassAcommonstockissuedbetweenApril1,2012andApril20,2012and 77,466,293 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of 25,000,000 shares of Class A common stock reserved for issuance under our 2012 Equity IncentivePlan,and52,466,293sharesofClassBcommonstockreservedasofMarch31,2012forissuance underour2005StockPlan.Onthedateofthisprospectus,anyremainingsharesavailableforissuanceunder our2005StockPlanwillbeaddedtothesharesreservedunderour2012EquityIncentivePlanandwewill ceasegrantingawardsunderthe2005StockPlan.Our2012EquityIncentivePlanalsoprovidesforautomatic annual increases in the number of shares reserved thereunder, as more fully described in Executive CompensationEmployeeBenefitPlans.
Unlessexpresslyindicatedorthecontextrequiresotherwise,allinformationinthisprospectusassumes: the conversion of all outstanding shares of our convertible preferred stock as of March 31, 2012 into 545,401,443sharesofClassBcommonstockinconnectionwithourinitialpublicoffering theautomaticconversionofsharesofourClassBcommonstockintoanequivalentnumberofsharesof ourClassAcommonstockupontheirsalebythesellingstockholdersinourinitialpublicoffering theconversionbycertainofourexistingstockholderspursuanttocontractualagreementsofanaggregateof sharesofourClassBcommonstockintoanequivalentnumberofsharesofourClassAcommonstock inconnectionwithourinitialpublicoffering 8
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noexercisebytheunderwritersoftheirrighttopurchaseuptoanadditionalsharesofClassAcommon stocktocoveroverallotmentsand thefilingofourrestatedcertificateofincorporationandtheeffectivenessofourrestatedbylawsinconnection withourinitialpublicoffering. 9
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SUMMARYCONSOLIDATEDFINANCIALDATA The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of income data for the years ended December 31, 2009, 2010, and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income data for the three months ended March 31, 2011 and 2012, and the consolidated balance sheet data as of March 31, 2012 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessaryforafairpresentationofthefinancialinformationsetforthinthosestatements.Ourhistoricalresultsarenot necessarilyindicativeofourresultsinanyfutureperiod.Thesummaryofourconsolidatedfinancialdatasetforthbelow shouldbereadtogetherwithourconsolidatedfinancialstatementsandtherelatednotes,aswellasthesectionentitled ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations,includedelsewhereinthis prospectus.
ThreeMonthsEnded YearEndedDecember31, March31, 2009 2010 2011 2011 2012 (inmillions,exceptpersharedata)
ConsolidatedStatementsofIncomeData: Revenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Incomefromoperations Interestandotherincome(expense),net Incomebeforeprovisionforincometaxes Provisionforincometaxes Netincome NetincomeattributabletoClassAandClassBcommon stockholders EarningspershareattributabletoClassAandClassB commonstockholders(2): Basic Diluted ProformaearningspershareattributabletoClassAand ClassBcommonstockholders(2): Basic Diluted
$ $ $
777 223 115 87 90 515 262 (8) 254 25 229 122
$ 1,974 493 184 144 121 942 1,032 (24) 1,008 402 $ 606 $ 372
$ 3,711 $ $ 860 427 388 280 1,955 1,756 (61) 1,695 695 1,000 668
$ $ $
731 167 68 57 51 343 388 10 398 165 233 153
$ 1,058 $ $ 277 159 153 88 677 381 1 382 177 205 137
$ 0.12 $ 0.10
$ $
0.34 0.28
$ $
0.52 0.46
$ 0.12 $ 0.11
$ $
0.10 0.09
$ $
0.49 0.43
$ $
0.10 0.09
(1) Costsandexpensesin2009,2010,and2011andthefirstquarterof2011and2012includesharebasedcompensationexpenseof$27million,$20million, $217million,$7million,and$103million,respectively,asfollows:
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Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebasedcompensationexpense
YearEndedDecember31, 2009 2010 2011 (inmillions) $ $ $ 9 2 2 43 6 9 114 19 9 51 $ 27 $ 20 $ 217
ThreeMonths EndedMarch31, 2011 2012 $ $ 4 3 7 $ $ 4 23 60 16 103
(2) See note 2 of the notes to our consolidated financial statements for a description of how we compute basic and diluted earnings per share attributable to ClassAandClassBcommonstockholdersandproformabasicanddilutedearningspershareattributabletoClassAandClassBcommonstockholders. March31,2012 Actual ProForma(1) (inmillions) ProFormaAs Adjusted (2)
(3)
ConsolidatedBalanceSheetData: Cash,cashequivalents,andmarketablesecurities Workingcapital Propertyandequipment,net Totalassets Totalliabilities Additionalpaidincapital Retainedearnings Totalstockholdersequity
$3,910 3,655 1,855 6,859 1,587 2,853 1,811 5,272
$3,910 3,980 1,855 7,184 1,587 4,433 1,171 5,597
(1) TheproformaconsolidatedbalancesheetdataasofMarch31,2012presentsourconsolidatedbalancesheetdatatogiveeffecttotheautomaticconversionof all of our outstanding shares of convertible preferred stock into shares of Class B common stock and to also give effect to a sharebased compensation expenseofapproximately$965millionassociatedwithRSUsgrantedpriorto2011,forwhichtheserviceconditionwassatisfiedasofMarch31,2012and which we expect to record upon completion of our initial public offering, as further described in Managements Discussion and Analysis of Financial ConditionandResultsofOperationsCriticalAccountingPoliciesandEstimatesSharebasedCompensation.Theproformaadjustmentrelatedtoshare basedcompensationexpenseofapproximately$965millionhasbeenreflectedasanincreasetoadditionalpaidincapitalandtheassociatedtaxeffectof$325 millionhasbeennettedagainstthischarge,resultinginanetreductionof$640milliontoretainedearnings.Theincometaxeffectshavebeenreflectedasan increase to deferred tax assets included in prepaid expenses and other current assets, to reflect the anticipated future tax benefits upon settlement of these RSUs. (2) The pro forma as adjusted consolidated balance sheet data reflects the items described in footnote (1) above and gives effect to our receipt of estimated net proceeds from the sale of shares of Class A common stock that we are offering at an assumed initial public offering price of the Class A common stock of $pershare,themidpointofthepricerangeonthecoverpageofthisprospectus,afterdeductingtheestimatedunderwritingdiscountsandcommissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease)eachofcash,cashequivalents,andmarketablesecurities,workingcapital,totalassets,additionalpaidincapital,andtotalstockholdersequityby $million,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,andafterdeductingthe estimatedunderwritingdiscountsandcommissions. (3) Theproformaasadjusteddatadiscussedaboveisillustrativeonlyandwillbeadjustedbasedontheactualinitialpublicofferingpriceandothertermsofour initialpublicofferingdeterminedatpricing.
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Table of Contents RISKFACTORS Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financialstatementsandtherelatednotesincludedelsewhereinthisprospectus,beforedecidingwhethertoinvestinshares ofourClassAcommonstock.Therisksanduncertaintiesdescribedbelowarenottheonlyonesweface.Additionalrisks anduncertaintiesthatweareunawareof,orthatwecurrentlybelievearenotmaterial,mayalsobecomeimportantfactors thatadverselyaffectourbusiness.Ifanyofthefollowingrisksactuallyoccurs,ourbusiness,financialcondition,resultsof operations,andfutureprospectscouldbemateriallyandadverselyaffected.Inthatevent,themarketpriceofourClassA commonstockcoulddecline,andyoucouldlosepartorallofyourinvestment. RisksRelatedtoOurBusinessandIndustry Ifwefailtoretainexistingusersoraddnewusers,orifourusersdecreasetheirlevelofengagementwithFacebook,our revenue,financialresults,andbusinessmaybesignificantlyharmed. Thesizeofouruserbaseandouruserslevelofengagementarecriticaltooursuccess.Wehad901millionmonthly active users (MAUs) as of March 31, 2012. Our financial performance has been and will continue to be significantly determinedbyoursuccessinadding,retaining,andengagingactiveusers.Weanticipatethatouractiveusergrowthratewill decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increaselevelsofuserengagementincurrentandnewmarkets.Ifpeopledonotperceiveourproductstobeuseful,reliable, andtrustworthy,wemaynotbeabletoattractorretainusersorotherwisemaintainorincreasethefrequencyanddurationof their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. A decrease in user retention, growth, or engagement could render Facebook less attractive to developers and advertisers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. Any number of factors could potentially negativelyaffectuserretention,growth,andengagement,includingif: usersincreasinglyengagewithcompetingproducts wefailtointroducenewandimprovedproductsorifweintroducenewproductsorservicesthatarenotfavorably received weareunabletosuccessfullybalanceoureffortstoprovideacompellinguserexperiencewiththedecisionswe makewithrespecttothefrequency,prominence,andsizeofadsandothercommercialcontentthatwedisplay weareunabletocontinuetodevelopproductsformobiledevicesthatusersfindengaging,thatworkwithavariety ofmobileoperatingsystemsandnetworks,andthatachieveahighlevelofmarketacceptance therearechangesinusersentimentaboutthequalityorusefulnessofourproductsorconcernsrelatedtoprivacy andsharing,safety,security,orotherfactors weareunabletomanageandprioritizeinformationtoensureusersarepresentedwithcontentthatisinteresting, useful,andrelevanttothem there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, includingsettlementsorconsentdecrees technicalorotherproblemspreventusfromdeliveringourproductsinarapidandreliablemannerorotherwise affecttheuserexperience 12
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Table of Contents weadoptpoliciesorproceduresrelatedtoareassuchassharingoruserdatathatareperceivednegativelybyour usersorthegeneralpublic wefailtoprovideadequatecustomerservicetousers,developers,oradvertisers we,ourPlatformdevelopers,orothercompaniesinourindustryarethesubjectofadversemediareportsorother negativepublicityor ourcurrentorfutureproducts,suchastheFacebookPlatform,reduceuseractivityonFacebookbymakingiteasier forouruserstointeractandshareonthirdpartywebsites.
Ifweareunabletomaintainandincreaseouruserbaseanduserengagement,ourrevenue,financialresults,andfuture growthpotentialmaybeadverselyaffected. Wegenerateasubstantialmajorityofourrevenuefromadvertising.Thelossofadvertisers,orreductioninspendingby advertiserswithFacebook,couldseriouslyharmourbusiness. The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011 and the first quarter of 2011 and 2012, advertising accounted for 98%, 95%, 85%, 87%, and 82%, respectively, of our revenue. As is common in the industry, our advertisers typically do not have longterm advertising commitmentswithus.Manyofouradvertisersspendonlyarelativelysmallportionoftheiroveralladvertisingbudgetwith us. In addition, advertisers may view some of our products, such as sponsored stories and ads with social context, as experimental and unproven. Advertisers will not continue to do business with us, or they will reduce the prices they are willingtopaytoadvertisewithus,ifwedonotdeliveradsandothercommercialcontentinaneffectivemanner,oriftheydo notbelievethattheirinvestmentinadvertisingwithuswillgenerateacompetitivereturnrelativetootheralternatives.Our advertisingrevenuecouldbeadverselyaffectedbyanumberofotherfactors,including: decreasesinuserengagement,includingtimespentonFacebook increaseduseraccesstoandengagementwithFacebookthroughourmobileproducts,wherewedonotcurrently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercialcontent product changes or inventory management decisions we may make that reduce the size, frequency, or relative prominenceofadsandothercommercialcontentdisplayedonFacebook ourinabilitytoimproveouranalyticsandmeasurementsolutionsthatdemonstratethevalueofouradsandother commercialcontent decisionsbyadvertiserstouseourfreeproducts,suchasFacebookPages,insteadofadvertisingonFacebook lossofadvertisingmarketsharetoourcompetitors adverse legal developments relating to advertising, including legislative and regulatory developments and developmentsinlitigation adversemediareportsorothernegativepublicityinvolvingus,ourPlatformdevelopers,orothercompaniesinour industry ourinabilitytocreatenewproductsthatsustainorincreasethevalueofouradsandothercommercialcontent thedegreetowhichusersoptoutofsocialadsorotherwiselimitthepotentialaudienceofcommercialcontent changesinthewayonlineadvertisingispriced 13
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Table of Contents theimpactofnewtechnologiesthatcouldblockorobscurethedisplayofouradsandothercommercialcontent and theimpactofmacroeconomicconditionsandconditionsintheadvertisingindustryingeneral.
Theoccurrenceofanyoftheseorotherfactorscouldresultinareductionindemandforouradsandothercommercial content, which may reduce the prices we receive for our ads and other commercial content, or cause advertisers to stop advertisingwithusaltogether,eitherofwhichwouldnegativelyaffectourrevenueandfinancialresults. GrowthinuseofFacebookthroughourmobileproducts,whereourabilitytomonetizeisunproven,asasubstituteforuse onpersonalcomputersmaynegativelyaffectourrevenueandfinancialresults. Wehad488millionMAUswhousedFacebookmobileproductsinMarch2012.Whilemostofourmobileusersalso accessFacebookthroughpersonalcomputers,weanticipatethattherateofgrowthinmobileusagewillexceedthegrowthin usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encouragemobileusageofFacebook.WehavehistoricallynotshownadstousersaccessingFacebookthroughmobileapps orourmobilewebsite.InMarch2012,webegantoincludesponsoredstoriesinusersmobileNewsFeeds.However,wedo notcurrentlydirectlygenerateanymeaningfulrevenuefromtheuseofFacebookmobileproducts,andourabilitytodoso successfully is unproven. Accordingly, if users increasingly access Facebook mobile products as a substitute for access throughpersonalcomputers,andifweareunabletosuccessfullyimplementmonetizationstrategiesforourmobileusers,or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected. Facebookusergrowthandengagementonmobiledevicesdependuponeffectiveoperationwithmobileoperatingsystems, networks,andstandardsthatwedonotcontrol. ThereisnoguaranteethatpopularmobiledeviceswillcontinuetofeatureFacebook,orthatmobiledeviceuserswill continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popularmobileoperatingsystemsthatwedonotcontrol,suchasAndroidandiOS,andanychangesinsuchsystemsthat degradeourproductsfunctionalityorgivepreferentialtreatmenttocompetitiveproductscouldadverselyaffectFacebook usageonmobiledevices.Additionally,inordertodeliverhighqualitymobileproducts,itisimportantthatourproducts work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successfulindevelopingrelationshipswithkeyparticipantsinthemobileindustryorindevelopingproductsthatoperate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook on their mobile devices, or if our users choose not to access or use Facebook on their mobile devicesorusemobileproductsthatdonotofferaccesstoFacebook,ourusergrowthanduserengagementcouldbeharmed. WemaynotbesuccessfulinoureffortstogrowandfurthermonetizetheFacebookPlatform. Wehavemadeandarecontinuingtomakemajorinvestmentstoenabledeveloperstobuildapplications(apps)and websitesthatintegratewiththeFacebookPlatform.ExistingandprospectivePlatformdevelopersmaynotbesuccessfulin buildingappsorwebsitesthatcreateandmaintainuserengagement.Additionally,developersmaychoosetobuildonother platforms, including mobile platforms controlled by third parties, rather than building on the Facebook Platform. We are continuouslyseekingtobalancethedistributionobjectivesofourPlatformdeveloperswithourdesiretoprovideanoptimal user experience, and we may not be successful in achieving a balance that continues to attract and retain Platform developers. From time to time, we have taken actions to reduce the volume of communications from apps to users on Facebook with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and our monetization opportunities from, apps on Facebook. In some instances, these actions have adverselyaffectedourrelationshipswithPlatformdevelopers.IfwearenotsuccessfulinoureffortstogrowourPlatformorif weare 14
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Table of Contents unable to build and maintain good relations with Platform developers, our user growth and user engagement and our financialresultsmaybeadverselyaffected. Additionally, we may not be successful in further monetizing the Facebook Platform. We currently monetize the FacebookPlatforminseveralways,includingadsonpagesgeneratedbyappsonFacebook,directadvertisingonFacebook purchasedbyPlatformdeveloperstodrivetraffictotheirappsandwebsites,andfeesfromourPlatformdevelopersuseofour Payments infrastructure to sell virtual and digital goods to users. Apps built by developers of social games, particularly Zynga,arecurrentlyresponsibleforsubstantiallyallofourrevenuederivedfromPayments.Inaddition,arelativelysmall percentage of our users have transacted with Facebook Payments. For example, in 2011, approximately 15 million users purchased virtual goods using Facebook Payments. If the Platform apps that currently generate revenue fail to grow or maintaintheirusersandengagement,ifPlatformdevelopersdonotcontinuetointroducenewappsthatattractusersand createengagement,ifPlatformdevelopersreducetheiradvertisingonFacebook,ifwefailtomaintaingoodrelationships withPlatformdevelopersorattractnewdevelopers,orifPlatformappsoutsideofsocialgamesdonotgainpopularityand generatesignificantrevenue,ourfinancialperformanceandabilitytogrowrevenuecouldbeadverselyaffected. Ourbusinessishighlycompetitive.Competitionpresentsanongoingthreattothesuccessofourbusiness. We face significant competition in almost every aspect of our business, including from companies such as Google, Microsoft,andTwitter,whichofferavarietyofInternetproducts,services,content,andonlineadvertisingofferings,aswell asfrommobilecompaniesandsmallerInternetcompaniesthatofferproductsandservicesthatmaycompetewithspecific Facebook features. We also face competition from traditional and online media businesses for advertising budgets. We competebroadlywithGooglessocialnetworkingofferings,includingGoogle+,andalsowithother,largelyregional,social networksthathavestrongpositionsinparticularcountries,includingCyworldinKorea,MixiinJapan,Orkut(ownedby Google)inBrazilandIndia,andvKontakteinRussia.WewouldalsofacecompetitionfromcompaniesinChinasuchas Renren,Sina,andTencentintheeventthatweareabletoaccessthemarketinChinainthefuture.Asweintroducenew products, as our existing products evolve, or as other companies introduce new products and services, we may become subjecttoadditionalcompetition. Someofourcurrentandpotentialcompetitorshavesignificantlygreaterresourcesandbettercompetitivepositionsin certainmarketsthanwedo.Thesefactorsmayallowourcompetitorstorespondmoreeffectivelythanustoneworemerging technologies and changes in market requirements. Our competitors may develop products, features, or services that are similar to ours or that achieve greater market acceptance, may undertake more farreaching and successful product developmenteffortsormarketingcampaigns,ormayadoptmoreaggressivepricingpolicies.Inaddition,Platformpartners may use information shared by our users through the Facebook Platform in order to develop products or features that competewithus.Certaincompetitors,includingGoogle,couldusestrongordominantpositionsinoneormoremarketsto gain competitive advantage against us in areas where we operate including: by integrating competing social networking platformsorfeaturesintoproductstheycontrolsuchassearchengines,webbrowsers,ormobiledeviceoperatingsystemsby makingacquisitionsorbymakingaccesstoFacebookmoredifficult.Asaresult,ourcompetitorsmayacquireandengage usersattheexpenseofthegrowthorengagementofouruserbase,whichmaynegativelyaffectourbusinessandfinancial results. We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including: theusefulness,easeofuse,performance,andreliabilityofourproductscomparedtoourcompetitors thesizeandcompositionofouruserbase theengagementofouruserswithourproducts 15
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Table of Contents the timing and market acceptance of products, including developments and enhancements to our or our competitorsproducts ourabilitytomonetizeourproducts,includingourabilitytosuccessfullymonetizemobileusage the frequency, size, and relative prominence of the ads and other commercial content displayed by us or our competitors customerserviceandsupportefforts marketingandsellingefforts ourabilitytoestablishandmaintaindevelopersinterestinbuildingontheFacebookPlatform changesmandatedbylegislation,regulatoryauthorities,orlitigation,includingsettlementsandconsentdecrees, someofwhichmayhaveadisproportionateeffectonus acquisitionsorconsolidationwithinourindustry,whichmayresultinmoreformidablecompetitors ourabilitytoattract,retain,andmotivatetalentedemployees,particularlysoftwareengineers ourabilitytocosteffectivelymanageandgrowouroperationsand ourreputationandbrandstrengthrelativetoourcompetitors.
Ifwearenotabletoeffectivelycompete,ouruserbaseandlevelofuserengagementmaydecrease,whichcouldmakeus lessattractivetodevelopersandadvertisersandmateriallyandadverselyaffectourrevenueandresultsofoperations. Action by governments to restrict access to Facebook in their countries could substantially harm our business and financialresults. It is possible that governments of one or more countries may seek to censor content available on Facebook in their country,restrictaccesstoFacebookfromtheircountryentirely,orimposeotherrestrictionsthatmayaffecttheaccessibility ofFacebookintheircountryforanextendedperiodoftimeorindefinitely.Forexample,accesstoFacebookhasbeenoris currentlyrestrictedinwholeorinpartinChina,Iran,NorthKorea,andSyria.Inaddition,governmentsinothercountries may seek to restrict access to Facebook if they consider us to be in violation of their laws. In the event that access to Facebook is restricted, in whole or in part, in one or more countries or our competitors are able to successfully penetrate geographic markets that we cannot access, our ability to retain or increase our user base and user engagement may be adverselyaffected,wemaynotbeabletomaintainorgrowourrevenueasanticipated,andourfinancialresultscouldbe adverselyaffected. Our efforts to expand the Facebook Platform may result in users increasingly engaging with our Platform developers FacebookintegratedwebsitesinsteadofengagingonFacebook,whichmaynegativelyaffectouradvertisingrevenueand harmourbusiness. WeactivelysupportPlatformdeveloperseffortstodevelopproductsthatintegratewithFacebookonthedevelopers websites.OurPlatformdevelopersmaychoosetoprioritizebuildingorsupportingFacebookintegratedwebsitesasopposed tobuildingorsupportingappsthatrunontheFacebookwebsite.WhenusersvisitaPlatformpartnersFacebookintegrated website,wedonotdeliveradvertisements,whereaswewouldhavedisplayedadvertisementstotheseusersiftheiractivity hadtakenplaceontheFacebookwebsite.IfFacebookintegratedwebsitesdrawusersawayfromourwebsite,itmayreduce orslowthegrowthofouruseractivitythatgeneratesadvertisingopportunities,whichcouldnegativelyaffectouradvertising revenue.AlthoughwebelievethattherearesignificantlongtermbenefitstoFacebookresultingfromincreasedengagement onFacebookintegratedwebsites,thesebenefitsmaynotoffsetthepossiblelossofadvertisingrevenue,inwhichcaseour businesscouldbeharmed. 16
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Table of Contents Ournewproductsandchangestoexistingproductscouldfailtoattractorretainusersorgeneraterevenue. Ourabilitytoretain,increase,andengageouruserbaseandtoincreaseourrevenuewilldependheavilyonourability tocreatesuccessfulnewproducts,bothindependentlyandinconjunctionwithPlatformdevelopersorotherthirdparties.We mayintroducesignificantchangestoourexistingproductsordevelopandintroducenewandunprovenproducts,including usingtechnologieswithwhichwehavelittleornopriordevelopmentoroperatingexperience.Ifneworenhancedproducts fail to engage users, developers, or advertisers, we may fail to attract or retain users or to generate sufficient revenue, operatingmargin,orothervaluetojustifyourinvestments,andourbusinessmaybeadverselyaffected.Inthefuture,wemay investinnewproductsandinitiativestogeneraterevenue,butthereisnoguaranteetheseapproacheswillbesuccessful.If we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipatedorrecoveranyassociateddevelopmentcosts,andourfinancialresultscouldbeadverselyaffected. Ourcultureemphasizesrapidinnovationandprioritizesuserengagementovershorttermfinancialresults. We have a culture that encourages employees to quickly develop and launch new and innovative products. As our businessgrowsandbecomesmorecomplex,ourculturalemphasisonmovingquicklymayresultinunintendedoutcomesor decisionsthatarepoorlyreceivedbyusers,developers,oradvertisers.Ourculturealsoprioritizesouruserengagementover shorttermfinancialresults,andwefrequentlymakeproductdecisionsthatmayreduceourshorttermrevenueorprofitability ifwebelievethatthedecisionsareconsistentwithourmissionandbenefittheaggregateuserexperienceandwillthereby improve our financial performance over the long term. These decisions may not produce the longterm benefits that we expect,inwhichcaseourusergrowthandengagement,ourrelationshipswithdevelopersandadvertisers,andourbusiness andresultsofoperationscouldbeharmed. Ifwearenotabletomaintainandenhanceourbrand,orifeventsoccurthatdamageourreputationandbrand,ourability toexpandourbaseofusers,developers,andadvertisersmaybeimpaired,andourbusinessandfinancialresultsmaybe harmed. WebelievethattheFacebookbrandhassignificantlycontributedtothesuccessofourbusiness.Wealsobelievethat maintainingandenhancingourbrandiscriticaltoexpandingourbaseofusers,developers,andadvertisers.Manyofournew users are referred by existing users, and therefore we strive to ensure that our users remain favorably inclined towards Facebook.Maintainingandenhancingourbrandwilldependlargelyonourabilitytocontinuetoprovideuseful,reliable, trustworthy,andinnovativeproducts,whichwemaynotdosuccessfully.Wemayintroducenewproductsortermsofservice thatusersdonotlike,whichmaynegativelyaffectourbrand.Additionally,theactionsofourPlatformdevelopersmayaffect ourbrandifusersdonothaveapositiveexperienceusingthirdpartyappsandwebsitesintegratedwithFacebook.Wehave inthepastexperienced,andweexpectthatinthefuturewewillcontinuetoexperience,media,legislative,orregulatory scrutinyofourdecisionsregardinguserprivacyorotherissues,whichmayadverselyaffectourreputationandbrand.We also may fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negativelyaffectedbytheactionsofusersthataredeemedtobehostileorinappropriatetootherusers,orbyusersacting underfalseorinauthenticidentities.Maintainingandenhancingourbrandmayrequireustomakesubstantialinvestments andtheseinvestmentsmaynotbesuccessful.IfwefailtosuccessfullypromoteandmaintaintheFacebookbrandorifwe incurexcessiveexpensesinthiseffort,ourbusinessandfinancialresultsmaybeadverselyaffected. Improperaccesstoordisclosureofourusersinformation,orviolationofourtermsofserviceorpolicies,couldharmour reputationandadverselyaffectourbusiness. OureffortstoprotecttheinformationthatourusershavechosentoshareusingFacebookmaybeunsuccessfuldueto theactionsofthirdparties,softwarebugsorothertechnicalmalfunctions,employeeerrorormalfeasance,orotherfactors.In addition,thirdpartiesmayattempttofraudulentlyinduceemployeesoruserstodiscloseinformationinordertogainaccess toourdataorourusersdata.Ifanyoftheseeventsoccur,ourusersinformationcouldbeaccessedordisclosedimproperly. OurDataUsePolicygovernstheuseofinformationthat 17
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Table of Contents usershavechosentoshareusingFacebookandhowthatinformationmaybeusedbyusandthirdparties.SomePlatform developersmaystoreinformationprovidedbyourusersthroughappsontheFacebookPlatformorwebsitesintegratedwith Facebook.IfthesethirdpartiesorPlatformdevelopersfailtoadoptoradheretoadequatedatasecuritypracticesorfailto complywithourtermsandpolicies,orintheeventofabreachoftheirnetworks,ourusersdatamaybeimproperlyaccessed ordisclosed. Anyincidentsinvolvingunauthorizedaccesstoorimproperuseoftheinformationofourusersorincidentsinvolving violationofourtermsofserviceorpolicies,includingourDataUsePolicy,coulddamageourreputationandourbrandand diminishourcompetitiveposition.Inaddition,theaffectedusersorgovernmentauthoritiescouldinitiatelegalorregulatory actionagainstusinconnectionwithsuchincidents,whichcouldcauseustoincursignificantexpenseandliabilityorresult in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverseeffectonourbusiness,reputation,orfinancialresults. Unfavorablemediacoveragecouldnegativelyaffectourbusiness. We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy practices, product changes, product quality, litigation or regulatory activity, or the actions of our Platform developersorourusers,couldadverselyaffectourreputation.Suchnegativepublicityalsocouldhaveanadverseeffecton thesize,engagement,andloyaltyofouruserbaseandresultindecreasedrevenue,whichcouldadverselyaffectourbusiness andfinancialresults. Ourfinancialresultswillfluctuatefromquartertoquarter,whichmakesthemdifficulttopredict. Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limitedoperatinghistorywiththecurrentscaleofourbusiness,whichmakesitdifficulttoforecastourfutureresults.Asa result,youshouldnotrelyuponourpastquarterlyfinancialresultsasindicatorsoffutureperformance.Youshouldtakeinto accounttherisksanduncertaintiesfrequentlyencounteredbycompaniesinrapidlyevolvingmarkets.Ourfinancialresults inanygivenquartercanbeinfluencedbynumerousfactors,manyofwhichweareunabletopredictorareoutsideofour control,including: ourabilitytomaintainandgrowouruserbaseanduserengagement ourabilitytoattractandretainadvertisersinaparticularperiod seasonalfluctuationsinspendingbyouradvertisers thenumberofadsshowntousers thepricingofouradsandotherproducts ourabilitytoincreasepaymentsandotherfeesrevenue thediversificationandgrowthofrevenuesourcesbeyondcurrentadvertisingandPayments thedevelopmentandintroductionofnewproductsorservicesbyusorourcompetitors increasesinmarketing,sales,andotheroperatingexpensesthatwemayincurtogrowandexpandouroperations andtoremaincompetitive ourabilitytomaintaingrossmarginsandoperatingmargins ourabilitytoobtainequipmentandcomponentsforourdatacentersandothertechnicalinfrastructureinatimely andcosteffectivemanner systemfailuresorbreachesofsecurityorprivacy inaccessibilityofFacebookduetothirdpartyactions 18
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Table of Contents sharebasedcompensationexpenseincludingapproximately$millionthatwewillincurinthequarterofthe completionofourinitialpublicofferinginconnectionwiththevestingofrestrictedstockunits(RSUs)granted priorto2011 adverselitigationjudgments,settlements,orotherlitigationrelatedcosts changes in the legislative or regulatory environment, including with respect to privacy, or enforcement by governmentregulators,includingfines,orders,orconsentdecrees fluctuationsincurrencyexchangeratesandchangesintheproportionofourrevenueandexpensesdenominatedin foreigncurrencies fluctuationsinthemarketvaluesofourportfolioinvestmentsandininterestrates changesinU.S.generallyacceptedaccountingprinciplesand changesinbusinessormacroeconomicconditions.
In2011andthefirstquarterof2012,weestimatethatupto19%and15%ofourrevenue,respectively,wasderivedfrom Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pagesgeneratedbyZyngaapps.IfZyngadoesnotmaintainitslevelofengagementwithourusersorifweareunableto successfullymaintainourrelationshipwithZynga,ourfinancialresultscouldbeharmed. In2011andthefirstquarterof2012,Zyngadirectlyaccountedforapproximately12%and11%,respectively,ofour revenue,whichwascomprisedofrevenuederivedfromPaymentsprocessingfeesrelatedtoZyngassalesofvirtualgoods andfromdirectadvertisingpurchasedbyZynga.Additionally,Zyngasappsgeneratepagesonwhichwedisplayadsfrom other advertisers for 2011 and the first quarter of 2012, we estimate that an additional approximately 7% and 4%, respectively, of our revenue was generated from the display of these ads. Zynga has recently launched games on its own websiteandonnonFacebookplatforms,andZyngamaychoosetotrytomigrateusersfromexistingFacebookintegrated gamestootherwebsitesorplatforms.WemayfailtomaintaingoodrelationswithZyngaorZyngamaydecidetoreduceor ceaseitsinvestmentsingamesontheFacebookPlatform.IftheuseofZyngagamesonourPlatformdeclinesfortheseor otherreasons,ourfinancialresultsmaybeadverselyaffected. Weexpectourratesofgrowthwilldeclineinthefuture. Webelievethatourratesofuserandrevenuegrowthwilldeclineovertime.Forexample,ourrevenuegrew154%from 2009to2010,88%from2010to2011,and45%fromthefirstquarterof2011tothesameperiodin2012.Historically,our usergrowthhasbeenaprimarydriverofgrowthinourrevenue.Weexpectthatourusergrowthandrevenuegrowthrateswill declineasthesizeofouractiveuserbaseincreasesandasweachievehighermarketpenetrationrates.Asourgrowthrates decline,investorsperceptionsofourbusinessmaybeadverselyaffectedandthemarketpriceofourClassAcommonstock coulddecline. OurbusinessissubjecttocomplexandevolvingU.S.andforeignlawsandregulationsregardingprivacy,dataprotection, andothermatters.Manyoftheselawsandregulationsaresubjecttochangeanduncertaininterpretation,andcouldresult inclaims,changestoourbusinesspractices,increasedcostofoperations,ordeclinesinusergrowthorengagement,or otherwiseharmourbusiness. WearesubjecttoavarietyoflawsandregulationsintheUnitedStatesandabroadthatinvolvematterscentraltoour business,includinguserprivacy,rightsofpublicity,dataprotection,content,intellectualproperty,distribution,electronic contractsandothercommunications,competition,protectionofminors,consumerprotection,taxation,andonlinepayment services.Foreigndataprotection,privacy,andotherlawsandregulationsareoftenmorerestrictivethanthoseintheUnited States.TheseU.S.federalandstateandforeignlawsandregulationsareconstantlyevolvingandcanbesubjecttosignificant change.Inaddition,theapplicationandinterpretationoftheselawsandregulationsareoftenuncertain,particularlyinthe newandrapidlyevolvingindustryinwhichweoperate.Forexample,theinterpretationofsomelawsandregulationsthat govern the use of names and likenesses in connection with advertising and marketing activities is unsettled and developmentsinthisareacouldaffectthemannerinwhichwedesignourproducts,aswellasourtermsofuse.Anumberof proposalsarependingbeforefederal,state,andforeignlegislativeandregulatorybodiesthatcouldsignificantlyaffectour business.Forexample,arevisiontothe1995EuropeanUnionDataProtectionDirectiveiscurrentlybeingconsideredby 19
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Table of Contents European legislative bodies that may include more stringent operational requirements for data processors and significant penalties for noncompliance. Similarly, there have been a number of recent legislative proposals in the United States, at both the federal and state level, that would impose new obligations in areas such as privacy and liability for copyright infringementbythirdparties.Theseexistingandproposedlawsandregulationscanbecostlytocomplywithandcandelay orimpedethedevelopmentofnewproducts,resultinnegativepublicity,increaseouroperatingcosts,requiresignificant managementtimeandattention,andsubjectustoclaimsorotherremedies,includingfinesordemandsthatwemodifyor ceaseexistingbusinesspractices. We have been subject to regulatory investigations and settlements and we expect to continue to be subject to such proceedingsinthefuture,whichcouldcauseustoincursubstantialcostsorrequireustochangeourbusinesspracticesin amannermateriallyadversetoourbusiness. From time to time, we receive inquiries from regulators regarding our compliance with laws and other matters. For example,in2011,wereachedagreementwiththeFederalTradeCommission(FTC)toresolveaninvestigationintovarious practicesbyenteringintoa20yearsettlementagreementthat,amongotherthings,requiresustoestablishandrefinecertain practices with respect to treatment of user data and privacy settings and also requires that we complete biannual independentprivacyaudits.Asanotherexample,in2011theIrishDataProtectionCommissioner(DPC)conductedanaudit ofthedata,security,andprivacypracticesandpoliciesofFacebookIreland,whichisthedatacontrollerforFacebookusers outsidetheUnitedStatesandCanada,andreleasedareportofitsconclusionsinDecember2011.TheFTCandDPChave investigatedandauditedaspectsofourproductsandpractices,andweexpecttocontinuetobethesubjectofregulatory investigationsandauditsinthefuturebytheseandotherregulatorsthroughouttheworld. Itispossiblethataregulatoryinquirymightresultinchangestoourpoliciesorpractices.Violationofexistingorfuture regulatoryordersorconsentdecreescouldsubjectustosubstantialmonetaryfinesandotherpenaltiesthatcouldnegatively affectourfinancialconditionandresultsofoperations.Inaddition,itispossiblethatfutureordersissuedby,orenforcement actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practicesinamannermateriallyadversetoourbusiness. Ifweareunabletoprotectourintellectualproperty,thevalueofourbrandandotherintangibleassetsmaybediminished, andourbusinessmaybeadverselyaffected. Werelyandexpecttocontinuetorelyonacombinationofconfidentialityandlicenseagreementswithouremployees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domainnameprotectionlaws,toprotectourproprietaryrights.IntheUnitedStatesandinternationally,wehavefiledvarious applicationsforprotectionofcertainaspectsofourintellectualproperty,andwecurrentlyholdanumberofissuedpatentsin multiplejurisdictions.Inaddition,inthefuturewemayacquireadditionalpatentsorpatentportfolios,whichcouldrequire significantcashexpenditures.However,thirdpartiesmayknowinglyorunknowinglyinfringeourproprietaryrights,third partiesmaychallengeproprietaryrightsheldbyus,andpendingandfuturetrademarkandpatentapplicationsmaynotbe approved.Inaddition,effectiveintellectualpropertyprotectionmaynotbeavailableineverycountryinwhichweoperate orintendtooperateourbusiness.Inanyorallofthesecases,wemayberequiredtoexpendsignificanttimeandexpensein ordertopreventinfringementortoenforceourrights.Althoughwehavetakenmeasurestoprotectourproprietaryrights, therecanbenoassurancethatotherswillnotofferproductsorconceptsthataresubstantiallysimilartooursandcompete withourbusiness.Inaddition,weregularlycontributesoftwaresourcecodeunderopensourcelicensesandhavemadeother technology we developed available under other open licenses, and we include open source software in our products. For example,wehavecontributedcertainspecificationsanddesignsrelatedtoourdatacenterequipmenttotheOpenCompute ProjectFoundation,anonprofitentitythatsharesanddevelopssuchinformationwiththetechnologycommunity,underthe OpenWebFoundationLicense.Asaresultofouropensourcecontributionsandtheuseofopensourceinourproducts,we maylicenseorberequiredtolicenseinnovationsthatturnouttobematerialtoourbusinessandmayalsobeexposedto increasedlitigationrisk.Iftheprotectionofourproprietaryrightsisinadequatetopreventunauthorizeduseorappropriation bythirdparties,thevalueofourbrand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methodsofoperations.Anyoftheseeventscouldhaveanadverseeffectonourbusinessandfinancialresults. 20
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Table of Contents Wearecurrently,andexpecttobeinthefuture,partytopatentlawsuitsandotherintellectualpropertyrightsclaimsthat areexpensiveandtimeconsuming,and,ifresolvedadversely,couldhaveasignificantimpactonourbusiness,financial condition,orresultsofoperations. CompaniesintheInternet,technology,andmediaindustriesownlargenumbersofpatents,copyrights,trademarks,and tradesecrets,andfrequentlyenterintolitigationbasedonallegationsofinfringement,misappropriation,orotherviolations ofintellectualpropertyorotherrights.Inaddition,variousnonpracticingentitiesthatownpatentsandotherintellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. Furthermore,fromtimetotimewemayintroducenewproducts,includinginareaswherewecurrentlydonotcompete,which couldincreaseourexposuretopatentandotherintellectualpropertyclaimsfromcompetitorsandnonpracticingentities. From time to time, we receive notice letters from patent holders alleging that certain of our products and services infringetheirpatentrights.Someofthesehaveresultedinlitigationagainstus.Forexample,onMarch12,2012,Yahoofiled alawsuitagainstusintheU.S.DistrictCourtfortheNorthernDistrictofCaliforniathatallegesthatanumberofourproducts infringe the claims of ten of Yahoos patents that Yahoo claims relate to advertising, social networking, privacy, customization, and messaging. Yahoo is seeking unspecified damages, a damage multiplier for alleged willful infringement,andaninjunction.Weintendtovigorouslydefendthislawsuit,andonApril3,2012,wefiledouranswerwith respecttothiscomplaintandassertedcounterclaimsthatYahoosproductsinfringetenofourpatents.Thislitigationisstill initsearlystagesandthefinaloutcome,includingourliability,ifany,withrespecttoYahoosclaims,isuncertain.Ifan unfavorableoutcomeweretooccurinthislitigation,theimpactcouldbematerialtoourbusiness,financialcondition,or resultsofoperations. Wepresentlyareinvolvedinanumberofotherlawsuits,andaswefaceincreasingcompetitionandgainanincreasingly highprofile,includinginconnectionwithourinitialpublicoffering,weexpectthenumberofpatentandotherintellectual propertyclaimsagainstustogrow.Defendingpatentandotherintellectualpropertylitigationiscostlyandcanimposea significant burden on management and employees, and there can be no assurances that favorable final outcomes will be obtainedinallcases.Inaddition,plaintiffsmayseek,andwemaybecomesubjectto,preliminaryorprovisionalrulingsin the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations.Wemaydecidetosettlesuchlawsuitsanddisputesontermsthatareunfavorabletous.Similarly,ifanylitigation towhichweareapartyisresolvedadversely,wemaybesubjecttoanunfavorablejudgmentthatmaynotbereversedupon appeal.Thetermsofsuchasettlementorjudgmentmayrequireustoceasesomeorallofouroperationsorpaysubstantial amountstotheotherparty.Inaddition,wemayhavetoseekalicensetocontinuepracticesfoundtobeinviolationofathird partysrights,whichmaynotbeavailableonreasonableterms,oratall,andmaysignificantlyincreaseouroperatingcosts and expenses. As a result, we may also be required to develop alternative noninfringing technology or practices or discontinuethepractices.Thedevelopmentofalternativenoninfringingtechnologyorpracticescouldrequiresignificant effort and expense or may not be feasible. Our business, financial condition, or results of operations could be adversely affectedasaresultofanunfavorableresolutionofthedisputesandlitigationreferredtoabove. Weareinvolvedinnumerousclassactionlawsuitsandotherlitigationmattersthatareexpensiveandtimeconsuming, and,ifresolvedadversely,couldharmourbusiness,financialcondition,orresultsofoperations. Inadditiontointellectualpropertyclaims,wearealsoinvolvedinnumerousotherlawsuits,includingputativeclass action lawsuits brought by users and advertisers, many of which claim statutory damages, and we anticipate that we will continuetobeatargetfornumerouslawsuitsinthefuture.Becausewehavehundredsofmillionsofusers,theplaintiffsin classactioncasesfiledagainstustypicallyclaimenormousmonetarydamageseveniftheallegedperuserharmissmallor nonexistent. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reverseduponappeal,orwemaydecidetosettlelawsuitsonsimilarlyunfavorableterms.Anysuchnegativeoutcomecould result in payments of substantial monetary damages or fines, or changes to our products or business practices, and accordinglyourbusiness,financialcondition,orresultsofoperationscouldbemateriallyandadverselyaffected.Although the results of lawsuits and claims cannot be predicted with certainty, we do not believe that the final outcome of those mattersthatwe 21
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Table of Contents currently face will have a material adverse effect on our business, financial condition, or results of operations. However, defendingtheseclaimsiscostlyandcanimposeasignificantburdenonmanagementandemployees,andwemayreceive unfavorablepreliminaryorinterimrulingsinthecourseoflitigation,whichcouldadverselyaffectthemarketpriceofour ClassAcommonstock.Therecanbenoassurancesthatafavorablefinaloutcomewillbeobtainedinallcases. OurCEOhascontroloverkeydecisionmakingasaresultofhiscontrolofamajorityofourvotingstock. As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder,Chairman,andCEO,willbeabletoexercisevotingrightswithrespecttoanaggregateofsharesofcommon stock,whichwillrepresentapproximately%ofthevotingpowerofouroutstandingcapitalstockfollowingourinitial publicoffering.Asaresult,Mr.Zuckerberghastheabilitytocontroltheoutcomeofmatterssubmittedtoourstockholders forapproval,includingtheelectionofdirectorsandanymerger,consolidation,orsaleofallorsubstantiallyallofourassets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantiallyallofourassetsthatourotherstockholderssupport,orconverselythisconcentratedcontrolcouldresultinthe consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the market price of our Class A common stock. In addition, Mr.Zuckerberghastheabilitytocontrolthemanagementandmajorstrategicinvestmentsofourcompanyasaresultofhis position as our CEO and his ability to control the election or replacement of our directors. In the event of his death, the sharesofourcapitalstockthatMr.Zuckerbergownswillbetransferredtothepersonsorentitiesthathedesignates.Asa boardmemberandofficer,Mr.Zuckerbergowesafiduciarydutytoourstockholdersandmustactingoodfaithinamanner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr.Zuckerbergisentitledtovotehisshares,andsharesoverwhichhehasvotingcontrolasaresultofvotingagreements,in hisowninterests,whichmaynotalwaysbeintheinterestsofourstockholdersgenerally.Foradescriptionofthesevoting agreements,seeDescriptionofCapitalStockVotingAgreements. We anticipate that we will expend substantial funds in connection with the tax liabilities that arise upon the initial settlementofRSUsfollowingourinitialpublicofferingandthemannerinwhichwefundthatexpendituremayhavean adverseeffectonourfinancialcondition. We anticipate that we will expend substantial funds to satisfy tax withholding and remittance obligations on a date approximatelysixmonthsfollowingourinitialpublicoffering,whenwewillsettleaportionofourRSUsgrantedpriorto January 1, 2011 (Pre2011 RSUs). On the settlement date, we plan to withhold and remit income taxes at applicable minimumstatutoryratesbasedonthethencurrentvalueoftheunderlyingshares.Wecurrentlyexpectthattheaverageof thesewithholdingtaxrateswillbeapproximately45%.Ifthepriceofourcommonstockatthetimeofsettlementwereequal to the midpoint of the price range on the cover page of this prospectus, we estimate that this tax obligation would be approximately$billionintheaggregate.Theamountofthisobligationcouldbehigherorlower,dependingonthe priceofoursharesontheRSUsettlementdate.TosettletheseRSUs,assuminga45%taxwithholdingrate,weanticipatethat wewillnetsettletheawardsbydeliveringapproximatelysharesofClassBcommonstocktoRSUholdersand simultaneouslywithholdingapproximatelysharesofClassBcommonstock.Inconnectionwiththisnetsettlement wewillwithholdandremitthetaxliabilitiesonbehalfoftheRSUholdersincashtotheapplicabletaxauthorities. Tofundthewithholdingandremittanceobligation,weexpecttosellequitysecuritiesnearthesettlementdateinan amountthatissubstantiallyequivalenttothenumberofsharesofcommonstockthatwewithholdinconnectionwiththe initialsettlementofthePre2011RSUs,suchthatthenewlyissuedsharesshouldnotbedilutive.However,intheeventthat weissueequitysecurities,wecannotassureyouthatwewillbeabletosuccessfullymatchtheproceedstotheamountofthis taxliability.Inaddition,anysuchequityfinancingcouldresultinadeclineinourstockprice.Ifweelectnottofullyfund taxwithholdingandremittanceobligationsthroughtheissuanceofequityorweareunabletocompletesuchanofferingdue tomarketconditionsorotherwise,wemaychoosetoborrowfundsfromourcreditfacilities,useasubstantialportionofour existing 22
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Table of Contents cash,orrelyuponacombinationofthesealternatives.Intheeventthatweelecttosatisfytaxwithholdingandremittance obligationsinwholeorinpartbydrawingonourcreditfacilities,ourinterestexpenseandprincipalrepaymentrequirements couldincreasesignificantly,whichcouldhaveanadverseeffectonourfinancialresults. Wecannotbecertainthatadditionalfinancingwillbeavailableonreasonabletermswhenrequired,oratall. Fromtimetotime,wemayneedadditionalfinancing,whetherinconnectionwithourRSUtaxobligationorotherwise. Ourabilitytoobtainadditionalfinancing,ifandwhenrequired,willdependoninvestordemand,ouroperatingperformance, theconditionofthecapitalmarkets,andotherfactors.TotheextentwedrawonourcreditfacilitiestofundtheRSUtax obligation,wemayneedtoraiseadditionalfundsandwecannotassureyouthatadditionalfinancingwillbeavailabletous onfavorabletermswhenrequired,oratall.Ifweraiseadditionalfundsthroughtheissuanceofequity,equitylinkedordebt securities,thosesecuritiesmayhaverights,preferences,orprivilegesseniortotherightsofourClassAcommonstock,and ourexistingstockholdersmayexperiencedilution. Ourcostsaregrowingquickly,whichcouldharmourbusinessandprofitability. Providingourproductstoourusersiscostlyandweexpectourexpensestocontinuetoincreaseinthefutureaswe broadenouruserbase,asusersincreasethenumberofconnectionsandamountofdatatheysharewithus,aswedevelopand implement new product features that require more computing infrastructure, and as we hire additional employees. Historically,ourcostshaveincreasedeachyearduetothesefactorsandweexpecttocontinuetoincurincreasingcosts,in particularforemployees,servers,storage,power,anddatacenters,tosupportouranticipatedfuturegrowth.Weexpectto continuetoinvestinourglobalinfrastructureinordertoprovideourproductsrapidlyandreliablytoallusersaroundthe world,includingincountrieswherewedonotexpectsignificantshorttermmonetization.Ourexpensesmaybegreaterthan we anticipate, and our investments to make our business and our technical infrastructure more efficient may not be successful. In addition, we may increase marketing, sales, and other operating expenses in order to grow and expand our operationsandtoremaincompetitive.Increasesinourcostsmayadverselyaffectourbusinessandprofitability. Ourbusinessisdependentonourabilitytomaintainandscaleourtechnicalinfrastructure,andanysignificantdisruption inourservicecoulddamageourreputation,resultinapotentiallossofusersandengagement,andadverselyaffectour financialresults. Ourreputationandabilitytoattract,retain,andserveourusersisdependentuponthereliableperformanceofFacebook andourunderlyingtechnicalinfrastructure.Oursystemsmaynotbeadequatelydesignedwiththenecessaryreliabilityand redundancytoavoidperformancedelaysoroutagesthatcouldbeharmfultoourbusiness.IfFacebookisunavailablewhen usersattempttoaccessit,orifitdoesnotloadasquicklyastheyexpect,usersmaynotreturntoourwebsiteasofteninthe future,oratall.AsouruserbaseandtheamountandtypesofinformationsharedonFacebookcontinuetogrow,wewillneed anincreasingamountoftechnicalinfrastructure,includingnetworkcapacity,andcomputingpower,tocontinuetosatisfy the needs of our users. It is possible that we may fail to effectively scale and grow our technical infrastructure to accommodatetheseincreaseddemands.Inaddition,ourbusinessissubjecttointerruptions,delays,orfailuresresultingfrom earthquakes,othernaturaldisasters,terrorism,orothercatastrophicevents. Asubstantialportionofournetworkinfrastructureisprovidedbythirdparties.Anydisruptionorfailureintheservices wereceivefromtheseproviderscouldharmourabilitytohandleexistingorincreasedtrafficandcouldsignificantlyharm ourbusiness.Anyfinancialorotherdifficultiestheseprovidersfacemayadverselyaffectourbusiness,andweexerciselittle controlovertheseproviders,whichincreasesourvulnerabilitytoproblemswiththeservicestheyprovide. Werecentlybegantoownandbuildkeyportionsofourtechnicalinfrastructure,and,becauseofourlimitedexperiencein thisarea,wecouldexperienceunforeseendifficulties. In2011,webeganservingourproductsfromdatacentersownedbyFacebookusingserversspecificallydesignedforus. Weplantocontinuetosignificantlyexpandthesizeofourinfrastructure,primarilythroughdata 23
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Table of Contents centersthatwedesignandown.Theinfrastructureexpansionweareundertakingiscomplex,andunanticipateddelaysinthe completionoftheseprojectsoravailabilityofcomponentsmayleadtoincreasedprojectcosts,operationalinefficiencies,or interruptionsinthedeliveryordegradationofthequalityofourproducts.Inaddition,theremaybeissuesrelatedtothis infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after we have started to fully utilize the underlying equipment, that could further degrade the user experience or increaseourcosts. Oursoftwareishighlytechnical,andifitcontainsundetectederrors,ourbusinesscouldbeadverselyaffected. Ourproductsincorporatesoftwarethatishighlytechnicalandcomplex.Oursoftwarehascontained,andmaynoworin thefuturecontain,undetectederrors,bugs,orvulnerabilities.Someerrorsinoursoftwarecodemayonlybediscoveredafter thecodehasbeenreleased.Anyerrors,bugs,orvulnerabilitiesdiscoveredinourcodeafterreleasecouldresultindamageto ourreputation,lossofusers,lossofrevenue,orliabilityfordamages,anyofwhichcouldadverselyaffectourbusinessand financialresults. Certainofourusermetricsaresubjecttoinherentchallengesinmeasurement,andrealorperceivedinaccuraciesinsuch metricsmayharmourreputationandnegativelyaffectourbusiness. ThenumbersofourMAUsanddailyactiveusers(DAUs)andaveragerevenueperuser(ARPU)arecalculatedusing internalcompanydata.Whilethesenumbersarebasedonwhatwebelievetobereasonableestimatesofouruserbaseforthe applicableperiodofmeasurement,thereareinherentchallengesinmeasuringusageofourproductsacrosslargeonlineand mobile populations around the world. For example, there may be individuals who have multiple Facebook accounts in violationofourtermsofservice,despiteoureffortstodetectandsuppresssuchbehavior.Weestimatethatfalseorduplicate accountsmayhaverepresentedapproximately56%ofourMAUsasofDecember31,2011.However,thisestimateisbased onaninternalreviewofalimitedsampleofaccountsandweapplysignificantjudgmentinmakingthisdetermination,such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimationoffalseorduplicateaccountsmaynotaccuratelyrepresenttheactualnumberofsuchaccounts.Ourmetricsare alsoaffectedbyapplicationsoncertainmobiledevicesthatautomaticallycontactourserversforregularupdateswithno useractioninvolved,andthisactivitycancauseoursystemtocounttheuserassociatedwithsuchadeviceasanactiveuser onthedaysuchcontactoccurs.Forexample,weestimatethatlessthan5%ofourestimatedworldwideDAUsasofDecember 31,2011and2010resultedfromthistypeofautomaticmobileactivity,andthatthistypeofactivityhadasubstantially smallereffectonourestimateofworldwideMAUsandmobileMAUs.Theimpactofthisautomaticactivityonourmetrics varies by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographiclocationofourusersisestimatedbasedonanumberoffactors,suchastheusersIPaddressandselfdisclosed location.Thesefactorsmaynotalwaysaccuratelyreflecttheusersactuallocation.Forexample,amobileonlyusermay appeartobeaccessingFacebookfromthelocationoftheproxyserverthattheuserconnectstoratherthanfromtheusers actual location. In addition, our estimates for revenue by user location are also affected by these factors. If advertisers, developers,orinvestorsdonotperceiveourusermetricstobeaccuraterepresentationsofouruserbase,orifwediscover materialinaccuraciesinourusermetrics,ourreputationmaybeharmedandadvertisersanddevelopersmaybelesswillingto allocatetheirbudgetsorresourcestoFacebook,whichcouldnegativelyaffectourbusinessandfinancialresults. Wecannotassureyouthatwewilleffectivelymanageourgrowth. Ouremployeeheadcountandthescopeandcomplexityofourbusinesshaveincreasedsignificantly,withthenumberof fulltimeemployeesincreasingfrom2,431asofMarch31,2011,to3,539asofMarch31,2012,andweexpectheadcount growth to continue for the foreseeable future. The growth and expansion of our business and products create significant challenges for our management, operational, and financial resources, including managing multiple relations with users, advertisers,Platformdevelopers,andotherthirdparties.Intheeventofcontinuedgrowthofouroperationsorinthenumber of our thirdparty relationships, our information technology systems or our internal controls and procedures may not be adequate to support our operations. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively. To effectively manage our growth, we must continue to improve our operational, financial, and management processes and systemsandto 24
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Table of Contents effectively expand, train, and manage our employee base. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefitsofourcorporateculture,includingourabilitytoquicklydevelopandlaunchnewandinnovativeproducts.This couldnegativelyaffectourbusinessperformance. Thelossofoneormoreofourkeypersonnel,orourfailuretoattractandretainotherhighlyqualifiedpersonnelinthe future,couldharmourbusiness. Wecurrentlydependonthecontinuedservicesandperformanceofourkeypersonnel,includingMarkZuckerbergand Sheryl K. Sandberg. Although we have entered into employment agreements with Mr. Zuckerberg and Ms. Sandberg, the agreements have no specific duration and constitute atwill employment. In addition, many of our key technologies and systemsarecustommadeforourbusinessbyourpersonnel.Thelossofkeypersonnel,includingmembersofmanagementas well as key engineering, product development, marketing, and sales personnel, could disrupt our operations and have an adverseeffectonourbusiness. As we continue to grow, we cannot guarantee we will continue to attract the personnel we need to maintain our competitiveposition.Inparticular,weintendtohireasignificantnumberofengineeringandsalespersonnelin2012,andwe expecttofacesignificantcompetitionfromothercompaniesinhiringsuchpersonnel,particularlyintheSanFranciscoBay Area. As we mature, the incentives to attract, retain, and motivate employees provided by our equity awards or by future arrangements,suchasthroughcashbonuses,maynotbeaseffectiveasinthepast.Additionally,wehaveanumberofcurrent employeeswhoseequityownershipinourcompanygivesthemasubstantialamountofpersonalwealth.Likewise,wehavea number of current employees whose equity awards are fully vested and shortly after the completion of our initial public offeringwillbeentitledtoreceivesubstantialamountsofourcapitalstock.Asaresult,itmaybedifficultforustocontinue toretainandmotivatetheseemployees,andthiswealthcouldaffecttheirdecisionsaboutwhetherornottheycontinueto work for us. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existingpersonnel,wemaybeunabletogroweffectively. WemayincurliabilityasaresultofinformationretrievedfromortransmittedovertheInternetorpostedtoFacebookand claimsrelatedtoourproducts. We have faced, currently face, and will continue to face claims relating to information that is published or made available on Facebook. In particular, the nature of our business exposes us to claims related to defamation, intellectual property rights, rights of publicity and privacy, and personal injury torts. This risk is enhanced in certain jurisdictions outsidetheUnitedStateswhereourprotectionfromliabilityforthirdpartyactionsmaybeunclearandwherewemaybeless protectedunderlocallawsthanweareintheUnitedStates.Wecouldincursignificantcostsinvestigatinganddefending suchclaimsand,ifwearefoundliable,significantdamages.Ifanyoftheseeventsoccur,ourbusinessandfinancialresults couldbeadverselyaffected. Computer malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations. Computermalware,viruses,andcomputerhackingandphishingattackshavebecomemoreprevalentinourindustry, haveoccurredonoursystemsinthepast,andmayoccuronoursystemsinthefuture.Becauseofourprominence,webelieve thatweareaparticularlyattractivetargetforsuchattacks.Thoughitisdifficulttodeterminewhat,ifany,harmmaydirectly resultfromanyspecificinterruptionorattack,anyfailuretomaintainperformance,reliability,security,andavailabilityof ourproductsandtechnicalinfrastructuretothesatisfactionofourusersmayharmourreputationandourabilitytoretain existingusersandattractnewusers. Inaddition,spammersattempttouseourproductstosendtargetedanduntargetedspammessagestousers,whichmay embarrassorannoyusersandmakeFacebooklessuserfriendly.Wecannotbecertainthatthetechnologiesandemployees that we have to attempt to defeat spamming attacks will be able to eliminate all spam messages from being sent on our platform.Asaresultofspammingactivities,ourusersmayuseFacebooklessorstopusingourproductsaltogether. 25
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Table of Contents PaymenttransactionsontheFacebookPlatformmaysubjectustoadditionalregulatoryrequirementsandotherrisksthat couldbecostlyanddifficulttocomplywithorthatcouldharmourbusiness. OuruserscanusetheFacebookPlatformtopurchasevirtualanddigitalgoodsfromourPlatformdevelopersusingour Payments infrastructure. Depending on how our Payments product evolves, we may be subject to a variety of laws and regulationsintheUnitedStates,Europe,andelsewhere,includingthosegoverningmoneytransmission,giftcardsandother prepaidaccessinstruments,electronicfundstransfers,antimoneylaundering,counterterroristfinancing,gambling,banking and lending, and import and export restrictions. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money transmitter licenses and expect to apply for additional money transmitter licensesintheUnitedStates,whichwillgenerallyrequireustodemonstratecompliancewithmanydomesticlawsinthese areas.Oureffortstocomplywiththeselawsandregulationscouldbecostlyandresultindiversionofmanagementtimeand effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatoryrequirements,wemaybesubjecttomonetaryfinesorotherpenaltiessuchasaceaseanddesistorder,orwemay berequiredtomakeproductchanges,anyofwhichcouldhaveanadverseeffectonourbusinessandfinancialresults. In addition, we may be subject to a variety of additional risks as a result of Payments on the Facebook Platform, including: increasedcostsanddiversionofmanagementtimeandeffortandotherresourcestodealwithbadtransactionsor customerdisputes potentialfraudulentorotherwiseillegalactivitybyusers,developers,employees,orthirdparties restrictionsontheinvestmentofconsumerfundsusedtotransactPaymentsand additionaldisclosureandreportingrequirements.
Weplantocontinueexpandingouroperationsabroadwherewehavelimitedoperatingexperienceandmaybesubjectto increasedbusinessandeconomicrisksthatcouldaffectourfinancialresults. We plan to continue the international expansion of our business operations and the translation of our products. We currentlymakeFacebookavailableinmorethan70differentlanguages,andwehaveofficesordatacentersinmorethan20 differentcountries.Wemayenternewinternationalmarketswherewehavelimitedornoexperienceinmarketing,selling, anddeployingourproducts.Forexample,wecontinuetoevaluateenteringChina.However,thismarkethassubstantiallegal andregulatorycomplexitiesthathavepreventedourentryintoChinatodate.Ifwefailtodeployormanageouroperations ininternationalmarketssuccessfully,ourbusinessmaysuffer.Inaddition,wearesubjecttoavarietyofrisksinherentin doingbusinessinternationally,including: political,social,oreconomicinstability risksrelatedtothelegalandregulatoryenvironmentinforeignjurisdictions,includingwithrespecttoprivacy,and unexpectedchangesinlaws,regulatoryrequirements,andenforcement potentialdamagetoourbrandandreputationduetocompliancewithlocallaws,includingpotentialcensorshipor requirementstoprovideuserinformationtolocalauthorities fluctuationsincurrencyexchangerates higherlevelsofcreditriskandpaymentfraud enhanceddifficultiesofintegratinganyforeignacquisitions burdensofcomplyingwithavarietyofforeignlaws reducedprotectionforintellectualpropertyrightsinsomecountries 26
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Table of Contents difficulties in staffing and managing global operations and the increased travel, infrastructure, and legal compliancecostsassociatedwithmultipleinternationallocations compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other jurisdictionsand compliancewithstatutoryequityrequirementsandmanagementoftaxconsequences.
If we are unable to expand internationally and manage the complexity of our global operations successfully, our financialresultscouldbeadverselyaffected. Weplantocontinuetomakeacquisitions,whichcouldrequiresignificantmanagementattention,disruptourbusiness, resultindilutiontoourstockholders,andadverselyaffectourfinancialresults. As part of our business strategy, we have made and intend to make acquisitions to add specialized employees, complementarycompanies,products,ortechnologies.Forexample,inApril2012,weenteredintoanagreementtoacquire Instagram,Inc.,theclosingofwhichissubjecttoclosingconditionsandregulatoryclearance.Ourabilitytoacquireand integratelargerormorecomplexcompanies,products,ortechnologiesinasuccessfulmannerisunproven.Inthefuture,we maynotbeabletofindothersuitableacquisitioncandidates,andwemaynotbeabletocompleteacquisitionsonfavorable terms, if at all. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed negatively by users, developers, advertisers, or investors. In addition, if we fail to successfully close or integrateanyacquisitions,orintegratetheproductsortechnologiesassociatedwithsuchacquisitionsintoourcompany,our revenue and operating results could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt, or issue equity securities to pay for any such acquisition,anyofwhichcouldadverselyaffectourfinancialresults.Thesaleofequityorissuanceofdebttofinanceany suchacquisitionscouldresultindilutiontoourstockholders.Theincurrenceofindebtednesswouldresultinincreasedfixed obligationsandcouldalsoincludecovenantsorotherrestrictionsthatwouldimpedeourabilitytomanageouroperations. If we default on our leasing and credit obligations, our operations may be interrupted and our business and financial resultscouldbeadverselyaffected. Wefinanceasignificantportionofourexpendituresthroughleasingarrangements,someofwhicharenotrequiredtobe reflectedonourbalancesheet,andwemayenterintoadditionalsimilararrangementsinthefuture.Inparticular,wehave usedthesetypesofarrangementstofinancesomeofourequipmentanddatacenters.Inaddition,wehavecreditfacilitiesthat wemaydrawupontofinanceouroperationsorothercorporatepurposes,suchasfundingourtaxwithholdingandremittance obligations in connection with the settlement of RSUs. If we default on these leasing and credit obligations, our leasing partnersandlendersmay,amongotherthings: requirerepaymentofanyoutstandingleaseobligationsoramountsdrawnonourcreditfacilities terminateourleasingarrangementsandcreditfacilities terminateouraccesstotheleaseddatacentersweutilize stopdeliveryoforderedequipment sellorrequireustoreturnourleasedequipmentor requireustopaysignificantdamages.
Ifsomeoralloftheseeventsweretooccur,ouroperationsmaybeinterruptedandourabilitytofundouroperationsor obligations,aswellasourbusiness,financialresults,andfinancialcondition,couldbeadverselyaffected. 27
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Table of Contents Wemayhaveexposuretogreaterthananticipatedtaxliabilities. Ourincometaxobligationsarebasedonourcorporateoperatingstructureandintercompanyarrangements,including the manner in which we develop, value, and use our intellectual property and the valuations of our intercompany transactions. The tax laws applicable to our international business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwideeffectivetaxrateandharmourfinancialpositionandresultsofoperations.Inaddition,ourfutureincometaxes couldbeadverselyaffectedbyearningsbeinglowerthananticipatedinjurisdictionsthathavelowerstatutorytaxratesand higherthananticipatedinjurisdictionsthathavehigherstatutorytaxrates,bychangesinthevaluationofourdeferredtax assetsandliabilities,orbychangesintaxlaws,regulations,oraccountingprinciples.Wearesubjecttoregularreviewand auditbybothU.S.federalandstateandforeigntaxauthorities.Anyadverseoutcomeofsucharevieworauditcouldhavea negativeeffectonourfinancialpositionandresultsofoperations.Inaddition,thedeterminationofourworldwideprovision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions wheretheultimatetaxdeterminationisuncertain.Althoughwebelievethatourestimatesarereasonable,theultimatetax outcomemaydifferfromtheamountsrecordedinourfinancialstatementsandmaymateriallyaffectourfinancialresultsin theperiodorperiodsforwhichsuchdeterminationismade. TheenactmentoflegislationimplementingchangesintheU.S.taxationofinternationalbusinessactivitiesortheadoption ofothertaxreformpoliciescouldmateriallyaffectourfinancialpositionandresultsofoperations. Thecurrentadministrationhasmadepublicstatementsindicatingthatithasmadeinternationaltaxreformapriority, andkeymembersoftheU.S.Congresshaveconductedhearingsandproposedawidevarietyofpotentialchanges.Certain changestoU.S.taxlaws,includinglimitationsontheabilitytodeferU.S.taxationonearningsoutsideoftheUnitedStates untilthoseearningsarerepatriatedtotheUnitedStates,couldaffectthetaxtreatmentofourforeignearnings,aswellascash andcashequivalentbalanceswecurrentlymaintainoutsideoftheUnitedStates.Duetothelargeandexpandingscaleofour internationalbusinessactivities,anychangesintheU.S.taxationofsuchactivitiesmayincreaseourworldwideeffectivetax rateandharmourfinancialpositionandresultsofoperations. RisksRelatedtoOurInitialPublicOfferingandOwnershipofOurClassACommonStock ThemarketpriceofourClassAcommonstockmaybevolatileormaydeclineregardlessofouroperatingperformance, andyoumaynotbeabletoresellyoursharesatorabovetheinitialpublicofferingprice. TheinitialpublicofferingpriceforourClassAcommonstockwillbedeterminedthroughnegotiationsbetweenthe underwritersandusandmayvaryfromthemarketpriceofourClassAcommonstockfollowingourinitialpublicoffering.If youpurchasesharesofourClassAcommonstockinourinitialpublicoffering,youmaynotbeabletoresellthosesharesat orabovetheinitialpublicofferingprice.WecannotassureyouthattheinitialpublicofferingpriceofourClassAcommon stock, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactionsofoursharesthathaveoccurredfromtimetotimepriortoourinitialpublicoffering.Themarketpriceofour ClassAcommonstockmayfluctuatesignificantlyinresponsetonumerousfactors,manyofwhicharebeyondourcontrol, including: actualoranticipatedfluctuationsinourrevenueandotheroperatingresults thefinancialprojectionswemayprovidetothepublic,anychangesintheseprojectionsorourfailuretomeetthese projections actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securitiesanalystswhofollowourcompany,orourfailuretomeettheseestimatesortheexpectationsofinvestors 28
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Table of Contents additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales, including if we issue shares to satisfy RSUrelated tax obligations or if existing stockholderssellsharesintothemarketwhenapplicablelockupperiodsend announcementsbyusorourcompetitorsofsignificantproductsorfeatures,technicalinnovations,acquisitions, strategicpartnerships,jointventures,orcapitalcommitments announcementsbyusorestimatesbythirdpartiesofactualoranticipatedchangesinthesizeofouruserbaseor thelevelofuserengagement changesinoperatingperformanceandstockmarketvaluationsoftechnologycompaniesinourindustry,including ourPlatformdevelopersandcompetitors price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole lawsuitsthreatenedorfiledagainstus developmentsinnewlegislationandpendinglawsuitsorregulatoryactions,includinginterimorfinalrulingsby judicialorregulatorybodiesand othereventsorfactors,includingthoseresultingfromwarorincidentsofterrorism,orresponsestotheseevents.
Inaddition,thestockmarketshaveexperiencedextremepriceandvolumefluctuationsthathaveaffectedandcontinue toaffectthemarketpricesofequitysecuritiesofmanytechnologycompanies.Stockpricesofmanytechnologycompanies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involvedinsecuritieslitigation,itcouldsubjectustosubstantialcosts,divertresourcesandtheattentionofmanagement fromourbusiness,andadverselyaffectourbusiness. Substantial blocks of our total outstanding shares may be sold into the market when lockup or market standoff periodsend.Iftherearesubstantialsalesofsharesofourcommonstock,thepriceofourClassAcommonstockcould decline. ThepriceofourClassAcommonstockcoulddeclineiftherearesubstantialsalesofourcommonstock,particularly salesbyourdirectors,executiveofficers,employees,andsignificantstockholders,orwhenthereisalargenumberofshares ofourcommonstockavailableforsale.Afterourinitialpublicoffering,wewillhaveoutstandingsharesofour ClassAcommonstockandsharesofourClassBcommonstock,basedonthenumberofsharesoutstandingasof March31,2012.Thisincludessharesthatweandthesellingstockholdersaresellinginourinitialpublicoffering, which shares may be resold in the public market immediately following our initial public offering, and assumes no additional exercises of outstanding options (other than the exercise of the option held by Mr. Zuckerberg described elsewhereinthisprospectus).Inaddition,weexpecttoissuesharesofourClassBcommonstockuponthenet settlementofRSUsapproximatelysixmonthsfollowingourinitialpublicoffering.SharesofourClassBcommonstockare convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our ClassAcommonstockupontransfer.ThesharesofourClassAcommonstockandsharesofourClassB commonstockthatarenotofferedandsoldinourinitialpublicofferingaswellasthesharesunderlyingoutstandingRSUs willbeeligibleforsaleinthepublicmarketinthenearfutureassetforthbelow. 29
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DateAvailableforSaleintoPublicMarket NumberofSharesofCommonStock
91daysafterthedateofthisprospectus Approximatelysixmonthsafterthedateofthisprospectus 181daysafterthedateofthisprospectus 211daysafterthedateofthisprospectus Oneyearafterthedateofthisprospectus 18monthsafterthedateofthisprospectus
sharesheldbythesellingstockholdersother thanMr.Zuckerberg approximatelysharesunderlyingnetsettled RSUs shares sharesheldbythesellingstockholders sharesheldbyMail.ruGroupLimitedandDST GlobalLimitedandtheirrespectiveaffiliates sharesheldbyMail.ruGroupLimitedandDST GlobalLimitedandtheirrespectiveaffiliates
Ofthe116,756,442sharesofourClassBcommonstockthatweresubjecttostockoptionsoutstanding(andnotheldby Mr.Zuckerberg)asofMarch31,2012,optionstopurchase104,184,511sharesofClassBcommonstockwerevestedasof March31,2012andtheClassBcommonstockunderlyingsuchoptionswillbeeligibleforsaleapproximatelysixmonths afterthedateofthisprospectus.WeexpectanadditionalsharesofClassBcommonstocktobedelivereduponthe netsettlementofRSUsbetweenthedatethatisapproximatelysixmonthsafterthedateofthisprospectusandDecember31, 2012,whichshareswouldbeeligibleforsaleinthepublicmarketimmediatelyfollowingsettlement. After our initial public offering, certain holders of our Class A common stock and Class B common stock will have rights,subjecttosomeconditions,torequireustofileregistrationstatementscoveringtheirsharesortoincludetheirshares inregistrationstatementsthatwemayfileforourselvesorourstockholders.Allofthesesharesaresubjecttomarketstandoff orlockupagreementsrestrictingtheirsaleforspecifiedperiodsoftimeafterthedateofthisprospectus.Wealsointendto registersharesofcommonstockthatwehaveissuedandmayissueunderouremployeeequityincentiveplans.Oncewe register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standofforlockupagreements. Morgan Stanley & Co. LLC may, in its sole discretion, permit our executive officers, our directors, and the selling stockholderstosellsharespriortotheexpirationoftherestrictiveprovisionscontainedinthelockupagreementswiththe underwriters. See Underwriting for a more complete description of the lockup agreements that we and our directors, executive officers, and selling stockholders have entered into with the underwriters. In addition, we may, in our sole discretion,permitouremployeesandcurrentstockholderswhoaresubjecttomarketstandoffagreementsorarrangements withusandwhoarenotsubjecttoalockupagreementwiththeunderwriterstosellsharespriortotheexpirationofthe restrictiveprovisionscontainedinthosemarketstandoffagreementsorarrangements. ThemarketpriceofthesharesofourClassAcommonstockcoulddeclineasaresultofthesaleofasubstantialnumber ofoursharesofcommonstockinthepublicmarketortheperceptioninthemarketthattheholdersofalargenumberof sharesintendtoselltheirshares. Inmakingyourinvestmentdecision,youshouldnotrelyoninformationinpublicmediathatispublishedbythirdparties. Youshouldrelyonlyonstatementsmadeinthisprospectusindeterminingwhethertopurchaseourshares. Youshouldcarefullyevaluatealloftheinformationinthisprospectus.Wehaveinthepastreceived,andmaycontinue toreceive,ahighdegreeofmediacoverage,includingcoveragethatisnotdirectlyattributabletostatementsmadebyour officersandemployees,thatincorrectlyreportsonstatementsmadebyourofficersoremployees,orthatismisleadingasa resultofomittinginformationprovidedbyus,ourofficers,oremployees.Youshouldrelyonlyontheinformationcontained inthisprospectusindeterminingwhethertopurchaseoursharesofClassAcommonstock. 30
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Table of Contents Wehavebroaddiscretionintheuseofthenetproceedsfromourinitialpublicofferingandmaynotusethemeffectively. Wecannotspecifywithanycertaintytheparticularusesofthenetproceedsthatwewillreceivefromourinitialpublic offering. Our management will have broad discretion in the application of the net proceeds, including working capital, possibleacquisitions,andothergeneralcorporatepurposes,andwemayspendorinvesttheseproceedsinawaywithwhich our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financialcondition.Pendingtheiruse,wemayinvestthenetproceedsfromourinitialpublicofferinginamannerthatdoes notproduceincomeorthatlosesvalue. If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price could decline. The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likelydecline. Wedonotintendtopaydividendsfortheforeseeablefuture. Wehaveneverdeclaredorpaidcashdividendsonourcapitalstock.Wecurrentlyintendtoretainanyfutureearningsto financetheoperationandexpansionofourbusiness,andwedonotexpecttodeclareorpayanydividendsintheforeseeable future.Asaresult,youmayonlyreceiveareturnonyourinvestmentinourClassAcommonstockifthemarketpriceofour ClassAcommonstockincreases.Inaddition,ourcreditfacilitiescontainrestrictionsonourabilitytopaydividends. Ifweareunabletoimplementandmaintaineffectiveinternalcontroloverfinancialreportinginthefuture,investorsmay loseconfidenceintheaccuracyandcompletenessofourfinancialreportsandthemarketpriceofourClassAcommon stockmaybenegativelyaffected. As a public company, we will be required to maintain internal controls over financial reporting and to report any materialweaknessesinsuchinternalcontrols.Inaddition,beginningwithour2013AnnualReportonForm10Ktobefiled in2014,wewillberequiredtofurnishareportbymanagementontheeffectivenessofourinternalcontroloverfinancial reportingpursuanttoSection404oftheSarbanesOxleyAct.Weareintheprocessofdesigning,implementing,andtesting the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly,andcomplicated.Ifweidentifymaterialweaknessesinourinternalcontroloverfinancialreporting,ifweareunable tocomplywiththerequirementsofSection404inatimelymannerorassertthatourinternalcontroloverfinancialreporting iseffective,orifourindependentregisteredpublicaccountingfirmisunabletoexpressanopinionastotheeffectivenessof ourinternalcontroloverfinancialreporting,investorsmayloseconfidenceintheaccuracyandcompletenessofourfinancial reportsandthemarketpriceofourClassAcommonstockcouldbenegativelyaffected,andwecouldbecomesubjectto investigationsbythestockexchangeonwhichoursecuritiesarelisted,theSecuritiesandExchangeCommission,orother regulatoryauthorities,whichcouldrequireadditionalfinancialandmanagementresources. Therequirementsofbeingapubliccompanymaystrainourresourcesanddivertmanagementsattention. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), the SarbanesOxley Act, the DoddFrank Act, the listing requirements of the NASDAQ Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, timeconsuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly,andcurrentreportswithrespecttoourbusinessandoperatingresults. 31
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Table of Contents Asaresultofdisclosureofinformationinthisprospectusandinfilingsrequiredofapubliccompany,ourbusinessand financialconditionwillbecomemorevisible,whichwebelievemayresultinthreatenedoractuallitigation,includingby competitorsandotherthirdparties.Ifsuchclaimsaresuccessful,ourbusinessandoperatingresultscouldbeharmed,and eveniftheclaimsdonotresultinlitigationorareresolvedinourfavor,theseclaims,andthetimeandresourcesnecessaryto resolvethem,coulddiverttheresourcesofourmanagementandharmourbusinessandoperatingresults. If you purchase shares of our Class A common stock in our initial public offering, you will experience substantial and immediatedilution. IfyoupurchasesharesofourClassAcommonstockinourinitialpublicoffering,youwillexperiencesubstantialand immediatedilutionintheproformanettangiblebookvaluepershareof$pershareasofMarch31,2012,basedonan assumedinitialpublicofferingpriceofourClassAcommonstockof$pershare,themidpointofthepricerangeonthe coverpageofthisprospectus,becausethepricethatyoupaywillbesubstantiallygreaterthantheproformanettangible bookvaluepershareoftheClassAcommonstockthatyouacquire.Thisdilutionisdueinlargeparttothefactthatour earlierinvestorspaidsubstantiallylessthantheinitialpublicofferingpricewhentheypurchasedtheirsharesofourcapital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentiveplans,uponvestingofRSUs,ifweissuerestrictedstocktoouremployeesunderourequityincentiveplans,orifwe otherwiseissueadditionalsharesofourcommonstock.Formoreinformation,seeDilution. Thedualclassstructureofourcommonstockandthevotingagreementsamongcertainstockholdershavetheeffectof concentratingvotingcontrolwithourCEO,andalsowithemployeesanddirectorsandtheiraffiliatesthiswilllimitor precludeyourabilitytoinfluencecorporatematters. OurClassBcommonstockhastenvotespershare,andourClassAcommonstock,whichisthestockweareofferingin ourinitialpublicoffering,hasonevotepershare.StockholderswhoholdsharesofClassBcommonstock,includingour executiveofficers,employees,anddirectorsandtheiraffiliates,willtogetherholdapproximately%ofthevotingpowerof our outstanding capital stock following our initial public offering. Because of the tentoone voting ratio between our ClassBandClassAcommonstock,theholdersofourClassBcommonstockcollectivelywillcontinuetocontrolamajority ofthecombinedvotingpowerofourcommonstockandthereforebeabletocontrolallmatterssubmittedtoourstockholders forapprovalsolongasthesharesofClassBcommonstockrepresentatleast9.1%ofalloutstandingsharesofourClassA andClassBcommonstock.Thisconcentratedcontrolwilllimitorprecludeyourabilitytoinfluencecorporatemattersfor theforeseeablefuture. FuturetransfersbyholdersofClassBcommonstockwillgenerallyresultinthosesharesconvertingtoClassAcommon stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Mr.ZuckerbergretainsasignificantportionofhisholdingsofClassBcommonstockforanextendedperiodoftime,he could,inthefuture,continuetocontrolamajorityofthecombinedvotingpowerofourClassAcommonstockandClassB commonstock.Foradescriptionofthedualclassstructure,seeDescriptionofCapitalStockAntiTakeoverProvisions. We have elected to take advantage of the controlled company exemption to the corporate governance rules for NASDAQlisted companies, which could make our Class A common stock less attractive to some investors or otherwise harmourstockprice. BecausewequalifyasacontrolledcompanyunderthecorporategovernancerulesforNASDAQlistedcompanies,we arenotrequiredtohaveamajorityofourboardofdirectorsbeindependent,norarewerequiredtohaveacompensation committeeoranindependentnominatingfunction.Inlightofourstatusasacontrolledcompany,ourboardofdirectorshas determinednottohaveanindependentnominatingfunctionandhaschosen 32
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Table of Contents tohavethefullboardofdirectorsbedirectlyresponsiblefornominatingmembersofourboard,andinthefuturewecould electnottohaveamajorityofourboardofdirectorsbeindependentornottohaveacompensationcommittee.Accordingly, shouldtheinterestsofourcontrollingstockholderdifferfromthoseofotherstockholders,theotherstockholdersmaynot havethesameprotectionsaffordedtostockholdersofcompaniesthataresubjecttoallofthecorporategovernancerulesfor NASDAQlisted companies. Our status as a controlled company could make our Class A common stock less attractive to someinvestorsorotherwiseharmourstockprice. Delawarelawandprovisionsinourrestatedcertificateofincorporationandbylawsthatwillbeineffectattheclosingof our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading priceofourClassAcommonstock. Following the closing of our initial public offering, our status as a Delaware corporation and the antitakeover provisionsoftheDelawareGeneralCorporationLawmaydiscourage,delay,orpreventachangeincontrolbyprohibitingus fromengaginginabusinesscombinationwithaninterestedstockholderforaperiodofthreeyearsafterthepersonbecomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restatedcertificateofincorporationandbylawsthatwillbeineffectattheclosingofourinitialpublicofferingwillcontain provisionsthatmaymaketheacquisitionofourcompanymoredifficult,includingthefollowing: untilthefirstdateonwhichtheoutstandingsharesofourClassBcommonstockrepresentlessthan35%ofthe combined voting power of our common stock, any transaction that would result in a change in control of our companywillrequiretheapprovalofamajorityofouroutstandingClassBcommonstockvotingasaseparate class we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcomeofmattersrequiringstockholderapproval,evenifheownssignificantlylessthanamajorityoftheshares ofouroutstandingClassAandClassBcommonstock whentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvoting powerofcommonstock,certainamendmentstoourrestatedcertificateofincorporationorbylawswillrequirethe approvaloftwothirdsofthecombinedvoteofourthenoutstandingsharesofClassAandClassBcommonstock whentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvoting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directorsandnotbystockholders whentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvoting powerofourcommonstock,ourboardofdirectorswillbeclassifiedintothreeclassesofdirectorswithstaggered threeyeartermsanddirectorswillonlybeabletoberemovedfromofficeforcause whentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvoting powerofourcommonstock,ourstockholderswillonlybeabletotakeactionatameetingofstockholdersandnot bywrittenconsent only our chairman, our chief executive officer, our president, or a majority of our board of directors will be authorizedtocallaspecialmeetingofstockholders advancenoticeprocedureswillapplyforstockholderstonominatecandidatesforelectionasdirectorsortobring mattersbeforeanannualmeetingofstockholders our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established,andsharesofwhichmaybeissued,withoutstockholderapprovaland certainlitigationagainstuscanonlybebroughtinDelaware.
Forinformationregardingtheseandotherprovisions,seeDescriptionofCapitalStockAntiTakeoverProvisions. 33
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Table of Contents SPECIALNOTEREGARDINGFORWARDLOOKINGSTATEMENTS Thisprospectuscontainsforwardlookingstatements.Allstatementscontainedinthisprospectusotherthanstatements ofhistoricalfact,includingstatementsregardingourfutureresultsofoperationsandfinancialposition,ourbusinessstrategy and plans, and our objectives for future operations, are forwardlooking statements. The words believe, may, will, estimate, continue, anticipate, intend, expect, and similar expressions are intended to identify forwardlooking statements.Wehavebasedtheseforwardlookingstatementslargelyonourcurrentexpectationsandprojectionsaboutfuture eventsandtrendsthatwebelievemayaffectourfinancialcondition,resultsofoperations,businessstrategy,shorttermand longtermbusinessoperationsandobjectives,andfinancialneeds.Theseforwardlookingstatementsaresubjecttoanumber ofrisks,uncertaintiesandassumptions,includingthosedescribedintheRiskFactorssection.Moreover,weoperateina very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our managementtopredictallrisks,norcanweassesstheimpactofallfactorsonourbusinessortheextenttowhichanyfactor, or combination of factors, may cause actual results to differ materially from those contained in any forwardlooking statementswemaymake.Inlightoftheserisks,uncertaintiesandassumptions,thefutureeventsandtrendsdiscussedinthis prospectusmaynotoccurandactualresultscoulddiffermateriallyandadverselyfromthoseanticipatedorimpliedinthe forwardlookingstatements. You should not rely upon forwardlooking statements as predictions of future events. The events and circumstances reflected in the forwardlooking statements may not be achieved or occur. Although we believe that the expectations reflectedintheforwardlookingstatementsarereasonable,wecannotguaranteefutureresults,levelsofactivity,performance, orachievements.Weareundernodutytoupdateanyoftheseforwardlookingstatementsafterthedateofthisprospectusor toconformthesestatementstoactualresultsorrevisedexpectations. 34
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Table of Contents INDUSTRYDATAANDUSERMETRICS This prospectus contains estimates and information concerning our industry, including market position, market size, andgrowthratesofthemarketsinwhichweparticipate,thatarebasedonindustrypublicationsandreports.Thisinformation involvesanumberofassumptionsandlimitations,andyouarecautionednottogiveundueweighttotheseestimates.We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, includingthosedescribedintheRiskFactorssection.Theseandotherfactorscouldcauseresultstodiffermateriallyfrom thoseexpressedinthesepublicationsandreports. The numbers of monthly active users (MAUs) and daily active users (DAUs) and average revenue per user (ARPU) presented in this prospectus are based on internal company data and we use certain of these numbers in managing our business.Thesenumbersarebasedonwhatwebelievetobereasonableestimatesofouruserbasefortheapplicableperiodof measurement,andwetakestepstoimprovetheiraccuracy,suchaseliminatingknownfalseorduplicateaccounts.Thereare inherent challenges in measuring usage across large online and mobile populations around the world. For example, there maybeindividualswhohavemultipleFacebookaccountsinviolationofourtermsofservice,despiteoureffortstodetect andsuppresssuchbehavior.Weestimatethatfalseorduplicateaccountsmayhaverepresentedapproximately56%ofour MAUsasofDecember31,2011.However,thisestimateisbasedonaninternalreviewofalimitedsampleofaccountsandwe applysignificantjudgmentinmakingthisdetermination,suchasidentifyingnamesthatappeartobefakeorotherbehavior thatappearsinauthentictothereviewers.Assuch,ourestimationoffalseorduplicateaccountsmaynotaccuratelyrepresent the actual number of such accounts. Our metrics are also affected by applications on certain mobile devices that automaticallycontactourserversforregularupdateswithnouseractioninvolved,andthisactivitycancauseoursystemto counttheuserassociatedwithsuchadeviceasanactiveuseronthedaysuchcontactoccurs.Forexample,weestimatethat less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobileMAUs.Assuch,thecalculationsofDAUsasapercentageofMAUspresentedinthisprospectusmaybeaffectedby this activity. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in differentregionsoftheworld.Inaddition,ourdataregardingthegeographiclocationofourusersisestimatedbasedona numberoffactors,suchastheusersIPaddressandselfdisclosedlocation.Thesefactorsmaynotalwaysaccuratelyreflect theusersactuallocation.Forexample,amobileonlyusermayappeartobeaccessingFacebookfromthelocationofthe proxyserverthattheuserconnectstoratherthanfromtheusersactuallocation.Inaddition,ourestimatesforrevenueby user location are also affected by these factors. We regularly review and may adjust our processes for calculating these metricstoimprovetheiraccuracy.Inaddition,ourMAUandDAUestimateswilldifferfromestimatespublishedbythird partiesduetodifferencesinmethodology.Forexample,somethirdpartiesdonotcountmobileusers. 35
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Table of Contents USEOFPROCEEDS WeestimatethatournetproceedsfromthesaleoftheClassAcommonstockthatweareofferingwillbeapproximately $billion,orapproximately$billioniftheunderwritersexerciseinfulltheirrighttopurchaseadditionalsharesto coveroverallotments,assuminganinitialpublicofferingpriceof$pershare,whichisthemidpointofthepricerange onthecoverpageofthisprospectus,andafterdeductingestimatedunderwritingdiscountsandcommissionsandestimated offeringexpensespayablebyus.A$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$pershare wouldincrease(decrease)thenetproceedstousfromourinitialpublicofferingby$million,assumingthenumberof shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwritingdiscountsandcommissions. TheprincipalpurposesofourinitialpublicofferingaretocreateapublicmarketforourClassAcommonstockand therebyenablefutureaccesstothepublicequitymarketsbyusandouremployees,obtainadditionalcapital,andfacilitate anorderlydistributionofsharesforthesellingstockholders.Weintendtousethenetproceedstousfromourinitialpublic offeringforworkingcapitalandothergeneralcorporatepurposeshowever,wedonotcurrentlyhaveanyspecificusesofthe netproceedsplanned.Wemayuseaportionofthenetproceedstoustosatisfyaportionoftheanticipatedtaxwithholding andremittanceobligationsrelatedtotheinitialsettlementofouroutstandingRSUs,whichwillbecomedueapproximately sixmonthsfollowingthecompletionofourinitialpublicoffering.Additionally,wemayuseaportionoftheproceedstous foracquisitionsofcomplementarybusinesses,technologies,orotherassets.However,wehavenocommitmentstousethe proceedsfromthisofferingforanysuchacquisitionsorinvestmentsatthistime. Pending other uses, we intend to invest the proceeds to us in investmentgrade, interestbearing securities such as moneymarketfunds,certificatesofdeposit,ordirectorguaranteedobligationsoftheU.S.government,orholdascash.We cannotpredictwhethertheproceedsinvestedwillyieldafavorablereturn.Ourmanagementwillhavebroaddiscretioninthe applicationofthenetproceedswereceivefromourinitialpublicoffering,andinvestorswillberelyingonthejudgmentof ourmanagementregardingtheapplicationofthenetproceeds. WewillnotreceiveanyproceedsfromthesaleofsharesofClassAcommonstockbythesellingstockholders.Mark Zuckerberg,ourfounder,Chairman,andCEO,willofferandsellsharesinourinitialpublicoffering.Weexpectthat substantiallyallofthenetproceedsMr.Zuckerbergwillreceiveuponsuchsalewillbeusedtosatisfytaxesthathewillincur uponhisexerciseofanoutstandingstockoptiontopurchase120,000,000sharesofourClassBcommonstock. DIVIDENDPOLICY Wehaveneverdeclaredorpaidcashdividendsonourcapitalstock.Wecurrentlyintendtoretainanyfutureearnings foruseintheoperationofourbusinessanddonotintendtodeclareorpayanycashdividendsintheforeseeablefuture.Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. In addition, the terms of our credit facilities containrestrictionsonourabilitytopaydividends. 36
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Table of Contents CAPITALIZATION Thefollowingtablesetsforthourcash,cashequivalents,andmarketablesecuritiesandcapitalizationasofMarch31, 2012: onanactualbasis on a pro forma basis to give effect to (i) the automatic conversion of all of our outstanding shares convertible preferredstockintoClassBcommonstock,(ii)theamendmentandrestatementofourcertificateofincorporation inconnectionwithourinitialpublicoffering,and(iii)asharebasedcompensationexpenseofapproximately$640 million,netofincometaxes,associatedwithrestrictedstockunits(RSUs)grantedpriortoJanuary1,2011(Pre 2011RSUs)forwhichtheserviceconditionwassatisfiedasofMarch31,2012,andwhichweexpecttorecord uponcompletionofourinitialpublicoffering,asdescribedinfootnote(1)belowand onaproformaasadjustedbasistogivefurthereffectto(i)theissuanceandsalebyusofsharesofClassA commonstockinourinitialpublicoffering,andthereceiptofthenetproceedsfromoursaleofthesesharesatan assumedinitialpublicofferingpriceoftheClassAcommonstockof$pershare,themidpointoftheprice rangeonthecoverpageofthisprospectus,afterdeductingestimatedunderwritingdiscountsandcommissionsand estimatedofferingexpensespayablebyus,(ii)theexercisebyMarkZuckerberg,ourfounder,Chairman,andCEO, ofanoutstandingstockoptiontopurchase120,000,000sharesofourClassBcommonstock,(iii)theautomatic conversionofsharesofourClassBcommonstockheldbythesellingstockholdersintoanequivalent numberofsharesofourClassAcommonstockupontheirsalebythesellingstockholdersinourinitialpublic offering,and(iv)theconversionbycertainofourexistingstockholdersofanaggregateofsharesofour ClassBcommonstockintoanequivalentnumberofsharesofourClassAcommonstockinconnectionwithour initialpublicoffering.
The pro forma and pro forma as adjusted information below is illustrative only, and cash, cash equivalents, and marketable securities, additional paidin capital, retained earnings, total stockholders equity, and total capitalization followingthecompletionofourinitialpublicofferingwillbeadjustedbasedontheactualinitialpublicofferingpriceand othertermsofourinitialpublicofferingdeterminedatpricing.Youshouldreadthistableinconjunctionwiththesections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and Description of CapitalStockandourconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus. 37
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AsofMarch31,2012 ProForma Actual ProForma(1) AsAdjusted (2)(3) (inmillions,exceptshareandpersharedata)
Cash,cashequivalents,andmarketablesecurities Stockholdersequity: Convertiblepreferredstock,$0.000006parvalue 569,001,400sharesauthorized,543,216,895sharesissued andoutstandingactualnosharesauthorized,issuedand outstanding,proformaandproformaasadjusted Preferredstock,$0.000006parvaluenosharesauthorized, issuedandoutstanding,actual100,000,000shares authorized,nosharesissuedandoutstanding,proformaand proformaasadjusted ClassAcommonstock,$0.000006parvalue4,141,000,000 sharesauthorized,117,549,393sharesissuedand outstanding,actual5,000,000,000sharesauthorized, 117,549,393sharesissuedandoutstanding,proforma 5,000,000,000sharesauthorized,sharesissuedand outstanding,proformaasadjusted ClassBcommonstock,$0.000006parvalue4,141,000,000 sharesauthorized,1,235,134,201sharesissuedand outstanding,actual4,141,000,000sharesauthorized, 1,780,535,644sharesissuedandoutstanding,proforma 4,141,000,000sharesauthorized,sharesissuedand outstanding,proformaasadjusted Additionalpaidincapital Accumulatedothercomprehensiveloss Retainedearnings Totalstockholdersequity Totalcapitalization
$3,910
3,910
$ 615
2,853 (7) 1,811 5,272 $5,272
4,433 (7) 1,171 5,597 5,597
(1) The pro forma data as of March 31, 2012 presents our cash, cash equivalents, and marketable securities, total stockholders equity, and total capitalization, and giveseffecttoasharebasedcompensationexpenseofapproximately$965millionassociatedwithPre2011RSUs,forwhichtheserviceconditionwascompleted as of March 31, 2012 and which we expect to record upon completion of our initial public offering, as further described in Managements Discussion and AnalysisofFinancialConditionandResultsofOperationsCriticalAccountingPoliciesandEstimatesSharebasedCompensation.Theproformaadjustment related to sharebased compensation expense of approximately $965 million has been reflected as an increase to additional paidin capital and the associated tax effect of $325 million has been netted against this charge, resulting in a net reduction of $640 million to retained earnings. The income tax effects have been reflectedasanincreasetodeferredtaxassetsincludedinprepaidexpensesandothercurrentassets,toreflecttheanticipatedfuturetaxbenefitsuponsettlementof these RSUs. We estimate that approximately shares underlying Pre2011 RSUs as of March 31, 2012 will vest and settle approximately six months followingourinitialpublicoffering.Theseshareshavenotbeenincludedinourproformaorproformaasadjustedsharesoutstanding. (2) A$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$persharewouldincrease(decrease)eachofcash,cashequivalents,andmarketable securities,additionalpaidincapital,totalstockholdersequity,andtotalcapitalizationby$million,assumingthatthenumberofsharesofferedbyus,as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. If the underwriters option to purchase additional shares to cover overallotments is exercised in full, the pro forma as adjusted amount of each of cash, cash equivalents, and marketable securities, additional paidin capital, total stockholders equity, and total capitalization would increase by approximately $ million, after deducting estimated underwriting discounts and commissions, and we would have shares of our Class A common stock and shares of our ClassBcommonstockissuedandoutstanding,proformaasadjusted. (3) Theproformaasadjustedinformationdiscussedaboveisillustrativeonlyandwillbeadjustedbasedontheactualinitialpublicofferingpriceandothertermsof ourinitialpublicofferingdeterminedatpricing.
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Table of Contents Thetableaboveexcludesthefollowingshares: 116,756,442sharesofClassBcommonstockissuableupontheexerciseofoptionsoutstandingasofMarch31, 2012underour2005StockPlan,withaweightedaverageexercisepriceofapproximately$0.94pershare 378,429,048sharesofClassBcommonstocksubjecttoRSUsoutstandingasofMarch31,2012underour2005 StockPlan 40,000sharesofClassAcommonstockissuedbetweenApril1,2012andApril20,2012and 77,466,293 shares of our common stock reserved for future issuance under our equity compensation plans, consistingof25,000,000sharesofClassAcommonstockreservedforissuanceunderour2012EquityIncentive Plan,and52,466,293sharesofClassBcommonstockreservedasofMarch31,2012forissuanceunderour2005 StockPlan.Onthedateofthisprospectus,anyremainingsharesavailableforissuanceunderour2005StockPlan willbeaddedtothesharesreservedunderour2012EquityIncentivePlanandwewillceasegrantingawardsunder the2005StockPlan.Our2012EquityIncentivePlanalsoprovidesforautomaticannualincreasesinthenumberof sharesreservedthereunder,asmorefullydescribedinExecutiveCompensationEmployeeBenefitPlans. 39
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Table of Contents DILUTION If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initialpublicofferingpricepershareofourClassAcommonstockandtheproformaasadjustednettangiblebookvalueper shareofourClassAcommonstockimmediatelyafterourinitialpublicoffering. OurproformanettangiblebookvalueasofMarch31,2012was$billion,or$pershareofcommonstock.Our proformanettangiblebookvaluepersharerepresentstheamountofourtotaltangibleassetsreducedbytheamountofour total liabilities and divided by the total number of shares of our common stock outstanding as of March 31, 2012, after givingeffecttotheautomaticconversionofalloutstandingsharesofourconvertiblepreferredstockintoClassBcommon stockinconnectionwithourinitialpublicoffering. Aftergivingeffectto(1)oursaleinourinitialpublicofferingofsharesofClassAcommonstockatanassumed initialpublicofferingpriceoftheClassAcommonstockof$pershare,themidpointofthepricerangeonthecover pageofthisprospectus,afterdeductingestimatedunderwritingdiscountsandcommissionsandestimatedofferingexpenses payablebyusand(2)theexercisebyMarkZuckerberg,ourfounder,Chairman,andCEO,ofanoutstandingstockoptionto purchase 120,000,000 shares of our Class B common stock, our pro forma as adjusted net tangible book value as of March31,2012wouldhavebeenapproximately$billion,or$pershareofcommonstock.Thisrepresentsan immediateincreaseinproformaasadjustednettangiblebookvalueof$persharetoourexistingstockholdersandan immediatedilutionof$persharetoinvestorspurchasingsharesinourinitialpublicoffering. Thefollowingtableillustratesthispersharedilution. Assumedinitialofferingpricepershare ProformanettangiblebookvaluepershareasofMarch31,2012 Increaseinproformanettangiblebookvaluepershareattributabletoinvestorspurchasing sharesinourinitialpublicoffering Proformaasadjustednettangiblebookvaluepershareafterourinitialpublicoffering Dilutioninproformanettangiblebookvaluepersharetoinvestorsinthisoffering $ $
A$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$persharewouldincrease(decrease)our proformaasadjustednettangiblebookvaluepershareafterourinitialpublicofferingby$,assumingthatthenumber ofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,andafterdeductingtheestimated underwritingdiscountsandcommissionspayablebyus. Iftheunderwritersoptiontopurchaseadditionalsharestocoveroverallotmentsisexercisedinfull,theproformanet tangiblebookvaluepershareaftergivingeffecttoourinitialpublicofferingwouldbeapproximately$pershare,and thedilutioninproformanettangiblebookvaluepersharetoinvestorsinourinitialpublicofferingwouldbeapproximately $pershare. 40
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Table of Contents Thefollowingtablesummarizes,asofMarch31,2012,thedifferencesbetweenthenumberofsharesofourcommon stockpurchasedfromus,aftergivingeffecttotheconversionofourconvertiblepreferredstockintoClassBcommonstock, thetotalcashconsiderationpaid,andtheaveragepricepersharepaidbyourexistingstockholdersandbyournewinvestors purchasingsharesinourinitialpublicofferingattheassumedinitialpublicofferingpriceoftheClassAcommonstockof $ per share, the midpoint of the price range on the cover page of this prospectus, before deducting estimated underwritingdiscountsandcommissionsandestimatedofferingexpensespayablebyus:
SharesPurchased Number Percent TotalConsideration Amount Percent Average PricePer Share
Existingstockholders Newinvestors Total
% $
100%
100%
A$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$persharewouldincrease(decrease)total considerationpaidbynewinvestorsby$million,assumingthatthenumberofsharesofferedbyus,assetforthonthe cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payablebyus. Sales of shares of Class A common stock by the selling stockholders in our initial public offering will reduce the numberofsharesofcommonstockheldbyexistingstockholdersto,orapproximately%ofthetotalsharesof commonstockoutstandingafterourinitialpublicoffering,andwillincreasethenumberofsharesheldbynewinvestorsto ,orapproximately%ofthetotalsharesofcommonstockoutstandingafterourinitialpublicoffering. If the underwriters option to purchase additional shares to cover overallotments is exercised in full, our existing stockholderswouldown%andournewinvestorswouldown%ofthetotalnumberofsharesofourcommonstock outstandingafterourinitialpublicoffering. The above table and discussion are based on 117,549,393 shares of our Class A common stock and 1,780,535,644 shares of our Class B common stock outstanding as of March 31, 2012, as well as the exercise by Mark Zuckerberg, our founder,Chairman,andCEO,ofanoutstandingstockoptiontopurchase120,000,000sharesofourClassBcommonstock, andexclude: 116,756,442sharesofClassBcommonstockissuableupontheexerciseofoptionsoutstandingasofMarch31, 2012underour2005StockPlan,withaweightedaverageexercisepriceofapproximately$0.94pershare 378,429,048sharesofClassBcommonstocksubjecttoRSUsoutstandingasofMarch31,2012underour2005 StockPlan 40,000sharesofClassAcommonstockissuedbetweenApril1,2012andApril20,2012and 77,466,293 shares of our common stock reserved for future issuance under our equity compensation plans, consistingof25,000,000sharesofClassAcommonstockreservedforissuanceunderour2012EquityIncentive Plan,and52,466,293sharesofClassBcommonstockreservedasofMarch31,2012forissuanceunderour2005 StockPlan.Onthedateofthisprospectus,anyremainingsharesavailableforissuanceunderour2005StockPlan willbeaddedtothesharesreservedunderour2012EquityIncentivePlanandwewillceasegrantingawardsunder the2005StockPlan.Our2012EquityIncentivePlanalsoprovidesforautomaticannualincreasesinthenumberof sharesreservedthereunder,asmorefullydescribedinExecutiveCompensationEmployeeBenefitPlans.
To the extent that any outstanding options are exercised or RSUs are settled, there will be further dilution to new investors. 41
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Table of Contents SELECTEDCONSOLIDATEDFINANCIALDATA TheconsolidatedstatementsofincomedataforeachoftheyearsendedDecember31,2009,2010,and2011andthe consolidated balance sheets data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statementsthatareincludedelsewhereinthisprospectus.Theconsolidatedstatementsofoperationsdatafortheyearsended December31,2007and2008andtheconsolidatedbalancesheetsdataasofDecember31,2007,2008,and2009arederived from audited consolidated financial statements that are not included in this prospectus. The consolidated statements of incomedataforthethreemonthsendedMarch31,2011and2012,andtheconsolidatedbalancesheetdataasofMarch31, 2012havebeenderivedfromourunauditedconsolidatedfinancialstatementsappearingelsewhereinthisprospectus.Inour opinion,suchfinancialstatementsincludealladjustments,consistingonlyofnormalrecurringadjustments,thatweconsider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarilyindicativeofourresultsinanyfutureperiod. YoushouldreadthisinformationtogetherwithManagementsDiscussionandAnalysisofFinancialConditionand ResultsofOperationsandourconsolidatedfinancialstatementsandtherelatednotesincludedelsewhereinthisprospectus.
YearEndedDecember31, 2008 2009 2010 2011 (inmillions,exceptpersharedata) ThreeMonths EndedMarch31, 2011 2012
2007
ConsolidatedStatementsofOperationsData: Revenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Income(loss)fromoperations Interestandotherincome(expense),net Income(loss)beforeprovisionforincometaxes Provisionforincometaxes Netincome(loss) Netincome(loss)attributabletoClassAandClassB commonstockholders Earnings(loss)pershareattributabletoClassAand ClassBcommonstockholders(2): Basic Diluted ProformaearningspershareattributabletoClassAand ClassBcommonstockholders(2): Basic Diluted
$ 153 $ 272 $ 777 $1,974 $3,711 $ 731 $1,058 41 32 81 123 277 (124) (11) (135) 3 $ (138) $ 124 76 47 80 327 (55) (1) (56) (56) 223 115 87 90 515 262 (8) 254 25 $ 229 493 184 144 121 942 1,032 (24) 1,008 402 $ 606 860 427 388 280 1,955 1,756 (61) 1,695 695 $1,000 167 68 57 51 343 388 10 398 165 $ 233 $ 277 159 153 88 677 381 1 382 177 205
$ (138) $ (56) $ 122 $ 372 $ 668 $ 153 $ 137
$(0.16) $(0.06) $0.12 $ 0.34 $ 0.52 $0.12 $ 0.10 $(0.16) $(0.06) $0.10 $ 0.28 $ 0.46 $0.11 $ 0.09
$ 0.49 $ 0.43 42
$ 0.10 $ 0.09
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(1) Costsandexpensesincludesharebasedcompensationexpenseasfollows: YearEndedDecember31, 2008 2009 2010 (inmillions) $ $ $ 4 2 2 7 6 9 19 19 9 $ 30 $ 27 $ 20 ThreeMonths EndedMarch31, 2011 2012 $ $ 4 3 7 $ $ 4 23 60 16 103
2007 Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebasedcompensationexpense $ $ 1 3 56 13 73
2011 $ $ 9 43 114 51 217
(2) See note 2 of the notes to our consolidated financial statements for a description of how we compute basic and diluted earnings (loss) per share attributable to ClassAandClassBcommonstockholdersandproformabasicanddilutedearningspershareattributabletoClassAandClassBcommonstockholders. AsofDecember31, 2007 2008 2009 2010 (inmillions) 2011 Asof March 31, 2012
ConsolidatedBalanceSheetsData: Cash,cashequivalents,andmarketablesecurities Workingcapital Propertyandequipment,net Totalassets Totalliabilities Totalstockholdersequity FreeCashFlow
$ 305 250 82 448 174 273
$ 297 279 131 505 170 335
$ 633 703 148 1,109 241 868
$1,785 1,857 574 2,990 828 2,162
$3,908 3,705 1,475 6,331 1,432 4,899
$3,910 3,655 1,855 6,859 1,587 5,272
In addition to other financial measures presented in accordance with U.S. generally accepted accounting principles (GAAP),wemonitorfreecashflow(FCF)asanonGAAPmeasuretomanageourbusiness,makeplanningdecisions,evaluate ourperformance,andallocateresources.WedefineFCFasnetcashprovidedbyoperatingactivitiesreducedbypurchasesof propertyandequipmentandpropertyandequipmentacquiredundercapitalleases. WebelievethatFCFisoneofthekeyfinancialindicatorsofourbusinessperformanceoverthelongtermandprovides usefulinformationregardingwhethercashprovidedbyoperatingactivitiesissufficienttofundtheongoingpropertyand equipmentinvestmentsrequiredtomaintainandgrowourbusiness.Wehavechosentosubtractbothpurchasesofproperty andequipmentandpropertyandequipmentacquiredundercapitalleasesinourcalculationofFCFbecausewebelievethat thesetwoitemscollectivelyrepresenttheamountofpropertyandequipmentweneedtoprocuretosupportourbusiness, regardlessofwhetherwefinancesuchpropertyorequipmentwithacapitallease.Themarketforfinancingserversandother technicalequipmentisdynamicandweexpectouruseofcapitalleasescouldvarysignificantlyfromyeartoyear. We have chosen our definition for FCF because we believe that this methodology can provide useful supplemental informationtohelpinvestorsbetterunderstandunderlyingtrendsinourbusiness.WepresentFCFinthisdocumentinthe samemanneritissharedwithourseniormanagementandboardofdirectors. FCFhaslimitationsasananalyticaltool,andyoushouldnotconsideritinisolationorasasubstituteforanalysisof otherGAAPfinancialmeasures,suchasnetcashprovidedbyoperatingactivities.SomeofthelimitationsofFCFare: FCFdoesnotreflectourfuturecontractualcommitmentsand othercompaniesinourindustrypresentsimilarlytitledmeasuresdifferentlythanwedo,limitingtheirusefulnessas comparativemeasures. 43
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Table of Contents Management compensates for the inherent limitations associated with using the FCF measure through disclosure of suchlimitations,presentationofourfinancialstatementsinaccordancewithGAAP,andreconciliationofFCFtothemost directlycomparableGAAPmeasure,netcashprovidedbyoperatingactivities,aspresentedbelow. The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
YearEndedDecember31, 2008 2009 2010 2011 (inmillions) ThreeMonths EndedMarch31, 2011 2012
2007
Netcashprovidedbyoperatingactivities Purchasesofpropertyandequipment Propertyandequipmentacquiredundercapitalleases Freecashflow
$ 11 (55) (11) $ (55) 44
$ 8 (70) (26) $ (88)
$ 155 (33) (56) $ 66
$ 698 (293) (217) $ 188
$1,549 (606) (473) $ 470
$ 345 $ 441 (153) (453) (211) (38) $ (19) $ (50)
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Table of Contents MANAGEMENTSDISCUSSIONANDANALYSISOFFINANCIAL CONDITIONANDRESULTSOFOPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historicalconsolidatedfinancialinformation,thefollowingdiscussioncontainsforwardlookingstatementsthatreflectour plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forwardlooking statements.Factorsthatcouldcauseorcontributetothesedifferencesincludethosediscussedbelowandelsewhereinthis prospectus,particularlyinRiskFactors.Foradiscussionoflimitationsinthemeasurementofcertainofourusermetrics, seethesectionentitledIndustryDataandUserMetrics. Overview Ourmissionistomaketheworldmoreopenandconnected.Facebookenablesyoutoexpressyourselfandconnectwith theworldaroundyouinstantlyandfreely. Webuildproductsthatsupportourmissionbycreatingutilityforusers,developers,andadvertisers: Users.WeenablepeoplewhouseFacebooktostayconnectedwiththeirfriendsandfamily,todiscoverwhatisgoing onintheworldaroundthem,andtoshareandexpresswhatmatterstothemtothepeopletheycareabout. Developers.WeenabledeveloperstousetheFacebookPlatformtobuildapplications(apps)andwebsitesthatintegrate withFacebooktoreachourglobalnetworkofusersandtobuildproductsthataremorepersonalized,social,andengaging. Advertisers.Weenableadvertiserstoengagewithmorethan900millionmonthlyactiveusers(MAUs)onFacebookor subsetsofourusersbasedoninformationtheyhavechosentosharewithussuchastheirage,location,gender,orinterests. Weofferadvertisersauniquecombinationofreach,relevance,socialcontext,andengagementtoenhancethevalueoftheir ads. WegeneratesubstantiallyallofourrevenuefromadvertisingandfromfeesassociatedwithourPaymentsinfrastructure that enables users to purchase virtual and digital goods from our Platform developers. In 2011, we recorded revenue of $3,711 million, operating income of $1,756 million, and net income of $1,000 million. In the first quarter of 2012, we recorded revenue of $1,058 million, operating income of $381 million, and net income of $205 million. We were incorporatedinJuly2004andareheadquarteredinMenloPark,California. Highlightsinourhistoryaredepictedinthegraphiconthenextpage. 45
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Table of Contents OurHistory
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Table of Contents TrendsinOurUserMetrics MonthlyActiveUsers(MAUs).WedefineamonthlyactiveuserasaregisteredFacebookuserwhologgedinand visitedFacebookthroughourwebsiteoramobiledevice,ortookanactiontosharecontentoractivitywithhisor herFacebookfriendsorconnectionsviaathirdpartywebsitethatisintegratedwithFacebook,inthelast30days asofthedateofmeasurement.MAUsareameasureofthesizeofourglobalactiveusercommunity,whichhas grownsubstantiallyinthepastseveralyears.
Note:ForpurposesofreportingMAUs,DAUs,andARPUbygeographicregion,EuropeincludesallusersinRussiaandTurkey,Asiaincludesallusers inAustraliaandNewZealand,andRestofWorldincludesAfrica,LatinAmerica,andtheMiddleEast.
As of March 31, 2012, we had 901 million MAUs, an increase of 33% from March 31, 2011. We experienced growthacrossdifferentgeographies,withusersinBrazil,India,andtheUnitedStatesrepresentingkeysourcesof growth.Wehad45millionMAUsinBrazilasofMarch31,2012,anincreaseof180%fromthesameperiodinthe prioryear,andwehad51millionMAUsinIndiaasofMarch31,2012,anincreaseof107%fromthesameperiod intheprioryear.Additionally,wehad169millionMAUsintheUnitedStatesasofMarch31,2012,anincreaseof 15%fromthesameperiodintheprioryear. TherearemorethantwobillionglobalInternetusers,accordingtoanIDCreportdatedAugust2011,andweaimto connect all of them. We have achieved varying levels of penetration within the population of Internet users in differentcountries.Forexample,asofDecember31,2011,incountriessuchasChile,Turkey,andVenezuelawe estimatethatwehadpenetrationratesofgreaterthan85% 47
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Table of Contents ofInternetusersincountriessuchasIndia,theUnitedKingdomandtheUnitedStatesweestimatethatwehad penetration rates of approximately 60% in countries such as Brazil and Germany we estimate that we had penetrationratesofapproximately3040%incountriessuchasJapan,Russia,andSouthKoreaweestimatethat we had penetration rates of 20% or lower and in China, where Facebook access is restricted, we have near 0% penetration.Wecontinuetoinvestingrowingouruserbase,particularlyinmarketswherewearerelativelyless penetrated.WeexpectMAUgrowthwillbenefitfromincreasesinworldwideInternetusers,inparticularasaresult of increasing broadband penetration and usage of mobile devices in developing markets. Growth in MAUs dependsonourabilitytoretainourcurrentusers,reengagewithinactiveusers,andaddnewusers,includingby extendingourreachacrossmobileplatforms. DailyActiveUsers(DAUs).WedefineadailyactiveuserasaregisteredFacebookuserwhologgedinandvisited Facebookthroughourwebsiteoramobiledevice,ortookanactiontosharecontentoractivitywithhisorher FacebookfriendsorconnectionsviaathirdpartywebsitethatisintegratedwithFacebook,onagivenday.We viewDAUs,andDAUsasapercentageofMAUs,asmeasuresofuserengagement.
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Table of Contents WorldwideDAUsincreased41%to526milliononaverageduringMarch2012from372millionduringMarch 2011. We experienced growth in DAUs across major markets including the United States, Brazil, and India. Increasedmobileusagewasakeycontributortothisgrowth.DAUsasapercentageofMAUsincreasedfrom55% in March 2011 to 58% in March 2012, which we believe was driven entirely by increased mobile usage of Facebook.WebelievethatincreasesinDAUsandinDAUsasapercentageofMAUsgenerallypositivelyaffectour revenuebecauseincreasesinuserengagementmayenableustodelivermorerelevantcommercialcontenttoour usersandmayprovideuswithmoreopportunitiesformonetization. We believe that we have the opportunity to continue to grow our DAUs around the world. Growth in DAUs dependsonourabilitytoattractnewusersandincreasethefrequencyofengagementforexistingusers.Weaimto increase DAUs by developing products that are more compelling for our users, increasing the relevance of the informationwedisplayforeachuser,increasingthenumberofcompellingPlatformappsandwebsiteintegrations, andimprovingthequalityofourproductsacrossmobileplatforms.Wealsobelievethatyoungerusershavehigher levelsofengagementwiththewebandmobiledevicesingeneralandwithFacebookspecifically.Weanticipate thatdemographictrendsoverthelongtermmaycontributetogrowthinengagementasagreaternumberofusers willcomefromdemographicgroupsthathavegrownupwiththewebandmobiledevicesandwhospendmore timeonlineeveryday. Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile app or via mobile optimizedversionsofourwebsitesuchasm.facebook.com,whetheronamobilephoneortabletsuchastheiPad, duringtheperiodofmeasurement. WorldwidemobileMAUsincreasedby69%from288millionasofMarch31,2011to488millionasofMarch31, 2012.Inallregions,anincreasingnumberofourMAUsareaccessingFacebookthroughmobiledevices,withusers intheUnitedStates,India,Indonesia,andBrazilrepresentingkeysourcesofmobilegrowthoverthisperiod.We estimate that approximately 83 million mobile MAUs accessed Facebook solely through mobile apps or our mobilewebsiteduringthemonthendedMarch31,2012,andwebelievethatmobileonlyusersincreasedrelative to the same period in the prior year. The remaining 405 million mobile MAUs accessed Facebook from both personalcomputersandmobiledevicesduringthatmonth.WebelievethatourmobileMAUgrowthwasdrivenby increased consumer usage of mobile devices generally and also by our product enhancements across several mobileplatforms.Forexample,weimprovedourproductofferingsonfeaturephonesfollowingouracquisitionof Snaptu in April 2011 and we launched the Facebook app for the iPad in October 2011. Improving our mobile productsandincreasingmobileusageofFacebookarekeycompanyprioritiesthatwebelievearecriticaltohelp usmaintainandgrowouruserbaseandengagementoverthelongterm.Weexpectconsumersaroundtheworld willincreasetheamountoftimetheyspendandtheinformationtheyshareandconsumethroughmobiledevices.
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Table of Contents WehavehistoricallynotshownadstousersaccessingFacebookthroughmobileappsorourmobilewebsite.To theextentthatincreasingusageofFacebookthroughmobileappsorourmobilewebsitesubstitutesfortheuseof Facebookthroughpersonalcomputerswherewedoshowads,thenumberofadsthatwedelivertousersandour revenue may be negatively affected unless and until we are successful with monetization strategies for mobile usageofFacebook,suchastheimplementationofsponsoredstoriesinusersmobileNewsFeeds,whichwebegan inMarch2012.WebelievethatpeoplearoundtheworldwillcontinuetoincreasetheirmobileusageofFacebook, and that some of this mobile usage has been and will continue to be a substitute for use of Facebook through personalcomputers. TrendsinOurMonetizationbyUserGeography
Note: Ourrevenue by user geography in the charts above is geographically apportioned based onour estimation of the geographic locationof ouruserswhen they perform a revenuegenerating activity. This allocation differs from our revenue by geography disclosure in our consolidated financial statements where revenueisgeographicallyapportionedbasedonthelocationoftheadvertiserordeveloper.
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Table of Contents Weestimateourrevenuebyusergeographybasedonthegeographyinwhichadimpressionsaredeliveredorvirtual goodsarepurchased.Wedefineaveragerevenueperuser(ARPU)asourtotalrevenueinagivengeographyduringagiven period,dividedbytheaverageofthenumberofMAUsinthegeographyatthebeginningandendoftheperiod.Ourrevenue andARPUinmarketssuchastheUnitedStates,Canada,andEuropearerelativelyhigherduetothesizeandmaturityof thoseadvertisingmarketsaswellasourgreatersalespresenceandthenumberofpaymentmethodsthatwemakeavailableto advertisersandusers. Inthefirstquarterof2012,50%ofourrevenuewasgeneratedbyusersintheUnitedStatesandCanada,adecreasefrom 54%ofourrevenueforthefirstquarterof2011,andin2011,52%ofourrevenuewasgeneratedbyusersintheUnitedStates andCanada,ascomparedto58%in2010,asweexperiencedmorerapidrevenuegrowthinmarketssuchasGermany,Brazil, Australia,andIndia. Duringthefirstquarterof2012,worldwideARPUwas$1.21,anincreaseof6%fromthefirstquarterof2011.Overthis period,ARPUincreasedacrossallgeographies.UsergrowthwasmorerapidingeographieswithrelativelylowerARPU,such asAsiaandRestofWorld.TheseusergrowthdynamicsresultedinworldwideARPUincreasingataslowerratethantherate experiencedinanyindividualgeography.ARPUinthefirstquarterof2012declined12%fromthefourthquarterof2011. Webelievethesequentialquarterlydeclinewasdrivenbyseasonaltrends,whichalsoaffectedARPUtrendsfromthefourth quarterof2010tothefirstquarterof2011,duringwhichperiodARPUdeclinedby10%.Inaddition,thesequentialdecline inARPUinthefirstquarterof2012wasaffectedbythefactthatourusergrowthwashigheringeographieswithrelatively lowerARPU. ARPUincreased32%from$3.08in2009to$4.08in2010and25%to$5.11in2011.Intheseperiods,weexperienced ARPUgrowthacrossallregions. FactorsAffectingOurPerformance GrowthinMAUs,DAUs,andMobileMAUs.GrowthtrendsinMAUs,DAUs,andmobileMAUsarecriticalvariablesthat affectourrevenueandfinancialresultsbyinfluencingthenumberofadsweareabletoshow,thevalueofthoseads,the volume of Payments transactions, as well as our expenses and capital expenditures. We expect our user growth rates to declineasthesizeofouractiveuserbaseincreasesandasweachievehighermarketpenetrationrates.Additionally,aswe grow our business and expand internationally, we expect to face challenges entering new markets such as China, where access to Facebook is restricted in whole or in part. As user growth rates slow, we expect the rate of growth in revenue, operatingincomefromoperations,andnetincomewilllikelydeclineovertime. User Engagement. Changes in user engagement also affect our revenue and financial performance. Growth in user engagement may increase the opportunities for us to display advertising and our ability to deliver relevant commercial content to users. Growth in user engagement also generally results in increases in our expenses and capital expenditures required to support user activity. We believe that overall engagement as measured by the percentage of users who create content(suchaswallposts,messages,orphotos)orgeneratefeedback(suchasbyLikingorCommentingonthecontent created)hasremainedstableorincreasedasouruserbasehasgrown.Moreover,theaverageamountofcontentandfeedback createdbyeachuserhascontinuedtoincreaseovertime. IncreasingMobileUsage.IncreasinguseofFacebookonmobiledeviceswillalsoaffectourperformance,particularlyif mobile use substitutes for use on personal computers. Historically, we have not shown ads to users accessing Facebook through mobile apps or our mobile website and we cannot be certain that our mobile monetization approaches will be successful in generating meaningful revenue. We cannot quantify the extent to which mobile usage of Facebook is substitutingfor,ratherthanincrementalto,usageofFacebookthroughpersonalcomputers,butwegenerallyexpectmobile usagetoincreaseatafasterratethanusagethroughpersonalcomputersfortheforeseeablefuture. 51
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Table of Contents ValueofAdvertisingProducts.Webelievethatincreasingthevalueofouradvertisingproductsandtheconsequent returnoninvestmenttoadvertisersfromworkingwithFacebookwillincreaseadvertiserdemandandtherebyincreasethe amountadvertisersspendwithus.Weaimtoincreasethevalueofouradvertisingproductsthroughsuchmeansasincreasing thesizeandengagementofouruserbase,improvingourabilitytoselectrelevantcontentofinteresttoindividualusers, developingnewformatsandproductssuchasadswithsocialcontext,andimprovingthemeasurementtoolsavailableto advertiserstooptimizetheircampaigns.Forexample,in2011,welaunchedsponsoredstoriesasanewformattoleverage socialcontext,andinMarch2012,webegantoincludesponsoredstoriesinusersmobileNewsFeeds. ManagementofAdInventory.Ourrevenuetrendsarealsoaffectedbyadinventorymanagementchangesaffectingthe number,size,orprominenceofadswedisplay.Forexample,inthefourthquarterof2010,wesignificantlyincreasedthe numberofadsonmanyFacebookpages.Asanotherexample,inthefourthquarterof2011,weincreasedthereserveprice (i.e.,theminimumpricethreshold)inouradvertisingauctionsysteminordertoreducethefrequencywithwhichlowquality adsaredisplayedtousers.Thischangecausedareductionintheoverallnumberofadsshownandincreasedtheaverage price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change. For this particular change, we estimate that the decrease in the numberofadsdisplayedandtheincreaseinaveragepriceperadapproximatelyoffseteachothersuchthattheimpacton totalrevenuewasminimal. ProductInnovation.Wemakeongoingproductchangesintendedtoenhancetheuserexperience.InSeptember2011,at our f8 conference, we announced the launch of Timeline as an enhanced and updated version of the Facebook Profile to enable users to better organize and access the growing quantity of their updates, photos, comments, and other content. Timelinewasrolledoutbroadlyaroundtheworldinthefirstquarterof2012.AlsoinSeptember2011,weannouncedthe launchofthenextiterationofOpenGraphAPIs,whichenablesPlatformdeveloperstocreatenewtypesofsocialappsthat facilitatesharing,selfexpression,andserendipitousdiscoveryacrossabroadvarietyofactivitiesandinterests.Weexpanded theOpenGraphtoincludemoretypesofsharingactivitiesinthefirstquarterof2012. InvestmentinInfrastructure.In2011,wecontinuedtomakesignificantinvestmentsinourtechnicalinfrastructureto ensurethatourgrowinguserbasecanaccessFacebookrapidlyandreliably.InApril2011andMarch2012,respectively,we beganservingusertrafficoutofourownedandbuiltdatacentersinPrineville,OregonandForestCity,NorthCarolina.We developeddesignsfordatacenters,serverhardware,andsoftwarethatwereoptimizedforuseinournewdatacenterfacilities, resultinginsignificantincreasesinenergyefficiencywhilesignificantlyreducingourserveroperationcostscomparedtothe usage of traditional servers and leased data centers. We are investing in additional Facebookowned data centers in the UnitedStatesandEuropeandweaimtodeliverFacebookproductsrapidlyandreliablytoallusersaroundtheworld. InvestmentinTalent.Attheendofthefirstquarterof2012,wehad3,539fulltimeemployees,anincreaseof46%from thesameperiodin2011.Ouremployeeheadcounthasincreasedsignificantlyandweexpectthisgrowthtocontinueforthe foreseeable future. We have also made and intend to make acquisitions with the primary objective of adding software engineers, product designers, and other personnel with certain technology expertise. While our organization is growing rapidly,wearefocusedonincreasingourtalentbaseataratethatallowsustopreserveourculture. BusinessDevelopmentandAcquisitions.Aspartofourbusinessstrategy,wehavemadeandintendtomakeacquisitions to add specialized employees, complementary companies, products, technologies, or other assets. For example, in April 2012,weenteredintoanagreementtoacquireInstagram,Inc.andanagreementwithMicrosoftCorporationtoobtaincertain patentassetsfromAOLInc.Ouracquisitionswillaffectourfuturefinancialresultsduetofactorssuchastheamortizationof acquiredintangibleassetsorotherpotentialchargessuchasrestructuringcostsorimpairmentexpense. 52
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Table of Contents SharebasedCompensationExpense.Wehavegrantedrestrictedstockunits(RSUs)toouremployeesandmembersof our boardofdirectors.RSUs granted prior toJanuary1, 2011(Pre2011RSUs) underour 2005 StockPlanvest upon the satisfactionofbothaserviceconditionandaliquiditycondition.Theserviceconditionforthemajorityoftheseawardsis satisfiedoverfouryears.Theliquidityconditionissatisfiedupontheoccurrenceofaqualifyingevent,definedasachange ofcontroltransactionorsixmonthsfollowingtheeffectivedateofourinitialpublicoffering.Pre2011RSUsforwhichthe serviceconditionhasbeensatisfiedarenotforfeitedshouldanemployeeterminatepriortotheliquidityconditionbeing met. As of March 31, 2012, we have recognized no sharebased compensation expense for Pre2011 RSUs because a qualifyingeventdescribedabovehadnotoccurred.Inthequarterinwhichourinitialpublicofferingiscompleted,wewill recognizesharebasedcompensationexpenseusingtheacceleratedattributionmethod,netofforfeitures,basedonthegrant datefairvalueofthePre2011RSUs.ForthePre2011RSUs,iftheinitialpublicofferinghadbeencompletedonMarch31, 2012, we would have recognized $965 million of sharebased compensation expense for all RSUs that met the service conditionasofthatdate,andwouldhaveapproximately$235millionofadditionalfutureperiodexpensetoberecognized overtheremainingserviceperiodsthrough2018. RSUsgrantedonorafterJanuary1,2011(Post2011RSUs)arenotsubjecttoaliquidityconditioninordertovest. SharebasedcompensationexpenserelatedtothesegrantsisbasedonthegrantdatefairvalueoftheRSUsandisrecognized onastraightlinebasisovertheapplicableserviceperiod.ThemajorityofPost2011RSUsareearnedoveraserviceperiod offourtofiveyears.In2011andthefirstquarterof2012,werecognized$189millionand$97million,respectively,of sharebasedcompensationexpenserelatedtothePost2011RSUs,andweanticipaterecognizing$1,119millionoffuture periodexpenserelatedtoPost2011RSUsoutstandingasofMarch31,2012. AsofMarch31,2012,therewas$2,381millionofunrecognizedsharebasedcompensationexpense,ofwhich$2,319 millionisrelatedtoRSUsand$62millionisrelatedtorestrictedsharesandstockoptions.Thisunrecognizedsharebased compensationexpenseisexpectedtoberecognizedoveraweightedaverageperiodofapproximatelytwoyears. SeeCriticalAccountingPoliciesandEstimatesSharebasedCompensationforadditionalinformationregarding oursharebasedcompensationexpense. ComponentsofResultsofOperations Revenue WegeneratesubstantiallyallofourrevenuefromadvertisingandfromfeesassociatedwithourPaymentsinfrastructure thatenablesuserstopurchasevirtualanddigitalgoodsfromourPlatformdevelopers. Advertising. Our advertising revenue is generated by displaying ad products on our website. Advertisers pay for ad products displayed on Facebook, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the display of impressionbased ads on our website in the contracted period in which the impressions are delivered. Impressions are considereddeliveredwhenanadappearsinpagesdisplayedtousers.Werecognizerevenuefromthedeliveryofclickbased adsonourwebsiteintheperiodinwhichauserclicksonanad. Paymentsandotherfees.WeenablePaymentsfromouruserstoourPlatformdevelopers.Ouruserscantransactand makepaymentsontheFacebookPlatformbyusingcreditcards,PayPalorotherpaymentmethodsavailableonourwebsite. WereceiveafeefromourPlatformdeveloperswhenusersmakepurchasesfromourPlatformdevelopersusingourPayments infrastructure.WerecognizerevenuenetofamountsremittedtoourPlatformdevelopers.Wehavemandatedtheuseofour Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games.Todate,gamesfromZyngahave 53
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Table of Contents generatedthemajorityofourpaymentsandotherfeesrevenue.Inaddition,wegenerateotherfeesrevenueinconnection witharrangementsrelatedtobusinessdevelopmenttransactionsandfeesfromvariousmobileprovidersinrecentperiods, otherfeesrevenuehasbeenimmaterial. CostofRevenueandOperatingExpenses Costofrevenue.Ourcostofrevenueconsistsprimarilyofexpensesassociatedwiththedeliveryanddistributionofour products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation,facilityandserverequipmentrentexpense,energyandbandwidthcosts,supportandmaintenancecosts,and salaries,benefits,andsharebasedcompensationforemployeesonouroperationsteams.Costofrevenuealsoincludescredit cardandothertransactionfeesrelatedtoprocessingcustomertransactions. Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and sharebased compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions.Ourmarketingandsalesexpensesalsoincludeuser,developer,andadvertiserfacingmarketingandpromotional expenditures. Researchanddevelopment.Researchanddevelopmentexpensesconsistprimarilyofsalaries,benefits,andsharebased compensationforemployeesonourengineeringandtechnicalteamswhoareresponsibleforbuildingnewproductsaswell asimprovingexistingproducts.Weexpensesubstantiallyallofourresearchanddevelopmentcostsastheyareincurred. Generalandadministrative.Ourgeneralandadministrativeexpensesconsistprimarilyofsalaries,benefits,andshare basedcompensationforourexecutivesaswellasourfinance,legal,humanresources,andotheradministrativeemployees.In addition,generalandadministrativeexpensesincludeoutsideconsulting,legalandaccountingservices,andfacilitiesand othersupportingoverheadcosts.Generalandadministrativeexpensesalsoincludelegalsettlements. 54
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Table of Contents ResultsofOperations Thefollowingtablesummarizesourhistoricalconsolidatedstatementsofincomedata:

YearEnded December31, 2010 ThreeMonthsEnded March31, 2011 2012
2009 ConsolidatedStatementsofIncomeData: Revenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Incomefromoperations Interestandotherincome(expense),net Incomebeforeprovisionforincometaxes Provisionforincometaxes Netincome (1) Costsandexpensesincludesharebasedcompensationexpenseasfollows:
2011 (inmillions) $ $ 3,711 860 427 388 280 1,955 1,756 (61) 1,695 695 1,000
$ $
777 223 115 87 90 515 262 (8) 254 25 229
$ $
1,974 493 184 144 121 942 1,032 (24) 1,008 402 606
$ $
731 167 68 57 51 343 388 10 398 165 233
$ $
1,058 277 159 153 88 677 381 1 382 177 205
YearEnded December31, 2009 2010 2011 (inmillions) $ $ $ 9 2 2 43 6 9 114 19 9 51 $ 27 $ 20 $ 217
ThreeMonthsEnded March31, 2011 2012 $ $ 4 3 7 $ $ 4 23 60 16 103
Thefollowingtablesummarizesourhistoricalconsolidatedstatementsofincomedataasapercentageofrevenueforthe periodsshown:
YearEnded December31, 2009 2010 2011 100% 29 15 11 12 66 34 (1) 33 3 100% 25 9 7 6 48 52 (1) 51 20 ThreeMonthsEnded March31, 2011 2012 100% 23 9 8 7 47 53 1 54 23 100% 26 15 14 8 64 36 36 17 19%
ConsolidatedStatementsofIncomeData: Revenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Incomefromoperations Interestandotherincome(expense),net Incomebeforeprovisionforincometaxes Provisionforincometaxes Netincome
100% 23 12 10 8 53 47 (2) 46 19
29%
31%
27%
32%
(1) Costsandexpensesincludethefollowingsharebasedcompensationexpenseasapercentageofrevenue: YearEnded December31, 2009 2010 % % 1 2 3% ThreeMonthsEnded March31, 2011 2011 2012 % % % 1 2 3 1 6 1 2 6% 1% 10%
1%
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Table of Contents ThreeMonthsEndedMarch31,2011and2012 Revenue

ThreeMonths EndedMarch31, 2011 2012 (inmillions)
%Change
Advertisingrevenue Paymentsandotherfeesrevenue Totalrevenue
$637 94 $731
$ 872 186 $1,058
37% 98% 45%
Revenueinthefirstquarterof2012increased$327million,or45%,comparedtothesameperiodin2011.Theincrease wasdueprimarilytoa37%increaseinadvertisingrevenueto$872million.Advertisingrevenuegrewduetoa35%increase inthenumberofadsdelivered.TheincreaseinadsdeliveredwasdrivenprimarilybyusergrowthMAUsgrew33%from March31,2011toMarch31,2012andaverageDAUsgrew41%fromMarch2011toMarch2012.Averagepriceperadfor thefirstquarterof2012comparedtothefirstquarterof2011wasunchanged,asanincreaseintheaveragepriceperadinthe UnitedStatesandCanadawasoffsetbyanincreasedpercentageofourworldwideadsbeingdeliveredintheAsiaandRestof Worldgeographieswheretheaveragepriceperad,whilegrowingonayearoveryearbasis,isrelativelylower.Theaverage priceperadwasalsoaffectedbyadeclineintheaveragepriceperadinEuropeinthefirstquarterof2012comparedtothe sameperiodin2011due,webelieve,tocontinuingweakeconomicconditionsinthatregion. Paymentsandotherfeesrevenueinthefirstquarterof2012increasedto$186million,or98%,comparedtothefirst quarter of 2011. Facebook Payments became mandatory for all game developers accepting payments on the Facebook PlatformwithlimitedexceptionsonJuly1,2011.Accordingly,comparisonsofPaymentsandotherfeesrevenuetoperiods beforethisdatemaynotbemeaningful. Thirteenpercentand11%ofourtotalrevenueforthefirstquarterof2011and2012,respectively,camefromasingle customer,Zynga.ThisrevenueconsistedofPaymentsprocessingfeesrelatedtoZyngassaleofvirtualgoodsandfromdirect advertisingpurchasedbyZynga.Additionally,Zyngasappsgeneratepagesonwhichwedisplayadsfromotheradvertisers forthefirstquarterof2012,weestimatethatanadditionalapproximately4%ofourtotalrevenuewasgeneratedfromthe displayoftheseads.InMay2010,weenteredintoanaddendumtoourstandardtermsandconditionswithZyngapursuant towhichitagreedtouseFacebookPaymentsastheprimarymeansofpaymentwithinZyngagamesplayedontheFacebook Platform.Underthisaddendum,weretainafeeofupto30%ofthefacevalueofuserpurchasesinZyngasgamesonthe FacebookPlatform.ThisaddendumexpiresinMay2015. Costofrevenue
ThreeMonths EndedMarch31, 2011 (inmillions) 2012 %Change
Costofrevenue Percentageofrevenue
$ 167 23%
$ 277 26%
66%
Costofrevenueinthefirstquarterof2012increased$110million,or66%,comparedtothesameperiodin2011.The increasewasprimarilyduetoexpensesrelatedtoexpandingourdatacenteroperations,includinga 56
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Table of Contents $59millionincreaseindepreciation,andtoalesserextent,anincreaseinpayrollandbenefitsexpensesresultingfroma66% increaseinemployeeheadcount.Theseexpensessupportedourusergrowth,theincreasedusageofourproductsbyusers, developers,andadvertisers,andthelaunchofnewproducts. Weanticipatethatcostofrevenuewillincreaseindollaramountfortheforeseeablefutureasweexpandourdatacenter capacitytosupportusergrowth,increaseduserengagement,andthedeliveryofnewproductsandofferings.Weexpectcosts willalsoriseforpaymentprocessingasweincreasePaymentsvolumes.Theexpectedincreaseincostofrevenuemaybe partiallymitigatedtotheextentweareabletorealizeimprovementsinserverperformanceandtheefficiencyofourtechnical operations.Weexpectcostofrevenueasapercentageofrevenuetoincreasein2012comparedto2011aswecontinueto investinourtechnicalinfrastructure. Marketingandsales
ThreeMonths EndedMarch31, 2011 2012 (inmillions) %Change
Marketingandsales Percentageofrevenue
$68 9%
$159 15%
134%
Marketingandsalesexpensesinthefirstquarterof2012increased$91million,or134%,comparedtothesameperiod in2011.Theincreasewasprimarilyduetoanincreaseinouruser,developer,andadvertiserfacingmarketing,andtoa lesserextent,anincreaseinpayrollandbenefitsexpensesresultingfroma34%increaseinemployeeheadcounttosupport globalsales,businessdevelopment,andcustomerservice.Additionally,sharebasedcompensationexpenseincreasedto$23 millioninthefirstquarterof2012duetorecognitionofexpenserelatedtoPost2011RSUs.Inthesameperiodin2011, sharebasedcompensationexpensewasimmaterial. Weanticipatethatmarketingandsalesexpenseswillincreaseindollaramountandasapercentageofrevenuein2012 compared to 2011 as a result of continued growth in headcount and headcountrelated expenses, including sharebased compensation expense related to Post2011 RSUs. We plan to add sales, business development and customer service employees,opennewoffices,andcontinueourinvestmentinuser,developer,andadvertiserfacingmarketing.Assuming wecompleteourinitialpublicofferingin2012,wealsoanticipateasignificantincreaseinmarketingandsalesexpensesin 2012duetotheinclusionofsharebasedcompensationexpensefromPre2011RSUsasdescribedinCriticalAccounting PoliciesandEstimatesSharebasedCompensation. Researchanddevelopment
Researchanddevelopment Percentageofrevenue
$57 8%
$153 15%
168%
Researchanddevelopmentexpensesinthefirstquarterof2012increased$96million,or168%,comparedtothesame period in 2011. The increase was primarily due to an increase of sharebased compensation expense related to Post2011 RSUsfrom$4millioninthefirstquarterof2011to$60millioninthesameperiodin2012.Payrollandbenefitsexpense alsoincreasedduetoa55%growthinemployeeheadcountinengineering,design,productmanagement,andothertechnical functions.Thisinvestmentsupportedoureffortstoimproveexistingproductsandbuildnewproductsforusers,developers, andadvertisers. 57
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Table of Contents Weanticipatethatresearchanddevelopmentexpenseswillincreaseindollaramountandasapercentageofrevenuein 2012comparedto2011asaresultofcontinuedgrowthinheadcountandheadcountrelatedexpenses,includingsharebased compensation expense related to Post2011 RSUs. We plan to continue rapidly hiring engineering, design, product management,andothertechnicalemployees.Assumingwecompleteourinitialpublicofferingin2012,wealsoanticipatea significant increase in research and development expenses in 2012 due to the inclusion of sharebased compensation expensefromPre2011RSUsasdescribedinCriticalAccountingPoliciesandEstimatesSharebasedCompensation. Generalandadministrative
Generalandadministrative Percentageofrevenue
$51 7%
$88 8%
73%
Generalandadministrativeexpensesinthefirstquarterof2012increased$37million,or73%,comparedtothesame periodin2011.Theincreasewasprimarilyduetoanincreaseinpayrollandbenefitsexpensesresultingfroma57%increase inemployeeheadcountinfinance,legal,humanresources,andotherfunctions,andtoalesserextent,outsideconsultingand legal fees. Additionally, sharebased compensation expense increased from $3 million in the first quarter of 2011 to $16 millioninthesameperiodin2012duetorecognitionofexpenserelatedtoPost2011RSUs. Weanticipatethatgeneralandadministrativeexpenseswillincreaseindollaramountandincreaseasapercentageof revenuein2012comparedto2011asaresultofgrowthinheadcountandheadcountrelatedexpenses,includingsharebased compensation related to the Post2011 RSUs. We plan to continue to increase general and administrative employee headcounttosupportourgrowth.Assumingwecompleteourinitialpublicofferingin2012,wealsoanticipateasignificant increaseingeneralandadministrativeexpensesin2012duetotheinclusionofsharebasedcompensationexpensefromPre 2011RSUsasdescribedinCriticalAccountingPoliciesandEstimatesSharebasedCompensation. Interestandotherincome(expense),net
Interestexpense Otherincome,net Interestandotherincome(expense),net
$ (7) 17 $ 10
$ (13) 14 $ 1
86% (18)% (90)%
Interestandotherincome(expense),netinthefirstquarterof2012decreased$9million,or90%,comparedtothesame periodin2011.Interestexpenseincreasedby$6million,primarilyduetoanincreasedvolumeofpropertyandequipment financedbycapitalleases.Thechangeinotherincome,netwasprimarilyduetoa$6milliondecreaseinforeignexchange relatedgains.ForeignexchangegainsresultedfromtheperiodicremeasurementofourintercompanyEurobalances.This decreasewaspartiallyoffsetbyanincreaseininterestincomedrivenbylargerinvestedcashbalances. 58
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Table of Contents Provisionforincometaxes

Provisionforincometaxes Effectivetaxrate
$ 165 41%
$ 177 46%
7%
Ourprovisionforincometaxesinthefirstquarterof2012increased$12million,or7%,comparedtothesameperiodin 2011. Our effective tax rate increased primarily due to the impact of nondeductible sharebased compensation expense, losses arising outside the United States in jurisdictions where we do not receive a tax benefit, and the expiration of the federaltaxcreditforresearchanddevelopmentactivitiesattheendof2011. Assuming we complete our initial public offering in 2012, there will be a significant increase in our sharebased compensationexpensefromPre2011RSUsfortheremainderof2012.Weexpectthatoureffectivetaxratesinthequarterwe completeourofferingandthesubsequentquartersof2012willbesignificantlygreaterthanoureffectivetaxratewasinthe firstquarterof2012,primarilybecausecertainsharebasedcompensationexpensewillnotbetaxdeductibleintheUnited States.Inaddition,oureffectivetaxratemayfluctuatesignificantlyinanyquarterinwhichthereissignificantsharebased compensationexpenseorsignificantexercisesorsettlementsofstockawards. OureffectivetaxratehasexceededtheU.S.statutoryrateinpartbecauseoflossesarisingoutsidetheUnitedStatesin jurisdictionswherewedonotreceiveataxbenefit.Theselosseswereprimarilyduetotheinitialstartupcostsincurredby ourforeignsubsidiariestooperateincertainforeignmarkets,includingthecostsincurredbythosesubsidiariestolicense, develop,anduseourintellectualproperty.Oureffectivetaxrateinthefuturewilldependontheportionofourprofitsearned withinandoutsidetheUnitedStates,whichwillalsobeaffectedbyourmethodologiesforvaluingourintellectualproperty andintercompanytransactions. Netincome Ournetincomeinthefirstquarterof2012decreasedcomparedtothesameperiodin2011.Totalcostsandexpenses grewmorethanrevenue,dueinparticulartoasignificantincreaseinsharebasedcompensationexpenseforPost2011RSUs during the first quarter of 2012, which expense was not significant in the first quarter of 2011 due to the timing of RSU grants. YearsEndedDecember31,2009,2010,and2011 Revenue
YearEndedDecember31, 2009 2010 2011 (inmillions) 2009to2010 %Change 2010to2011 %Change
Advertisingrevenue Paymentsandotherfeesrevenue Totalrevenue
$ 764 13 $777
$1,868 106 $1,974
$3,154 557 $3,711
145% NM 154%
69% NM 88%
2011Comparedto2010.Revenuein2011increased$1,737million,or88%comparedto2010.Theincreasewasdue primarilytoa69%increaseinadvertisingrevenueto$3,154million.Advertisingrevenuegrewduetoa42%increaseinthe numberofadsdeliveredandan18%increaseintheaveragepriceperaddelivered. 59
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Table of Contents The increase in ads delivered was driven primarily by user growth MAUs grew 39% from December 31, 2010 to December31,2011andaverageDAUsgrew48%fromDecember2010toDecember2011.Thenumberofadsdeliveredwas also affected by many other factors including product changes that significantly increased the number of ads on many Facebook pages beginning in the fourth quarter of 2010, partially offset by an increase in usage of our mobile products, wherewedidnotshowads,andbyvariousproductchangesimplementedin2011thatinaggregatemodestlyreducedthe number of ads on certain pages. The increase in average price per ad delivered was affected by factors including improvements in our ability to deliver more relevant ads to users and product changes that contributed to higher user interactionwiththeadsbyincreasingtheirrelativeprominence. Paymentsandotherfeesrevenueincreasedto$557millionin2011duetotheadoptionofFacebookPayments,which hasbeengraduallyadoptedbyourPlatformdevelopersandbegangeneratingsignificantrevenueinthefourthquarterof 2010. We estimate that approximately 5 million and 15 million users purchased virtual or digital goods using Facebook PaymentsduringtheyearsendedDecember31,2010and2011,respectively.FacebookPaymentsbecamemandatoryforall game developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011. Accordingly, comparisons of payments and other fees revenue to periods before that date may not be meaningful. In 2011, other fees revenuewasimmaterial. In2011,wegeneratedapproximately56%ofourrevenuefromadvertisersandPlatformdevelopersbasedintheUnited States,comparedto62%in2010.Thischangeisduetofactorsincludingafastergrowthrateofinternationalusersandthe expansionofinternationalsalesofficesandpaymentmethods.ThemajorityofourrevenueoutsideoftheUnitedStatescame fromcustomerslocatedinwesternEurope,Canada,andAustralia. 2010Comparedto2009.Revenuein2010increased$1,197million,or154%,comparedto2009.Theincreasewas primarilyduetoa145%increaseinadvertisingrevenueto$1,868millionin2010.Advertisingrevenuegrewprimarilydue toanincreaseinthenumberofadsdelivereddrivenbygrowthinusersandengagementaswellasthenumberofadsper page.MAUsgrew69%fromDecember31,2009toDecember31,2010andaverageDAUsgrew77%fromDecember2009to December2010.Paymentsandotherfeesrevenueincreasedto$106millionin2010duetotheinitialadoptionofFacebook Payments during the year. In 2010, we generated approximately 62% of our revenue from advertisers and Platform developersbasedintheUnitedStates,comparedto67%in2009. Twelvepercentofourtotalrevenuein2011,andlessthan10%in2010and2009,camefromasinglecustomer,Zynga. This revenue consisted of Payments processing fees related to Zyngas sales of virtual goods and from direct advertising purchasedbyZynga.Additionally,Zyngasappsgeneratepagesonwhichwedisplayadsfromotheradvertisersfor2011, weestimatethatanadditionalapproximately7%ofourrevenuewasgeneratedfromthedisplayoftheseads. Costofrevenue
YearEndedDecember31, 2009 2010 2011 (dollarsinmillions) 2009to2010 %Change 2010to2011 %Change
Costofrevenue Percentageofrevenue
$ 223 29%
$ 493 25%
$ 860 23%
121%
74%
2011Comparedto2010.Costofrevenuein2011increased$367million,or74%,comparedto2010.Theincreasewas primarilyduetoexpensesrelatedtoexpandingourdatacenteroperations,includinga$164millionincreaseindepreciation anda$35millionincreaseindatacenterfacilityrent.Theseexpensessupportedourusergrowth,theincreasedusageofour productsbyusers,developers,andadvertisers,andthelaunchofnewproducts.Additionally,creditcardandotherrelated revenueprocessingfeesincreasedby$60million. 60
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Table of Contents 2010Comparedto2009.Costofrevenuein2010increased$270million,or121%,comparedto2009.Theincrease was primarily due to expenses related to expanding our data center operations, including a $77 million increase in equipmentrent,a$49millionincreaseindepreciation,anda$33millionincreaseindatacenterfacilityrent.Additionally, creditcardandotherrelatedrevenueprocessingfeesincreasedby$25million. Marketingandsales
Marketingandsales Percentageofrevenue
$ 115 15%
$ 184 9%
$ 427 12%
60%
132%
2011Comparedto2010.Marketingandsalesexpensesin2011increased$243million,or132%,comparedto2010. Theincreasewasprimarilyduetoanincreaseinpayrollandbenefitsexpensesresultingfroma46%increaseinemployee headcount to support global sales, business development, and customer service, and to a lesser extent, an increase in our user, developer, and advertiserfacing marketing. Additionally, sharebased compensation expense increased from $2 millionin2010to$43millionin2011duetorecognitionofexpenserelatedtoPost2011RSUs. 2010Comparedto2009.Marketingandsalesexpensesin2010increased$69million,or60%,comparedto2009.The increase was primarily due to an increase in payroll and benefits expenses resulting from a 90% increase in employee headcounttosupportglobalsales,businessdevelopment,andcustomerservice.Additionally,weincreasedourspendingto supportouruser,developer,andadvertiserfacingmarketingaswellasourmarketresearchandanalyticscapabilities. Researchanddevelopment
Researchanddevelopment Percentageofrevenue
$ 87 11%
$ 144 7%
$ 388 10%
66%
169%
2011Comparedto2010.Researchanddevelopmentexpensesin2011increased$244million,or169%,comparedto 2010. The increase was primarily due to an increase from $9 million in 2010 to $114 million in 2011 for sharebased compensation expense related to Post2011 RSUs. Payroll and benefits expense also increased due to a 57% growth in employeeheadcountinengineering,design,productmanagement,andothertechnicalfunctions.Thisinvestmentsupported oureffortstoimproveexistingproductsandbuildnewproductsforusers,developers,andadvertisers. 2010 Compared to 2009. Research and development expenses in 2010 increased $57 million, or 66%, compared to 2009. The increase was primarily due to an increase in payroll and benefits expenses resulting from an 81% increase in employee headcount in engineering and related functions. This investment supported our efforts to improve existing productsandbuildnewproductsforusers,developers,andadvertisers. Generalandadministrative
Generalandadministrative Percentageofrevenue 61
$ 90 12%
$ 121 6%
$ 280 8%
34%
131%
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Table of Contents 2011Comparedto2010.Generalandadministrativeexpensesin2011increased$159million,or131%,comparedto 2010. The increase was primarily due to an increase in payroll and benefits expenses resulting from a 54% increase in employeeheadcountinfinance,legal,humanresources,andotherfunctions.Additionally,outsideconsultingandlegalfees contributedtotheincrease.Sharebasedcompensationexpenseincreasedfrom$9millionin2010to$51millionin2011 duetorecognitionofexpenserelatedtoPost2011RSUs. 2010 Compared to 2009. General and administrative expenses in 2010 increased $31 million, or 34%, compared to 2009. The increase was primarily due to an increase in payroll and benefits expenses resulting from a 61% increase in employeeheadcountingeneralandadministrativefunctionsand,toalesserextent,anincreaseinoutsideconsultingand legalfees. Interestandotherincome(expense),net
2009 YearEndedDecember31, 2010 2011 (inmillions) 2009to2010 %Change 2010to2011 %Change
Interestexpense Otherincome(expense),net Interestandotherincome(expense),net
$(10) 2 $ (8)
$(22) (2) $(24)
$(42) (19) $(61)
120% NM 200%
91% NM 154%
2011Comparedto2010.Interestandotherincome(expense),netin2011increased$37million,or154%,comparedto 2010.Interestexpenseincreasedby$20million,drivenbyanincreaseinfeesrelatedtoourcreditfacilityasdescribedin LiquidityandCapitalResources,andthepaymentsrelatedtoanincreasedvolumeofpropertyandequipmentfinancedby capitalleases.Thechangeinotherincome(expense),netwasprimarilydueto$29millioninforeignexchangerelatedlosses in2011.Foreignexchangelossesin2011stemmedfromtheperiodicremeasurementofourintercompanyEurobalances. Foreigncurrencybalanceswereimmaterialin2010.Theseexpenseswerepartiallyoffsetbyanincreaseininterestincome drivenbylargerinvestedcashbalances. 2010Comparedto2009.Interestexpensein2010increasedasaresultofanincreaseduseofcapitalleasesandinterest payments related to our $250 million credit facility as described in Liquidity and Capital Resources. This loan was repaidinfullinMarch2011. Provisionforincometaxes
Provisionforincometaxes Effectivetaxrate
$ 25 10%
$ 402 40%
$ 695 41%
NM
73%
2011Comparedto2010.Ourprovisionforincometaxesin2011increased$293million,or73%,comparedto2010 primarilyduetoanincreaseinpretaxincome.Oureffectivetaxrateincreasedprimarilyduetolossesarisingoutsidethe United States in jurisdictions where we do not receive a tax benefit and the impact of nondeductible sharebased compensationexpenseduringtheyear. 2010Comparedto2009.Ourprovisionforincometaxesin2010increased$377millioncomparedto2009primarily duetoanincreaseinpretaxincome.Oureffectivetaxrateincreasedprimarilyduetoabenefitrecordedin2009relatedto thereleaseofavaluationallowance,whichdidnotrecurin2010. 62
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Table of Contents QuarterlyResultsofOperationsData Thefollowingtablessetforthourquarterlyconsolidatedstatementsofincomedataindollarsandasapercentageof totalrevenueforeachoftheninequartersintheperiodendedMarch31,2012.Wehavepreparedthequarterlyconsolidated statementsofincomedataonabasisconsistentwiththeauditedconsolidatedfinancialstatementsincludedelsewhereinthis prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurringadjustments,whichweconsidernecessaryforafairpresentationofthisdata.Thisinformationshouldbereadin conjunctionwiththeauditedconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus.The resultsofhistoricalperiodsarenotnecessarilyindicativeoftheresultsforanyfutureperiod.
Mar31, 2010 Jun30, 2010 Sep30, 2010 ThreeMonthsEnded Dec31, Mar31, Jun30, 2010 2011 2011 (inmillions) Sep30, 2011 Dec31, 2011 Mar31, 2012
ConsolidatedStatementsofIncome Data: Revenue: Advertisingrevenue Paymentsandotherfeesrevenue Totalrevenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Incomefromoperations Netincome
$340 $424 $450 $655 $637 $776 $798 $ 943 $ 872 5 8 17 76 94 119 156 188 186 345 431 467 731 731 895 954 1,131 1,058 100 111 131 36 44 45 25 32 41 22 26 34 183 213 251 162 218 216 $ 95 $ 129 $ 131 $ 150 59 45 40 294 437 251 $ 167 68 57 51 343 388 233 $ 210 103 99 76 488 407 240 $ 236 124 108 72 540 414 227 $ 247 132 124 80 583 548 302 $ 277 159 153 88 677 381 205
(1) Costsandexpensesincludesharebasedcompensationexpenseasfollows: ThreeMonthsEnded Dec31, Mar31, Jun30, 2010 2011 2011 (inmillions) $ $ $ 3 1 11 3 4 35 2 3 15 $ 6 $ 7 $ 64
Mar31, 2010 Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebasedcompensation $ $ 2 3 5
Jun30, 2010 $ $ 1 2 2 5
Sep30, 2010 $ $ 2 2 4
Sep30, 2011 $ $ 3 16 33 18 70
Dec31, 2011 $ $ 3 16 42 15 76
Mar31, 2012 $ $ 4 23 60 16 103
63
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Table of Contents
ThreeMonthsEnded Dec31, Mar31, Jun30, 2010 2011 2011 (asapercentageoftotalrevenue)
Mar31, 2010
Jun30, 2010
Sep30, 2010
Sep30, 2011
Dec31, 2011
Mar31, 2012
ConsolidatedStatementsof IncomeData: Revenue: Advertisingrevenue Paymentsandotherfees revenue Totalrevenue Costsandexpenses(1): Costofrevenue Marketingandsales Researchand development Generaland administrative Totalcostsandexpenses Incomefromoperations Netincome
99%
98%
96%
90%
87%
87%
84%
83%
82%
1 2 4 10 13 13 16 17 18 100% 100% 100% 100% 100% 100% 100% 100% 100% 29% 10 7 6 53 47 28% 26% 10 7 6 49 51 30% 28% 10 9 7 54 46 28% 21% 8 6 5 40 60 34% 23% 9 8 7 47 53 32% 23% 12 11 8 55 45 27% 25% 13 11 8 57 43 24% 22% 12 11 7 52 48 27% 26% 15 14 8 64 36 19%
(1) Costsandexpensesincludesharebasedcompensationexpenseasfollows: Mar31, 2010 Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebased compensation % 1 1 1% Jun30, 2010 % 1% Sep30, 2010 % 1% ThreeMonthsEnded Dec31, Mar31, Jun30, 2010 2011 2011 (asapercentageoftotalrevenue) % % % 1 1 4 2 1% 1% 7% Sep30, 2011 % 2 3 2 7% Dec31, 2011 % 1 4 1 7% Mar31, 2012 % 2 6 2 10%
QuarterlyTrends Revenue Advertising spending is traditionally seasonally strong in the fourth quarter of each year. We believe that this seasonalityinadvertisingspendingaffectsourquarterlyresults,whichgenerallyreflectstronggrowthinadvertisingrevenue betweenthethirdandfourthquartersandslowergrowth,andforcertainyearsadecline,inadvertisingspendingbetweenthe fourthandsubsequentfirstquarters.Forinstance,ouradvertisingrevenueincreased64%,46%,and18%betweenthethird andfourthquartersof2009,2010,and2011,respectively,whileadvertisingrevenueinthefirstquarterof2010increased5% ascomparedtothefourthquarterof2009andadvertisingrevenueforthefirstquarterof2011and2012declined3%and8% comparedtothefourthquartersof2010and2011,respectively.Therapidgrowthinourbusinessmayhavepartiallymasked theseseasonaltrendstodateandtheseasonalimpactsmaybemorepronouncedinthefuture. Costofrevenueandoperatingexpenses Costofrevenueandoperatingexpensesincreasedduringeveryquarterpresented,primarilyduetoincreasedexpenses related to the continued expansion of our technical infrastructure and increases in employee headcount. The increases in marketingandsales,researchanddevelopment,andgeneralandadministrativeexpensesinthe2011quarterlyperiodsalso reflectsignificantincreasesforsharebasedcompensationexpenserelatedtoPost2011RSUs. 64
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Table of Contents Foradditionalinformationonmattersthatmayaffectourquarterlyresults,seeRiskFactorsOurfinancialresultswill fluctuatefromquartertoquarter,whichmakesthemdifficulttopredict. LiquidityandCapitalResources

ThreeMonths Ended March31, 2011 2012
YearEndedDecember31, 2009 2010 2011 (inmillions)
ConsolidatedStatementsofCashFlowsData: Netcashprovidedbyoperatingactivities Netcashusedininvestingactivities Netcashprovidedbyfinancingactivities Purchasesofpropertyandequipment Depreciationandamortization Sharebasedcompensation
$155 (62) 243 (33) 78 27
$698 (324) 781 (293) 139 20
$ 1,549 (3,023) 1,198 (606) 323 217
$ 345 (153) 798 (153) 51 7
$ 441 (720) 50 (453) 110 103
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks and investmentsinmoneymarketfundsandU.S.governmentandU.S.governmentagencysecurities.Cashandcashequivalents andmarketablesecuritiestotaled$3,910millionasofMarch31,2012,anincreaseof$2millionfromDecember31,2011. Themostsignificantcashflowactivitiesconsistedof$441millionofcashgeneratedfromoperations,offsetby$453million usedforcapitalexpenditures.Cashandcashequivalentsandmarketablesecuritiestotaled$3,908millionasofDecember31, 2011, an increase of $2,123 million from December 31, 2010. This increase primarily reflects $1,549 million of cash generatedfromoperationsand$998millionofproceedsfromthesaleofcommonstock,partiallyoffsetby$606millionused forcapitalexpendituresandrepaymentofa$250millioncreditfacility.Wecurrentlyanticipatethatouravailablefunds, creditfacilities,andcashflowfromoperationswillbesufficienttomeetouroperationalcashneedsfortheforeseeablefuture. InApril2012,weenteredintoanagreementtoacquireInstagram,Inc.,whichhasbuiltamobilephonebasedphoto sharingservice,forapproximately23millionsharesofourcommonstockand$300millionincash.Followingtheclosingof this acquisition, we plan to maintain Instagrams products as independent mobile applications to enhance our photos productofferingsandtoenableuserstoincreasetheirlevelsofmobileengagementandphotosharing.Thisacquisitionis subject to customary closing conditions, including the expiration or early termination of all applicable waiting periods undertheHartScottRodinoAntitrustImprovementActof1976,asamended(HSR),andiscurrentlyexpectedtocloseinthe second quarter of 2012. We have agreed to pay Instagram a $200 million termination fee if governmental authorities permanently enjoin or otherwise prevent the completion of the merger or if either party terminates the agreement after December10,2012. Also,inApril2012,weenteredintoanagreementwithMicrosoftCorporationpursuanttowhichwewillbeassigned Microsoftsrightstoacquireapproximately650patentsandpatentapplicationsthataresubjecttotheagreementbetween AOLInc.andMicrosoftenteredintoonApril5,2012,inexchangeforatotalcashpaymentofapproximately$550million. Aspartofthistransaction,wewillobtainalicensetotheotherAOLpatentsandpatentapplicationsbeingpurchasedby MicrosoftandwillgrantMicrosoftalicensetotheAOLpatentsandpatentapplicationsthatweacquire.Inaddition,wewill beassignedMicrosoftsrightstoacquiretheoutstandingsharesofawhollyowned,nonoperatingsubsidiaryofAOLthat holds a portion of the aforementioned patents and patent applications. The transaction is subject to the closing of MicrosoftstransactionwithAOLaswellascustomaryclosingconditions,includingtheexpirationorearlyterminationof allapplicablewaitingperiodsunderHSR. 65
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Table of Contents Pre2011RSUsvestuponthesatisfactionofbothaserviceconditionandaliquiditycondition.Theliquiditycondition willbesatisfiedsixmonthsfollowingourinitialpublicoffering.WeexpectthataportionoftheseRSUswillbesettledona dateapproximatelysixmonthsafterourinitialpublicoffering.Onthesettlementdate,weplantowithholdandremitincome taxesatapplicableminimumstatutoryratesbasedonthethencurrentvalueoftheunderlyingshares.Wecurrentlyexpect thattheaverageofthesewithholdingtaxrateswillbeapproximately45%.Ifthepriceofourcommonstockatthetimeof settlement were equal to the midpoint of the price range on the cover page of this prospectus, we estimate that this tax obligationwouldbeapproximately$billionintheaggregate.Theamountofthisobligationcouldbehigherorlower, dependingonthepriceofoursharesontheRSUsettlementdate.TosettletheseRSUs,assuminga45%taxwithholdingrate, weanticipatethatwewillnetsettletheawardsbydeliveringapproximatelysharesofClassBcommonstockto RSUholdersandsimultaneouslywithholdingapproximatelysharesofClassBcommonstock.Inconnectionwith thisnetsettlementwewillwithholdandremitthetaxliabilitiesonbehalfoftheRSUholderstotherelevanttaxauthorities incash. Tofundthewithholdingandremittanceobligation,weexpecttosellequitysecuritiesnearthesettlementdateinan amountsubstantiallyequivalenttothenumberofsharesofcommonstockthatwewithholdinconnectionwiththeinitial settlementofthePre2011RSUs,suchthatthenewlyissuedsharesshouldnotbedilutive.However,intheeventthatwe issueequitysecurities,wecannotassureyouthatwewillbeabletosuccessfullymatchtheproceedstotheamountofthistax liability.Ifweelectnottofullyfundtaxwithholdingandremittanceobligationsthroughtheissuanceofequityorweare unabletocompletesuchanofferingduetomarketconditionsorotherwise,wemaychoosetoborrowfundsfromourcredit facilities,useasubstantialportionofourexistingcash,orrelyuponacombinationofthesealternatives. In2011,weenteredintoanagreementforanunsecuredfiveyearrevolvingcreditfacilitythatallowedustoborrowup to$2,500million,withinterestpayableonborrowedamountssetattheLondonInterbankOfferedRate(LIBOR)plus1.0%. InFebruary2012,weterminatedthiscreditfacilityandweenteredintoanewagreementforanunsecuredfiveyearrevolving credit facility that allows us to borrow up to $5,000 million for general corporate purposes, with interest payable on the borrowedamountssetatLIBORplus1.0%.Priortoourinitialpublicoffering,wecanborrowupto$2,500millionunderthis facility.Wepaidoriginationfeesatclosingandthesefeesareamortizedovertheremainingtermofthecreditfacility.Under the terms of the new agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance.NoamountsweredrawndownunderthisagreementasofMarch31,2012. Concurrent with our entering into the new revolving credit facility, we also entered into a bridge credit facility that allowsustoborrowupto$3,000milliontofundtaxwithholdingandremittanceobligationsrelatedtothesettlementof RSUsinconnectionwithourinitialpublicoffering,withinterestpayableontheborrowedamountssetatLIBORplus1.0% andanadditional0.25%payableondrawnbalancesoutstandingfromandafterthe180thdayofborrowing.Wemaymakea singleborrowingunderthisbridgefacilitybeginningontheclosingdateofourinitialpublicofferingandendingonthe datethatis240daysafterthatdate.Anyamountsoutstandingunderthisfacilitywillbedueoneyearafterthedatewedraw onthefacilitybutnolaterthanJune30,2014.Duringthetermofthisbridgefacility,thelenderscommitmentsaresubjectto reductionandamountsborrowedthereunderaresubjecttorepaymentintheeventweraisecapitalthroughcertainassetsales, debtissuances,orequityissuances.Wepaidoriginationfeesatclosingandthesefeesareamortizedovertheremainingterm ofthefacility,andweareobligatedtopayanadditionalupfrontfeeof0.20%oftheaggregateamountoftheborrowings requestedonanyapplicablefundingdate.Underthetermsoftheagreement,weareobligatedtopayacommitmentfeeof 0.10%perannumonthedailyundrawnbalancefromandafterthe90thdayfollowingthedateweenteredintothebridge facilityNoamountsweredrawndownunderthisagreementasofMarch31,2012. AsofMarch31,2012,$486millionofthe$3,910millionincashandcashequivalentsandmarketablesecuritieswas heldbyourforeignsubsidiaries.Wehaveprovidedfortheadditionaltaxesthatwouldbedueifwerepatriatedthesefunds foruseinouroperationsintheUnitedStates. 66
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Table of Contents Cashprovidedbyoperatingactivities Cashflowfromoperatingactivitiesduringthefirstquarterof2012primarilyconsistedofnetincomeof$205million, adjusted for certain noncash items, including total depreciation and amortization of $110 million, and sharebased compensationexpenseof$103million.Theincreaseincashflowfromoperatingactivitiesduringthefirstquarterof2012 comparedtothesameperiodin2011wasmainlyduetoanincreaseinnetincomeasadjustedfornoncashitemssuchas depreciation,amortization,andsharebasedcompensation. Cash flow from operating activities during 2011 primarily resulted from net income of $1,000 million, adjusted for certain noncash items, including total depreciation and amortization of $323 million, and sharebased compensation expenseof$217million. Cashflowfromoperatingactivitiesduring2010primarilyresultedfromnetincomeof$606million,adjustedforcertain noncashitems,includingtotaldepreciationandamortizationof$139millionandsharebasedcompensationexpenseof$20 million,partiallyoffsetbycashconsumedbyworkingcapitalof$70million. Cashflowfromoperatingactivitiesduring2009primarilyresultedfromnetincomeof$229million,adjustedforcertain noncashitems,includingtotaldepreciationandamortizationof$78millionandsharebasedcompensationof$27million, partiallyoffsetbycashconsumedbyworkingcapitalof$179million. Cashusedininvestingactivities Cash used in investing activities during the first quarter of 2012 primarily resulted from capital expenditures of $453millionrelatedtothepurchaseofservers,networkingequipment,storageinfrastructure,andtheconstructionofdata centersaswellas$240millionforthenetpurchaseofmarketablesecurities.Theincreaseincashusedininvestingactivities duringthefirstquarterof2012comparedtothesameperiodin2011wasmainlyduetoincreasesincapitalexpendituresand thepurchaseofmarketablesecuritieswhichwerenotinourinvestmentportfoliointhepriorperiod. Cashusedininvestingactivitiesduring2011primarilyresultedfromtheuseofapproximately$2,396millionforthe netpurchaseofmarketablesecurities.Ourcashusedininvestingactivitiesin2011alsoconsistedofcapitalexpendituresof $606millionrelatedtothepurchaseofservers,networkingequipment,storageinfrastructure,andtheconstructionofdata centers. Cash used in investing activities during 2010 and 2009 primarily consisted of capital expenditures related to the purchasesofpropertyandequipmentandtheconstructionofdatacenters.Changesinrestrictedcashanddepositsconsumed $9 million and $32 million of cash related to security deposits in support of real estate expansion in 2010 and 2009, respectively.Acquisitions,netofcashacquired,alsoconsumed$22millionofcashin2010. Weanticipatemakingcapitalexpendituresin2012ofapproximately$1.6billionto$1.8billion,aportionofwhichwe willfinancethroughleasingarrangements.Wealsoanticipatespending$300millionincashaspartofthepurchasepricefor the acquisition of Instagram and approximately $550 million in cash in exchange for the assignment of Microsoft CorporationsrightstoacquirecertainpatentassetsofAOLInc.aswellastheentityholdingaportionofthoseassets. Cashprovidedbyfinancingactivities Our financing activities have primarily consisted of equity issuances, lease financing, and debt financing. Net cash providedbyfinancingactivitieswas$50millionand$798million,respectively,forthefirstquartersof2012and2011,and $1,198million,$781million,and$243million,respectively,for2011,2010,and2009.Thisincludesexcesstaxbenefits fromstockawardactivitiesof$54million,$69million,$433million,$115million,and$51million,respectively. 67
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Table of Contents InJanuary2011,wecompletedanofferingofourClassAcommonstocktocertainnonU.S.investorsthatgenerated $998 million in net proceeds. In December 2010, we completed an offering of our Class A common stock that generated $500millioninproceeds.InMay2009,wecompletedanofferingofSeriesEpreferredstockthatgenerated$200millionin proceeds. InMarch2010,weenteredintoacreditfacilitywithcertainlenders.Thisfacilityallowedforthedrawdownofupto $250millioninunsecuredseniorloans.InApril2010,wedrewdownthefullamountavailableunderthefacility,andin March2011,werepaidtheentire$250millionbalance. OffBalanceSheetArrangements Wedidnothaveanyoffbalancesheetarrangementsinthefirstquarterof2012,orin2011,2010,or2009. Contingencies Weareinvolvedinclaims,lawsuits,governmentinvestigations,andproceedingsarisingfromtheordinarycourseofour business.Werecordaprovisionforaliabilitywhenwebelievethatitisbothprobablethataliabilityhasbeenincurred,and theamountcanbereasonablyestimated.Significantjudgmentisrequiredtodeterminebothprobabilityandtheestimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyondourcontrol.Shouldanyoftheseestimatesandassumptionschangeorprovetobeincorrect,itcouldhaveamaterial impactonourresultsofoperations,financialposition,andcashflows. Commitments Ourprincipalcommitmentsconsistofobligationsundercapitalandoperatingleasesforequipmentandofficeanddata center facilities. The following table summarizes our commitments to settle contractual obligations in cash as of December31,2011.
PaymentDuebyPeriod Total Less than 1Year 13 Years 35 Years More than 5Years
Operatingleaseobligations Capitalleaseobligations Othercontractualcommitments(1) Totalcontractualobligations
$ 945 817 500 $2,262
$180 322 450 $ 952
$243 337 25 $ 605
$197 28 25 $ 250
$325 130 $ 455
(1) Other contractual commitments primarily relate to equipment and supplies for our data center operations, and to a lesser extent, construction of our data center sites.
Inaddition,ourotherliabilitiesinclude$60millionrelatedtouncertaintaxpositionsasofDecember31,2011.Dueto uncertaintiesinthetimingofthecompletionoftaxaudits,thetimingoftheresolutionofthesepositionsisuncertainandwe areunabletomakeareasonablyreliableestimateofthetimingofpaymentsinindividualyearsbeyond12months.Asa result,thisamountisnotincludedintheabovetable. RecentlyIssuedandAdoptedAccountingPronouncements ComprehensiveIncome InMay2011,theFinancialAccountingStandardsBoardissuedguidancethatchangedtherequirementforpresenting ComprehensiveIncomeintheconsolidatedfinancialstatements.Theupdaterequiresanentitytopresentthecomponents of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December15,2011andshouldbeappliedretrospectively.WeadoptedthisnewguidanceonJanuary1,2012. 68
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Table of Contents CriticalAccountingPoliciesandEstimates OurconsolidatedfinancialstatementsarepreparedinaccordancewithU.S.generallyacceptedaccountingprinciples (GAAP).Thepreparationoftheseconsolidatedfinancialstatementsrequiresustomakeestimatesandassumptionsthataffect thereportedamountsofassets,liabilities,revenue,costsandexpenses,andrelateddisclosures.Theseestimatesformthebasis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources.Webaseourestimatesandjudgmentsonhistoricalexperienceandonvariousotherassumptionsthatwebelieveare reasonableunderthecircumstances.Onanongoingbasis,weevaluateourestimatesandassumptions.Ouractualresultsmay differfromtheseestimatesunderdifferentassumptionsorconditions. We believe that of our significant accounting policies, which are described in note 1 to our consolidated financial statements,thefollowingaccountingpoliciesinvolveagreaterdegreeofjudgmentandcomplexity.Accordingly,theseare thepolicieswebelievearethemostcriticaltoaidinfullyunderstandingandevaluatingourfinancialconditionandresults ofoperations. RevenueRecognitionforPaymentsandOtherFees WeenablePaymentsfromouruserstoourPlatformdevelopers.OuruserscanmakepaymentsontheFacebookPlatform by using credit cards or other payment methods available on our website. The primary process for these transactions is throughthepurchaseofourvirtualcurrency.Ourusersthenusethisvirtualcurrencytopurchasevirtualanddigitalgoodsin games and apps from developers on the Facebook Platform. Upon the initial sale of the virtual currency, we record considerationreceivedfromauserasadeposit. Whenauserengagesinapaymenttransactionutilizingthevirtualcurrencyforthepurchaseofavirtualordigitalgood fromaPlatformdeveloper,wereducethevirtualcurrencybalanceoftheuserbythepriceofthepurchase,whichisaprice thatissolelydeterminedbythePlatformdeveloper.WeremittothePlatformdeveloperanamountthatisbasedonthetotal amountofvirtualcurrencyredeemedlesstheprocessingfeethatwechargethePlatformdeveloperfortheserviceperformed. Ourrevenueisthenetamountofthetransactionrepresentingourprocessingfeeforthetransaction.Werecordrevenueona netbasisaswedonotconsiderourselvestobetheprincipalinthesaleofthevirtualordigitalgoodtotheuser.UnderGAAP guidancerelatedtoreportingrevenuegrossasaprincipalversusnetasanagent,theindicatorsusedtodeterminewhetheran entity is a principal or an agent to a transaction are subject to judgment. We consider ourselves the agent to these transactionswhenweapplytheindicatorstoourfacts.Shouldmaterialsubsequentchangesinthesubstanceornatureofthe transactionswithPlatformdevelopersresultinusbeingconsideredtheprincipalinsuchsales,wewouldreflectthevirtual anddigitalgoodssaleasrevenueandtheamountspaidtothePlatformdevelopersasanassociatedcost.Thiswouldhaveno impactuponouroperatingincome,butourrevenueandassociatedcostswouldincreasebyasimilaramount. IncomeTaxes We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertaintiesintheapplicationofaccountingprinciplesandcomplextaxlaws. Werecordaprovisionforincometaxesfortheanticipatedtaxconsequencesofthereportedresultsofoperationsusing theassetandliabilitymethod.Underthismethod,werecognizedeferredtaxassetsandliabilitiesfortheexpectedfuturetax consequencesoftemporarydifferencesbetweenthefinancialreportingandtaxbasesofassetsandliabilities,aswellasfor operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.Werecordavaluationallowancetoreduceourdeferredtaxassetstothenetamountthatwebelieveismorelikely thannottoberealized. Werecognizetaxbenefitsfromuncertaintaxpositionsonlyifwebelievethatitismorelikelythannotthatthetax positionwillbesustainedonexaminationbythetaxingauthoritiesbasedonthetechnicalmeritsofthe 69
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Table of Contents position.Althoughwebelievethatwehaveadequatelyreservedforouruncertaintaxpositions,wecanprovidenoassurance thatthefinaltaxoutcomeofthesematterswillnotbemateriallydifferent.Wemakeadjustmentstothesereserveswhenfacts andcircumstanceschange,suchastheclosingofataxauditortherefinementofanestimate.Totheextentthatthefinaltax outcomeofthesemattersisdifferentthantheamountsrecorded,suchdifferenceswillaffecttheprovisionforincometaxesin theperiodinwhichsuchdeterminationismadeandcouldhaveamaterialimpactonourfinancialconditionandoperating results.Theprovisionforincometaxesincludestheeffectsofanyreservesthatwebelieveareappropriate,aswellasthe relatednetinterestandpenalties. SharebasedCompensation Overview We have granted RSUs to our employees and members of our board of directors. Pre2011 RSUs vest upon the satisfactionofbothaserviceconditionandaliquiditycondition.Theserviceconditionforthemajorityoftheseawardsis satisfiedoverfouryears.Theliquidityconditionissatisfiedupontheoccurrenceofaqualifyingevent,definedasachange ofcontroltransactionorsixmonthsfollowingtheeffectivedateofaninitialpublicoffering.Underthetermsofour2005 Stock Plan, the shares underlying RSUs that satisfy both of these conditions are to be delivered to holders six months followingourinitialpublicoffering. Post2011RSUsarenotsubjecttoaliquidityconditioninordertovest.ThemajorityofPost2011RSUsareearned overaserviceperiodoffourorfiveyears. SharebasedCompensationExpense Weaccountforsharebasedemployeecompensationplansunderthefairvaluerecognitionandmeasurementprovisions inaccordancewithapplicableaccountingstandards,whichrequireallsharebasedpaymentstoemployees,includinggrants ofstockoptionsandRSUs,tobemeasuredbasedonthegrantdatefairvalueoftheawards. Sharebasedcompensationexpenseisrecordednetofestimatedforfeituresinourconsolidatedstatementsofincomeand as such is recorded for only those sharebased awards that we expect to vest. We estimate the forfeiture rate based on historicalforfeituresofequityawardsandadjusttheratetoreflectchangesinfactsandcircumstances,ifany.Wewillrevise our estimated forfeiture rate if actual forfeitures differ from our initial estimates. We record sharebased compensation expenseforservicebasedequityawardssuchasstockoptions,restrictedshares,andPost2011RSUsusingthestraightline attributionmethodovertheperiodduringwhichtheemployeeisrequiredtoperformserviceinexchangefortheaward.We recordsharebasedcompensationexpenseforperformancebasedequityawardssuchasPre2011RSUsusingtheaccelerated attributionmethod.Upontheeffectivenessofourinitialpublicoffering,wewillrecognizeasignificantcumulativeshare basedcompensationexpensefortheportionofthePre2011RSUsthathadmettheserviceconditionasofthatdate. Wehavehistoricallyissuedunvestedrestrictedsharestoemployeestockholdersofcertainacquiredcompanies.Asthese awards are generally subject to continued postacquisition employment, we have accounted for them as postacquisition sharebasedcompensationexpense.Werecognizecompensationexpenseequaltothegrantdatefairvalueofthecommon stockonastraightlinebasisovertheemployeesrequiredserviceperiod,netofestimatedforfeitures. Wecapitalizesharebasedemployeecompensationexpensewhenappropriate.Wedidnotcapitalizeanysharebased compensationexpenseinthefirstquarterof2012orinthethreeyearsendedDecember31,2011. As of March 31, 2012, no sharebased compensation expense had been recognized for Pre2011 RSUs because the qualifyingeventsdescribedabovehadnotoccurred.Inthequarterinwhichourinitialpublicofferingiscompleted,wewill beginrecordingsharebasedcompensationexpenseusingtheacceleratedattributionmethodnetofforfeituresbasedonthe grantdatefairvalueofthePre2011RSUs.ForPre2011RSUs,ifourinitialpublicofferinghadoccurredonMarch31,2012, wewouldhaverecognized$965millionofcumulativesharebasedcompensationexpenseonthatdate. 70
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Table of Contents Thefollowingtablesummarizes,onaproformabasis,thenumberofvestedandunvestedPre2011RSUsoutstandingat March31,2012andthesharebasedcompensationexpenserelatedtoPre2011RSUsthatwewouldhaveincurred,assuming ourinitialpublicofferinghadoccurredonMarch31,2012.

VestedPre2011RSUs asofMar31,2012(1) UnvestedPre2011RSUs asofMar31,2012(2) (inthousands) ProFormaSharebased CompensationExpense (inmillions)
241,314
84,918
$965
(1) Forpurposesofthistable,VestedRSUsincludethoseRSUsforwhichtheserviceconditionhadbeenfulfilledasofMarch31,2012. (2) For purposes of this table, Unvested RSUs include those RSUs for which the service condition had not been fulfilled as of March 31, 2012 and exclude an estimateofforfeitedRSUs.
ThistableisbasedonPre2011RSUsoutstandingasofMarch31,2012andisintendedtobeillustrativeonly.The actualtimingofcompensationexpensewewillrecognizerelatedtooutstandingPre2011RSUawardswilldependonthe dateoftheclosingofourinitialpublicoffering.Theactualamountofcompensationexpensewewillincurwillvarybecause theserviceconditionofadditionalRSUswillbefulfilledbetweenMarch31,2012andtheclosingdateofourinitialpublic offering. WeestimatethattheremainingunrecognizedsharebasedcompensationexpenserelatingtoPre2011RSUswouldbe approximately$235million,aftergivingeffecttoestimatedforfeituresandwouldberecognizedintheremainderof2012 andthereafterasshownonthetablebelow,ifourinitialpublicofferinghadoccurredonMarch31,2012. In addition, as of March 31, 2012, we had 53 million Post2011 RSUs outstanding. For these Post2011 RSUs, $97 millioninexpensewasrecognizedinthefirstquarterof2012and,aftergivingeffecttoestimatedforfeitures,aremaining $1,119millionwillberecognizedintheremainderof2012andthereafterasshowninthetablebelow.Thistableestimates futuresharebasedcompensationexpenserelatedtoalloutstandingequitygrants,consistingofRSUs,restrictedshares,and stockoptionsthroughMarch31,2012.Thetabledoesnottakeintoaccountanysharebasedcompensationexpenserelated tofutureawardsthatmaybegrantedtoemployees,directors,orotherserviceproviders.Additionally,theamountsinthe tableincludeanestimateofunvestedawardsthatmaybeforfeitedinfutureperiodsduetothedepartureofemployeesor directors.Ourforfeitureestimatesaresubjecttoadjustmentbasedonactualexperience.
Remainderof 2012 2013 2014 (inmillions) 2015 Beyond2015
Pre2011RSUs(1)(2) Post2011RSUs Restrictedshares Stockoptions Total
$ $
107 215 10 6 338
$ 79 289 11 7 $386
$ 31 291 10 5 $337
$ 8 240 3 4 $255
$ $
10 84 6 100
(1) AssumesourinitialpublicofferingwascompletedonMarch31,2012. (2) Excludestheestimated$965millionexpenserelatedtoPre2011RSUsforwhichtheserviceconditionhadbeenachievedasofMarch31,2012andwhichwould havebeenincurredassumingourinitialpublicofferinghadoccurredonMarch31,2012.
The aggregate intrinsic value of vested and unvested stock options and vested and unvested RSUs as of March 31, 2012,basedonanassumedinitialpublicofferingpriceof$pershare,themidpointofthepricerangesetforthonthe coverofthisprospectus,was$million,$million,$million,and$million,respectively. WeestimatedthefairvalueofstockoptionawardsincludedinthetableaboveusingtheBlackScholesMertonsingle optionvaluationmodel,whichrequiresinputssuchasexpectedterm,expectedvolatility,andrisk 71
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Table of Contents free interest rate. The estimated forfeiture rate of stock option awards also affects the amount of aggregate compensation expensewewillincur.Theseinputsaresubjectiveandgenerallyrequiresignificantanalysisandjudgmenttodevelop. We estimate the expected term for stock option awards based upon the historical behavior of our employees. The expectedvolatilityisbasedonastudyofpubliclytradedindustrypeercompanies.Theforfeiturerateisderivedprimarily fromourhistoricaldata,andtheriskfreeinterestrateisbasedontheyieldavailableonU.S.Treasuryzerocouponissues. Ourdividendyieldis0%,sincewehavenotpaid,anddonotexpecttopay,dividends. Weestimatedthefairvalueofemployeestockoptionsgrantedin2009and2010asofthedateofthegrantusingthe followingweightedaverageassumptions:
YearEndedDecember31, 2009 2010
Expectedtermfromgrantdate(inyears) Riskfreeinterestrate Expectedvolatility Dividendyield
5.04 2.01% 0.57
7.15 1.69% 0.46
Theweightedaveragegrantdatefairvalueofemployeestockoptionsgrantedduring2009and2010was$1.12and $5.26,respectively,pershare.Wedidnotgrantanystockoptionsin2011orinthefirstquarterof2012. TaxWithholdingandRemittanceObligations WeestimatethatapproximatelysharesunderlyingPre2011RSUswillsettleapproximatelysixmonthsafterour initialpublicoffering.Inaddition,weestimatethatanadditionalmillionPre2011RSUswillsettlefollowingsuchdate throughtheendof2012.WeestimatethatanaggregateofmillionPre2011RSUsandPost2011RSUswillsettlein 2013. RSUholdersgenerallywillrecognizetaxableincomebaseduponthevalueofthesharesonthedatetheyaresettledand wearerequiredtowithholdtaxesonsuchvalueatapplicableminimumstatutoryrates.Wecurrentlyexpectthattheaverage ofthesewithholdingrateswillbeapproximately45%.Foradditionalinformationonourtaxwithholdingandremittance obligationsrelatedtoRSUvesting,seeLiquidityandCapitalResourcesabove. CorporateIncomeTaxes TheRSUactivitydiscussedabove,aswellasactivityfromotherequityawardsincludingstockoptions,willalsohave corporateincometaxeffects.Themostsignificanteffectisthatthesettlementofawardsorexerciseofnonstatutorystock optionsgeneratesacorporateincometaxdeductionthatwillreduceourU.S.corporateincometaxliability.Theexerciseof incentivestockoptions(ISOs)mayalsoresultinacorporateincometaxdeduction,butonlyincertaincircumstanceswhere theholderoftheISOsalsosellstheacquiredsharesinadisqualifyingdisposition.Theamountofthiscorporateincometax deductionwillbebasedonthevalueofsharesattheexerciseorsettlementdate,whichdiffersfromthevalueofthesharesat thegrantdatethatisusedtodeterminethesharebasedcompensationexpense.Dependingonthevalueofthesharesonthe datetheequityawardsaresettledoroptionsareexercised,wecouldgenerateacorporateincometaxdeductionthatexceeds ourotherU.S.taxableincomeinthatyear,whichwouldresultinataxablelossforU.S.corporateincometaxpurposesthat reduces our U.S. corporate income tax liability to an immaterial amount for that year. In 2012, we expect to settle approximatelymillionRSUs.Inaddition,asofMarch31,2012,wehadvestednonstatutoryoptionsoutstandingto purchaseapproximately185millionsharesofourClassBcommonstock.AsofMarch31,2012,wealsohadvestedISOs outstanding to purchase approximately 40 million shares of our Class B common stock, but given the uncertainty in predictingwhethertheISOholderswillchoosetomakedisqualifyingdispositions, 72
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Table of Contents we are assuming that no corporate income tax deductions will be generated by these ISOs. Assuming all of these vested nonstatutorystockoptionsareexercisedduring2012andassumingthevalueofourClassBcommonstockatsettlementor uponexerciseisthemidpointofthepricerangeonthecoverpageofthisprospectus,weestimatethatthissettlementand optionexerciseactivitywouldgenerateacorporateincometaxdeductionofapproximately$billionto$billion.The amountthatthisdeductionexceedsourotherU.S.taxableincomewillresultinanetoperatingloss(NOL)thatcanbecarried backtotheprecedingtwoyearstooffsetourtaxableincomeforU.S.federalincometaxpurposes,aswellasinsomestates, which would allow us to receive a refund of some of the corporate income taxes we paid in those years. Based on the assumptionsabove,weanticipatethatthisrefundcouldbeupto$500millionandpayabletousduringthefirstsixmonths of2013.AnyportionoftheNOLremainingafterthiscarrybackwouldbecarriedforwardtooffsetourotherU.S.taxable incomegeneratedinfutureyears,whichtaxableincomewillalsobereducedbydeductionsgeneratedfromnewstockaward settlementandstockoptionexerciseactivityoccurringinthosefutureyears. Utilization of our NOL carryforwards may be subject to annual limitations due to the ownership change limitations providedbytheInternalRevenueCodeandsimilarstateprovisions.Suchannuallimitationscouldresultintheexpirationof theNOLcarryforwardsbeforetheirutilization.Theeventsthatmaycauseownershipchangesinclude,butarenotlimitedto, acumulativestockownershipchangeofgreaterthan50%overathreeyearperiod. Thecorporateincometaxdeductionsgeneratedbythissettlementandexerciseactivitydescribedabovedonotreduce our effective tax rate reflected in our consolidated statements of income. Our provision for income taxes reflects the tax benefitsthatarerecordedatthetimethesharebasedcompensationisinitiallyrecognizedasanexpense,whichisbasedon thefairvalueofsharesatgrantdate,andisdifferentthanthecorporateincometaxdeduction,whichisbasedonthevalueof sharesatsettlementoratexercise.Ifthereductioninourcorporateincometaxliabilityfromsettlementsandexercisesis greaterthanthetaxbenefitsthatwerecognizedwhenthesharebasedcompensationexpensewasinitiallyrecorded,which willgenerallyoccurifoursharepricehasappreciatedbetweengrantdateandsettlementorexercisedate,thiswillcreatean excesstaxbenefitthatisrecordedasacomponentofadditionalpaidincapitalandnotasareductionofourprovisionfor incometaxesinourconsolidatedstatementsofincome.Thetiminginwhichtheseexcesstaxbenefitsarereflectedonour balancesheetgenerallymatchesthetiminginwhichthereductioninpriororfutureincometaxliabilityoccurs.Thus,ifwe havethesetypesofNOLsremainingafteranycarrybackclaims,wewouldnotrecordadeferredtaxassetforsuchNOLs,but rather we would record an adjustment to additional paidin capital and a reduction to our corporate income tax liability duringtheperiodinwhichthoseNOLsareusedtoreduceourcorporateincometaxliability.Theseexcesstaxbenefitswould berecordedinourstatementsofcashflowsascashprovidedbyfinancingactivities. ValuationofOurCommonStock The valuations of our Class B common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of PrivatelyHeldCompany Equity Securities IssuedasCompensation.Weconsiderednumerousobjectiveandsubjectivefactorstodetermineourbestestimateofthefair valueofourClassBcommonstock,includingbutnotlimitedto,thefollowingfactors: recentprivatestocksaletransactions ourhistoricalfinancialresultsandestimatedtrendsandprospectsforourfuturefinancialperformance ourperformanceandmarketpositionrelativetoourcompetitorsand/orsimilarpubliclytradedcompanies theeconomicandcompetitiveenvironment,includingtheindustryinwhichweoperateand independentthirdpartyvaluationscompletedasoftheendofeachquarter. 73
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Table of Contents WehavegrantedthefollowingRSUssinceJanuary1,2011:

Shares Underlying RSUs (thousands) GrantDate FairValue Aggregate GrantDate FairValue (millions)
GrantDate
2011 FirstQuarter February16,2011 March25,2011 SecondQuarter May11,2011 June6,2011 June22,2011 ThirdQuarter July21,2011 September1,2011 September6,2011 September22,2011 FourthQuarter November11,2011 December22,2011 2012 FirstQuarter January12,2012 January27,2012
2,022 40,006 2,580 1,643 1,010 2,898 1,426 20 1,649 670 1,202
$ 24.10 25.43 27.58 28.88 29.67 30.07 30.07 30.07 30.07 29.91 29.76
$49 1,017 71 47 30 87 43 1 50 20 36
944 1,003
30.18 30.73
28 31
WeconductedvaluationsofourClassBcommonstockthattookintoaccountthefactorsdescribedaboveanduseda combinationoffinancialandmarketbasedmethodologiestodetermineourbusinessenterprisevalue(BEV)includingthe followingapproaches: Discounted Cash Flow Method (DCFM). DCFM involves estimating the future cash flows of a business for a certaindiscreteperiodanddiscountingsuchcashflowstopresentvalue.Ifthecashflowsareexpectedtocontinue beyondthediscretetimeperiod,thenaterminalvalueofthebusinessisestimatedanddiscountedtopresentvalue. The discount rate reflects the risks inherent in the cash flows and the market rates of return available from alternativeinvestmentsofsimilartypeandqualityasofthevaluationdate. GuidelinePublicCompanyMethod(GPCM).GPCMassumesthatbusinessesoperatinginthesameindustrywill sharesimilarcharacteristicsandthatthesubjectbusinesssvaluewillcorrelatetothosecharacteristics.Therefore,a comparisonofthesubjectbusinesstosimilarbusinesseswhosefinancialinformationandpublicmarketvalueare availablemayprovideareasonablebasistoestimatethesubjectbusinesssvalue.TheGPCMprovidesanestimate ofvalueusingmultiplesderivedfromthestockpricesofpubliclytradedcompanies.Inselectingguidelinepublic companiesforthisanalysis,wefocusedprimarilyonquantitativeconsiderations,suchasfinancialperformanceand otherquantifiabledata,aswellasqualitativeconsiderations,suchasindustryandeconomicdrivers. Market Transaction Method (MTM). MTM considers transactions in the equity securities of the business being valued. During 2011, there were private stock sale transactions in our common stock. These transactions are considered if they occur with or among willing and unrelated parties. For our MTM estimates, we evaluate all transactionsinthequarterwithparticularfocusontransactionsthatarecloserinproximitytothevaluationdate. WechoosetheweightingfortheMTMeachquarterbasedon 74
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Table of Contents factors such as the volume of transactions in each period, the timing of these transactions, and whether the transactionsinvolvedinvestorswithaccesstoourfinancialinformation. We performed all three methodologies for each quarter, and weighted the methodologies based on the facts and circumstancesinthequarter.OurindicatedBEVateachvaluationdatewasthenallocatedtothesharesofpreferredstock, commonstock,warrants,options,andRSUs,usingtheoptionpricingmethod(OPM). FirstQuarter2011 WedeterminedthefairvalueofourClassBcommonstocktobe$25.54pershareasofMarch31,2011.Weassigneda 50% weighting to the MTM due to the significant volume of thirdparty private stock sale transactions in March 2011, including a thirdparty Class B common stock tender offer transaction for employee shares for $25.00 per share which commencedonMarch1,2011andbecamebindinguponthesellingstockholdersonMarch29,2011.Thetenderofferwas undertakenbyinvestorswhohadaccesstoourhistoricalfinancialinformation.TocalculatetheMTM,weusedtheweighted average price of all transactions originating in March 2011 that were expected to be consummated, including the tender offer. We based our MTM estimate on March 2011 transactions because we believe transactions occurring closer to the quarterendvaluationdatearemorerelevanttofairvaluethanthosetransactionsoccurringearlierinthequarter.Weassigned a35%weightingtotheGPCMwhichreflectedthestockpricesandmarketmultiplesofguidelinepubliccompanies.We assigned a 15% weighting to the DCFM which was based on a weighted average cost of capital of 15% and a perpetual growthrateof5%.TheDCFMreceivedthelowestweightbecauseourfinancialplanhadnotbeenrecentlyupdated,and thereforewebelievedthecashflowassumptionsusedintheDCFMwerelessrelevanttothedeterminationoffairvalueasof themeasurementdate.TheBEVresultingfromthisanalysiswasthenallocatedusingtheOPManda7.5%marketability discountwasapplied. ThefairvalueoftheRSUsgrantedinFebruary2011wasdeterminedusingastraightlinemethodology,withthebenefit ofhindsight,betweenthefairvaluedeterminedasofDecember31,2010of$20.85pershareandthe$25.00pershareoffer priceforthetenderofferdescribedabovethatcommencedonMarch1,2011.ThefairvalueoftheRSUsgrantedinMarch 2011 was determined using a similar straightline methodology between the tender offer price of $25.00 per share as of March1,2011,andthefairvaluedeterminedasofMarch31,2011of$25.54pershare.Wedeterminedthatthestraightline methodologyprovidesthemostreasonablebasisforthevaluationsfortheRSUsgrantedontheinterimdatesbecausewedid notidentifyanysingleeventthatoccurredduringthisinterimperiod(otherthantheMarch2011tenderoffer)thatwould havecausedamaterialchangeinfairvalue. SecondQuarter2011 WedeterminedthefairvalueofourClassBcommonstocktobe$30.07pershareasofJune30,2011.Weassigneda 50% weighting to the MTM due to the significant volume of thirdparty private stock sale transactions in June 2011, includingtransactionsinvolvinginvestorswhohadaccesstoourhistoricalfinancialinformation.TocalculatetheMTM,we used the weighted average price of all transactions originating in June 2011 that were expected to be consummated. We based our MTM estimate on June 2011 transactions because we believe transactions occurring closer to the quarterend valuationdatearemorerelevanttothedeterminationoffairvaluethanthosetransactionsoccurringearlierinthequarter.We madenochangetotheweightingsassignedtotheGPCMandDCFMfromthepreviousquarter.Inthisperiod,weadded certain Internet companies that had recently completed initial public offerings to our set of guideline public companies, whichincreasedthevalueoftheGPCMfromthepriorvaluationperiod.TheDCFMwasbasedonaweightedaveragecostof capitalof15%andaperpetualgrowthrateof5%.TheBEVresultingfromthisanalysiswasthenallocatedusingtheOPM anda6.5%marketabilitydiscountwasapplied.Significantfactorsinfluencingthechangeinvaluationrelativetotheprior quarterincludedtheforegoingprivatestocksaletransactionsandtheadditiontooursetofguidelinepubliccompaniesof newlypubliccompanieswhosevaluationmultipleswererelativelyhigherthanothersinthecomparisongroup.Webelieve ourvaluationincreasewasaffectedbymediaspeculationthatwewereplanning 75
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Table of Contents an initial public offering in 2012, investor speculation that our financial performance was better than investors had previouslybelieved,andthesuccessfulpublicofferingsandtradingperformanceofcertainInternetcompaniesinthesecond quarter. ThefairvaluesoftheRSUsgrantedinMayandJune2011weredeterminedusingastraightlinemethodology,withthe benefit of hindsight, between the fair value determined as of March 31, 2011 of $25.54 per share and the fair value determinedasofJune30,2011of$30.07pershare.Wedeterminedthatthestraightlinemethodologyprovidesthemost reasonablebasisforthevaluationsfortheRSUsgrantedontheinterimdatesbecausewedidnotidentifyanysingleevent thatoccurredduringthisinterimperiodthatwouldhavecausedamaterialchangeinfairvalue. ThirdQuarter2011 WedeterminedthefairvalueofourClassBcommonstocktobe$30.07pershareasofSeptember30,2011.Weuseda combination of the GPCM, the DCFM, and the MTM to determine BEV. We assigned a 50% weighting to the DCFM becausewehadrecentlycompletedacomprehensiveupdatetoourfinancialplanandthereforewebelievedtheassumptions usedintheDCFMcloselyreflectedBEV.TheBEVresultingfromthisDCFManalysiswasallocatedusingtheOPManda 6.0%marketabilitydiscountwasapplied.Relativetothefirstandsecondquarters,inthethirdquarterweassignedalower weightingof25%totheMTMduetotheloweroverallvolumeofthirdpartyprivatestocksaletransactionsandthelackof significant transactions with investors that had access to our financial information. To calculate the MTM, we used the weightedaveragepriceofalltransactionsoriginatinginSeptember2011thatwereexpectedtobeconsummated.Webased our MTM estimate on September 2011 transactions because we believe transactions occurring closer to the quarterend valuationdatearemorerelevanttothedeterminationoffairvaluethanthosetransactionsoccurringearlierinthequarter. Because there was no change to fair value between the two valuation periods, and because we did not identify any eventsduringtheperiodthatwouldhavecausedamaterialchangeinfairvalue,weused$30.07pershareasthefairvaluefor allRSUgrantsduringtheperiod. FourthQuarter2011 We determined the fair value of our Class B common stock to be $29.73 per share as of December 31, 2011. We assigned a 50% weighting to the MTM due to the significant volume of thirdparty private stock sale transactions in December 2011, including transactions involving investors who had access to our historical financial information. To calculatetheMTM,weusedtheweightedaveragepriceofalltransactionsoriginatinginDecember2011thatwereexpected tobeconsummated.WebasedourMTMestimateonDecember2011transactionsbecausewebelievetransactionsoccurring closertothequarterendvaluationdatearemorerelevanttothedeterminationoffairvaluethanthosetransactionsoccurring earlierinthequarter.Weassigneda25%weightingtotheGPCMandtheDCFMtodeterminefairvalue.Inthisperiod,we includedadditionalInternetcompaniesthathadrecentlycompletedinitialpublicofferingstooursetofguidelinepublic companiesforuseinestimatingtheGPCM.ComparedtoourvaluationasofSeptember30,2011,weassignedalowerweight totheDCFMinthisperiodbecausetimehadpassedsincekeyelementsofourfinancialplanhadbeenupdated,andtherefore thecashflowassumptionsusedintheDCFMwerelessrelevanttothedeterminationoffairvalueasofthemeasurementdate. TheDCFMwasbasedonaweightedaveragecostofcapitalof15%andaperpetualgrowthrateof5%.TheBEVresulting from this analysis was then allocated using the OPM and a 5.5% marketability discount was applied. The primary factor influencingthechangeinvaluationrelativetothepriorquarterwastheforegoingprivatestocksaletransactions,andwe believeourvaluationdecreasewasaffectedbycontinuedpublicmarketvolatility. The fair values of the RSUs granted in November and December 2011 were determined using a straightline methodology,withthebenefitofhindsight,betweenthefairvaluedeterminedasofSeptember30,2011of$30.07pershare andthefairvaluedeterminedasofDecember31,2011of$29.73pershare.Wedeterminedthat 76
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Table of Contents thestraightlinemethodologyprovidesthemostreasonablebasisforthevaluationfortheRSUsgrantedontheinterimdates because we did not identify any single event that occurred during this interim period that would have caused a material changeinfairvalue. FirstQuarter2012 WedeterminedthefairvalueofourClassBcommonstocktobe$30.89pershareasofJanuary31,2012.Noequity awardshavebeenissuedsubsequenttoFebruary1,2012.Weassigneda50%weightingtotheMTMduetothesignificant volumeofthirdpartyprivatestocksaletransactionsinJanuary2012,includingtransactionsinvolvinginvestorswhohad accesstoourhistoricalfinancialinformation.TocalculatetheMTM,weusedtheweightedaveragepriceofalltransactions originatinginJanuary2012thatwereexpectedtobeconsummated.Wemadenochangetotheweightingsassignedtothe GPCM and DCFM from the previous quarter. The DCFM was based on a weighted average cost of capital of 15% and a perpetualgrowthrateof5%.TheBEVresultingfromthisanalysiswasthenallocatedusingtheOPManda5%marketability discountwasapplied.Webelievetheprimaryfactorsinfluencingtheincreaseinvaluationfromthepriorperiodwerethe foregoingprivatestocksaletransactionsandageneralincreaseinthepricesofpubliclytradedequities. The fair values of the RSUs granted in January 2012 were determined using a straightline methodology, with the benefit of hindsight, between the fair value determined as of December 31, 2011 of $29.73 per share and the fair value determinedasofJanuary31,2012of$30.89pershare.Wedeterminedthatthestraightlinemethodologyprovidesthemost reasonablebasisforthevaluationsfortheRSUsgrantedontheinterimdatesbecausewedidnotidentifyanysingleevent thatoccurredduringthisinterimperiodthatwouldhavecausedamaterialchangeinfairvalue. QualitativeandQuantitativeDisclosuresaboutMarketRisk Weareexposedtomarketrisk,includingchangestointerestrates,foreigncurrencyexchangeratesandinflation. ForeignCurrencyExchangeRisk Internationalrevenueasapercentageofrevenuewas42%and49%forthefirstquarterof2011and2012,respectively, and33%,38%,and44%for2009,2010,and2011,respectively.Wehaveforeigncurrencyrisksrelatedtoourrevenueand operatingexpensesdenominatedincurrenciesotherthantheU.S.dollar,primarilytheEuro.Ingeneral,weareanetreceiver ofcurrenciesotherthantheU.S.dollar.Accordingly,changesinexchangerates,andinparticularastrengtheningoftheU.S. dollar,willnegativelyaffectourrevenueandotheroperatingresultsasexpressedinU.S.dollars. Wehaveexperiencedandwillcontinuetoexperiencefluctuationsinournetincomeasaresultoftransactiongainsor lossesrelatedtorevaluingcertaincurrentassetandcurrentliabilitybalancesthataredenominatedincurrenciesotherthan thefunctionalcurrencyoftheentitiesinwhichtheyarerecorded.Werecognizedforeigncurrencygainsof$16millionand $10millioninthefirstquarterof2011and2012,respectively,andaforeigncurrencylossof$29millionin2011.Foreign currencylosseswerenotsignificantin2009or2010.Atthistimewedonot,butwemayinthefuture,enterintoderivatives orotherfinancialinstrumentsinanattempttohedgeourforeigncurrencyexchangerisk.Itisdifficulttopredicttheimpact hedgingactivitieswouldhaveonourresultsofoperations. InterestRateSensitivity Ourcashandcashequivalentsandmarketablesecuritiesconsistofcash,certificatesofdeposit,timedeposits,money marketfundsandU.S.governmenttreasuryandagencydebtsecurities.Ourinvestmentpolicyandstrategyarefocusedon preservationofcapital,supportingourliquidityrequirements,andcompliancewiththeInvestmentCompanyActof1940. 77
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Table of Contents ChangesinU.S.interestratesaffecttheinterestearnedonourcashandcashequivalentsandmarketablesecuritiesand themarketvalueofthosesecurities.Ahypothetical100basispointincreaseininterestrateswouldresultinadecreaseof approximately$19millionand$15millioninthemarketvalueofouravailableforsaledebtsecuritiesasofMarch31,2012 andDecember31,2011,respectively.Anyrealizedgainsorlossesresultingfromsuchinterestratechangeswouldonlyoccur ifwesoldtheinvestmentspriortomaturity. InflationRisk Wedonotbelievethatinflationhashadamaterialeffectonourbusiness,financialcondition,orresultsofoperations. 78
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Table of Contents LETTERFROMMARKZUCKERBERG Facebookwasnotoriginallycreatedtobeacompany.Itwasbuilttoaccomplishasocialmissiontomaketheworldmore openandconnected. WethinkitsimportantthateveryonewhoinvestsinFacebookunderstandswhatthismissionmeanstous,howwemake decisionsandwhywedothethingswedo.Iwilltrytooutlineourapproachinthisletter. At Facebook, were inspired by technologies that have revolutionized how people spread and consume information. We oftentalkaboutinventionsliketheprintingpressandthetelevisionbysimplymakingcommunicationmoreefficient, theyledtoacompletetransformationofmanyimportantpartsofsociety.Theygavemorepeopleavoice.Theyencouraged progress.Theychangedthewaysocietywasorganized.Theybroughtusclosertogether. Today,oursocietyhasreachedanothertippingpoint.Weliveatamomentwhenthemajorityofpeopleintheworldhave accesstotheinternetormobilephonestherawtoolsnecessarytostartsharingwhattheyrethinking,feelinganddoing withwhomevertheywant.Facebookaspirestobuildtheservicesthatgivepeoplethepowertoshareandhelpthemonce againtransformmanyofourcoreinstitutionsandindustries. Thereisahugeneedandahugeopportunitytogeteveryoneintheworldconnected,togiveeveryoneavoiceandtohelp transformsocietyforthefuture.Thescaleofthetechnologyandinfrastructurethatmustbebuiltisunprecedented,andwe believethisisthemostimportantproblemwecanfocuson. Wehopetostrengthenhowpeoplerelatetoeachother. Evenifourmissionsoundsbig,itstartssmallwiththerelationshipbetweentwopeople. Personalrelationshipsarethefundamentalunitofoursociety.Relationshipsarehowwediscovernewideas,understandour worldandultimatelyderivelongtermhappiness. AtFacebook,webuildtoolstohelppeopleconnectwiththepeopletheywantandsharewhattheywant,andbydoingthis weareextendingpeoplescapacitytobuildandmaintainrelationships. Peoplesharingmoreevenifjustwiththeirclosefriendsorfamiliescreatesamoreopencultureandleadstoabetter understandingofthelivesandperspectivesofothers.Webelievethatthiscreatesagreaternumberofstrongerrelationships betweenpeople,andthatithelpspeoplegetexposedtoagreaternumberofdiverseperspectives. Byhelpingpeopleformtheseconnections,wehopetorewirethewaypeoplespreadandconsumeinformation.Wethinkthe worldsinformationinfrastructureshouldresemblethesocialgraphanetworkbuiltfromthebottomuporpeertopeer, ratherthanthemonolithic,topdownstructurethathasexistedtodate.Wealsobelievethatgivingpeoplecontroloverwhat theyshareisafundamentalprincipleofthisrewiring. Wehavealreadyhelpedmorethan900millionpeoplemapoutmorethan100billionconnectionssofar,andourgoalisto helpthisrewiringaccelerate. Wehopetoimprovehowpeopleconnecttobusinessesandtheeconomy. Wethinkamoreopenandconnectedworldwillhelpcreateastrongereconomywithmoreauthenticbusinessesthatbuild betterproductsandservices. Aspeoplesharemore,theyhaveaccesstomoreopinionsfromthepeopletheytrustabouttheproductsandservicestheyuse. Thismakesiteasiertodiscoverthebestproductsandimprovethequalityandefficiencyoftheirlives. 79
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Table of Contents Oneresultofmakingiteasiertofindbetterproductsisthatbusinesseswillberewardedforbuildingbetterproductsones thatarepersonalizedanddesignedaroundpeople.Wehavefoundthatproductsthataresocialbydesigntendtobemore engaging than their traditional counterparts, and we look forward to seeing more of the worlds products move in this direction. Our developer platform has already enabled hundreds of thousands of businesses to build higherquality and more social products.Wehaveseendisruptivenewapproachesinindustrieslikegames,musicandnews,andweexpecttoseesimilar disruptioninmoreindustriesbynewapproachesthataresocialbydesign. Inadditiontobuildingbetterproducts,amoreopenworldwillalsoencouragebusinessestoengagewiththeircustomers directlyandauthentically.MorethanfourmillionbusinesseshavePagesonFacebookthattheyusetohaveadialoguewith theircustomers.Weexpectthistrendtogrowaswell. Wehopetochangehowpeoplerelatetotheirgovernmentsandsocialinstitutions. Webelievebuildingtoolstohelppeoplesharecanbringamorehonestandtransparentdialoguearoundgovernmentthat could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggestproblemsofourtime. Bygivingpeoplethepowertoshare,wearestartingtoseepeoplemaketheirvoicesheardonadifferentscalefromwhathas historicallybeenpossible.Thesevoiceswillincreaseinnumberandvolume.Theycannotbeignored.Overtime,weexpect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediariescontrolledbyaselectfew. Throughthisprocess,webelievethatleaderswillemergeacrossallcountrieswhoareprointernetandfightfortherightsof theirpeople,includingtherighttosharewhattheywantandtherighttoaccessallinformationthatpeoplewanttosharewith them. Finally, as more of the economy moves towards higherquality products that are personalized, we also expect to see the emergence of new services that are social by design to address the large worldwide problems we face in job creation, educationandhealthcare.Welookforwardtodoingwhatwecantohelpthisprogress.
OurMissionandOurBusiness As I said above, Facebook was not originally founded to be a company. Weve always cared primarily about our social mission,theserviceswerebuildingandthepeoplewhousethem.Thisisadifferentapproachforapubliccompanytotake, soIwanttoexplainwhyIthinkitworks. IstartedoffbywritingthefirstversionofFacebookmyselfbecauseitwassomethingIwantedtoexist.Sincethen,mostof theideasandcodethathavegoneintoFacebookhavecomefromthegreatpeopleweveattractedtoourteam. Mostgreatpeoplecareprimarilyaboutbuildingandbeingapartofgreatthings,buttheyalsowanttomakemoney.Through theprocessofbuildingateamandalsobuildingadevelopercommunity,advertisingmarketandinvestorbaseIve developedadeepappreciationforhowbuildingastrongcompanywithastrongeconomicengineandstronggrowthcanbe thebestwaytoalignmanypeopletosolveimportantproblems. Simplyput:wedontbuildservicestomakemoneywemakemoneytobuildbetterservices. Andwethinkthisisagoodwaytobuildsomething.ThesedaysIthinkmoreandmorepeoplewanttouseservicesfrom companiesthatbelieveinsomethingbeyondsimplymaximizingprofits. 80
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Table of Contents Byfocusingonourmissionandbuildinggreatservices,webelievewewillcreatethemostvalueforourshareholdersand partners over the long term and this in turn will enable us to keep attracting the best people and building more great services.Wedontwakeupinthemorningwiththeprimarygoalofmakingmoney,butweunderstandthatthebestwayto achieveourmissionistobuildastrongandvaluablecompany. ThisishowwethinkaboutourIPOaswell.Weregoingpublicforouremployeesandourinvestors.Wemadeacommitment tothemwhenwegavethemequitythatwedworkhardtomakeitworthalotandmakeitliquid,andthisIPOisfulfillingour commitment.Aswebecomeapubliccompany,weremakingasimilarcommitmenttoournewinvestorsandwewillwork justashardtofulfillit.
TheHackerWay Aspartofbuildingastrongcompany,weworkhardatmakingFacebookthebestplaceforgreatpeopletohaveabigimpact ontheworldandlearnfromothergreatpeople.Wehavecultivatedauniquecultureandmanagementapproachthatwecall theHackerWay. The word hacker has an unfairly negative connotation from being portrayed in the media as people who break into computers.Inreality,hackingjustmeansbuildingsomethingquicklyortestingtheboundariesofwhatcanbedone.Like mostthings,itcanbeusedforgoodorbad,butthevastmajorityofhackersIvemettendtobeidealisticpeoplewhowantto haveapositiveimpactontheworld. The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that somethingcanalwaysbebetter,andthatnothingisevercomplete.Theyjusthavetogofixitofteninthefaceofpeople whosayitsimpossibleorarecontentwiththestatusquo. Hackerstrytobuildthebestservicesoverthelongtermbyquicklyreleasingandlearningfromsmalleriterationsratherthan tryingtogeteverythingrightallatonce.Tosupportthis,wehavebuiltatestingframeworkthatatanygiventimecantryout thousandsofversionsofFacebook.WehavethewordsDoneisbetterthanperfectpaintedonourwallstoremindourselves toalwayskeepshipping. Hackingisalsoaninherentlyhandsonandactivediscipline.Insteadofdebatingfordayswhetheranewideaispossibleor whatthebestwaytobuildsomethingis,hackerswouldratherjustprototypesomethingandseewhatworks.Theresahacker mantrathatyoullhearalotaroundFacebookoffices:Codewinsarguments. Hackercultureisalsoextremelyopenandmeritocratic.Hackersbelievethatthebestideaandimplementationshouldalways winnotthepersonwhoisbestatlobbyingforanideaorthepersonwhomanagesthemostpeople. Toencouragethisapproach,everyfewmonthswehaveahackathon,whereeveryonebuildsprototypesfornewideasthey have.Attheend,thewholeteamgetstogetherandlooksateverythingthathasbeenbuilt.Manyofourmostsuccessful productscameoutofhackathons,includingTimeline,chat,video,ourmobiledevelopmentframeworkandsomeofourmost importantinfrastructureliketheHipHopcompiler. Tomakesureallourengineerssharethisapproach,werequireallnewengineersevenmanagerswhoseprimaryjobwill notbetowritecodetogothroughaprogramcalledBootcampwheretheylearnourcodebase,ourtoolsandourapproach. Therearealotoffolksintheindustrywhomanageengineersanddontwanttocodethemselves,butthetypeofhandson peoplewerelookingforarewillingandabletogothroughBootcamp. 81
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Table of Contents Theexamplesaboveallrelatetoengineering,butwehavedistilledtheseprinciplesintofivecorevaluesforhowwerun Facebook: FocusonImpact Ifwewanttohavethebiggestimpact,thebestwaytodothisistomakesurewealwaysfocusonsolvingthemostimportant problems. It sounds simple, but we think most companies do this poorly and waste a lot of time. We expect everyone at Facebooktobegoodatfindingthebiggestproblemstoworkon. MoveFast Movingfastenablesustobuildmorethingsandlearnfaster.However,asmostcompaniesgrow,theyslowdowntoomuch because theyre more afraid of making mistakes than they are of losing opportunities by moving too slowly. We have a saying:Movefastandbreakthings.Theideaisthatifyouneverbreakanything,youreprobablynotmovingfastenough. BeBold Buildinggreatthingsmeanstakingrisks.Thiscanbescaryandpreventsmostcompaniesfromdoingtheboldthingsthey should. However, in a world thats changing so quickly, youre guaranteed to fail if you dont take any risks. We have anothersaying:Theriskiestthingistotakenorisks.Weencourageeveryonetomakebolddecisions,evenifthatmeans beingwrongsomeofthetime. BeOpen Webelievethatamoreopenworldisabetterworldbecausepeoplewithmoreinformationcanmakebetterdecisionsand haveagreaterimpact.Thatgoesforrunningourcompanyaswell.WeworkhardtomakesureeveryoneatFacebookhas accesstoasmuchinformationaspossibleabouteverypartofthecompanysotheycanmakethebestdecisionsandhavethe greatestimpact. BuildSocialValue Once again, Facebook exists to make the world more open and connected, and not just to build a company. We expect everyoneatFacebooktofocuseverydayonhowtobuildrealvaluefortheworldineverythingtheydo.
Thanksfortakingthetimetoreadthisletter.Webelievethatwehaveanopportunitytohaveanimportantimpactonthe worldandbuildalastingcompanyintheprocess.Ilookforwardtobuildingsomethinggreattogether.
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Table of Contents BUSINESS Overview
AdigitaldisplayoftheFacebookusercommunityandtheconnectionsbetweenusers.Onablankbackground,theconnectionsforma picturethatapproximatesaglobalmap.
Ourmissionistomaketheworldmoreopenandconnected. Webelievethatsomeofthemostimportantinnovationsinhistoryhavebeentoolsthatmakeiteasierorfasterforone humanbeingtosharesomethingwithanother. Facebookenablesyoutosharethethingsyoucareaboutwiththepeopleyoucareabout.Youcanpublishyourideas, opinions, pictures and activities to your friends, family, colleagues or the world. We believe that Facebook gives every personavoiceanopportunitytosay:Iexist,andthisismystory. Facebookalsoenablesyoutodiscoverwhatsgoingonintheworldaroundyou,throughtheeyesandearsofpeople youtrust.EverydayhundredsofmillionsofpeoplecometoFacebooktofindoutwhattheirfriendshavetosharethebest newmusictheyvelistenedto,photosfromtheirrecenthoneymoon,whotheyplantovoteforinthenextelection.Each personsexperienceonFacebookisuniqueandcompletelypersonalizedakintoreadingarealtimenewspaperofstories compiledjustforthemthattheycancarrywiththemwherevertheygo. PeopleconnectwithFacebooktoconnectwithpeople.Webelievethatweareattheforefrontofenablingfaster,easier andrichercommunicationbetweenpeoplearoundtheworld. 83
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Table of Contents HowWeCreateValueforUsers
Userscan sharephotos withtheir friendsand family
Friendsand familycan Likeor Commenton thephotos
Ourtoppriorityistobuildusefulandengagingproductsthatenableyouto: ConnectwithYourFriends.Withmorethan900millionmonthlyactiveusers(MAUs)worldwide,ourusersare increasingly able to find and stay connected with their friends, family, and colleagues on Facebook. Users can sharemajorlifeeventssuchasthebirthofachild,uploadphotosoftheirlatestvacation,congratulateafriendona newjobbyLikingorCommentingonthefriendspost,andstayintouchthroughmessagesandchat. DiscoverandLearn.WebelievethatuserscometoFacebooktodiscoverandlearnmoreaboutwhatisgoingonin the world around them, particularly in the lives of their friends and family and with public figures and organizationsthatinterestthem.EachusersexperienceonFacebookisuniquebasedonthecontentsharedbyhis orherfriendsandconnections.ThiscontentispersonalizedforeachuserinourproductssuchasNewsFeedand Timeline. Express Yourself. We enable our users to share and publish their opinions, ideas, photos, and activities to audiences ranging from their closest friends to our 900 million users, giving every user a voice within the Facebookcommunity. 84
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Table of Contents ControlWhatYouShare.ThroughFacebooksprivacyandsharingsettings,ouruserscancontrolwhattheyshare andwithwhomtheyshareit.

ExampleofUserControlOverSharing
Userscancontrolwhatthey shareandwithwhomthey shareit.Forexample,each timeauserupdateshisorher status,heorshecanchoose tosharewitheveryone, withallfriends,orwitha subsetoffriendsthattheuser cancustomize. ExperienceFacebookAcrosstheWeb.Throughapplications(apps)andwebsitesbuiltbydevelopersusingthe Facebook Platform, our users can interact with their Facebook friends while playing games, listening to music, watchingmovies,readingnews,andengaginginotheractivities. StayConnectedwithYourFriendsonMobileDevices.Throughthecombinationofourmobilesites,smartphone apps,andfeaturephoneproducts,userscanbringFacebookwiththemonmobiledeviceswherevertheygo.
FoundationsoftheSocialWeb Webelievethattheweb,includingthemobileweb,isevolvingtobecomemoresocialandpersonalized.Historically, mostpeoplesurfedthewebanonymouslyandvisitedwebsiteswheretheysawthesamecontentaseveryoneelse.Recent innovationsinsoftwaredevelopmentalongwithadvancesinlargescaledatabaseandcomputinginfrastructurehaveenabled web experiences that are more personalized to each users interests and created new ways of realtime sharing and communicating. The social web creates rewarding experiences that are centered on people, their connections, and their interests.Webelievethatthefollowingelementsformthefoundationofthesocialweb: Authentic Identity. We believe that using your real name, connecting to your real friends, and sharing your genuine interests online create more engaging and meaningful experiences. Representing yourself with your authenticidentityonlineencouragesyoutobehavewiththesamenormsthatfostertrustandrespectinyourdaily lifeoffline.AuthenticidentityiscoretotheFacebookexperience,andwebelievethatitiscentraltothefutureof theweb.Ourtermsofservicerequireyoutouseyourrealnameandweencourageyoutobeyourtrueselfonline, enablingusandPlatformdeveloperstoprovideyouwithmorepersonalizedexperiences.Wedeployavarietyof algorithmicandmanualcheckstohelpensuretheintegrityofuseraccounts,however,wecannotverifytheidentity andauthenticityofeveryoneofourusersortheiractions. SocialGraph.TheSocialGraphrepresentstheconnectionsbetweenpeopleandtheirfriendsandinterests.Every personorentityisrepresentedbyapointwithinthegraph,andtheaffiliationsbetweenpeopleandtheirfriendsand interestsformbillionsofconnectionsbetweenthepoints.OurmappingoftheSocialGraphenablesFacebookand Platformdeveloperstobuildmoreengaginguserexperiencesthatarebasedontheseconnections. 85
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IllustrationoftheSocialGraph
SocialDistribution.Overtime,peopleareconsumingandcreatingmorekindsofinformationatafasterpaceacross a broader range of devices. The growing volume of information makes it challenging to find meaningful and trustedcontentandtoeffectivelymakeyourvoiceheard.Facebookorganizesandprioritizescontentandservesas apowerfulsocialdistributiontooldeliveringtouserswhatwebelievetheywillfindmostcompellingbasedon their friends and interests. Facebooks social distribution enables users, Platform developers, and advertisers to shareinformationwithtargetaudienceslargeorsmall.
OurSizeandScale Building on our use of authentic identity, the Social Graph, and social distribution, Facebook has grown from our beginningsinacollegedormroomin2004toaservicethatisfundamentallychangingthewaypeopleconnect,discover, andsharearoundtheworld.WebelievethatFacebookhasbecomeanintegralpartofmanyofourusersdailylives.Users addvaluetotheoverallFacebookecosystemeachtimetheyengagewithfriends,developers,oradvertisers.Increasesinuser engagement enable us to attract more users, developers, and advertisers. Growth in the number of users, developers, and advertisersandtheinteractionsamongthemenhancesthevaluewedelivertoallofourconstituencies. We had 901 million MAUs as of March 31, 2012, an increase of 33% as compared to 680 million MAUs as of March31,2011. We had 526 million daily active users (DAUs) on average in March 2012, an increase of 41% as compared to 372millionDAUsinMarch2011. Wehad488millionMAUswhousedFacebookmobileproductsinMarch2012,andwesurpassed500million mobileMAUsasofApril20,2012. DuringthemonthofMarch2012,wehadonaverage398millionuserswhowereactivewithFacebookonatleast sixoutofthelastsevendays,providingperspectiveonthenumberofpeopleforwhomFacebookisessentiallyan everydayactivity. Thereweremorethan125billionfriendconnectionsonFacebookasofMarch31,2012. Onaveragemorethan300millionphotosperdaywereuploadedtoFacebookinthethreemonthsendedMarch31, 2012. Ourusersgeneratedanaverageof3.2billionLikesandCommentsperdayduringthefirstquarterof2012.Since users Like and Comment on content they find interesting, we believe that the number of Likes and Comments providessomeinsightintohowengagingusersfindthecontentavailabletothemonFacebookandthroughour Platformdevelopers. 86
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Table of Contents AsofMarch31,2012,thereweremorethan42millionPageswithtenormoreLikes.Anyone,includingartists, publicfigures,businesses,brands,orcharitiescansetupaFacebookPagetoengagewithourusers.Examplesof popular Pages on Facebook include Lady Gaga, Disney, and Manchester United, each of which has more than 20millionLikes.
HowWeCreateValueforDevelopersThroughtheFacebookPlatform The Facebook Platform is a set of development tools and application programming interfaces (APIs) that enables developerstoeasilyintegratewithFacebooktocreatesocialappsandwebsitesandtoreachour900millionusers.Platform developers build experiences that allow our users to connect and share with friends while engaging in activities such as playing games, listening to music, watching movies, reading news articles, discovering new recipes, and exploring new runningroutes.Platformdevelopersrangefromastudentonhisorhercomputerathometoteamsofprogrammersatleading websites.MorethanninemillionappsandwebsiteswereintegratedwithFacebookasofMarch31,2012.Wearefocusedon thegrowthandsuccessofPlatformdevelopersincreatingcompellinguserexperiencesbyenabling: Personalized and Social Experiences. We enable Platform developers to create better products that are personalizedandsocialandthatoffernewwaysforouruserstoengagewithfriendsandshareexperiencesacross thewebandonmobiledevices.Forexample,aFacebookusercanvisitthePandorawebsiteandimmediatelybegin listening to a personalized radio station that is customized based on the bands the user Likes on Facebook. As another example, a Facebook user can visit The New York Times website and see which articles have been recommendedbyfriends.OurPlatformdeveloperscanonlyaccessinformationthatourusersagreetosharewith them. SocialDistribution.WeenablePlatformdeveloperstoreachourglobaluserbaseanduseoursocialdistribution channelstoincreasetraffictotheirappsandwebsites.Forexample,userscaninvitetheirFacebookfriendstoplay agameorseewhentheirfriendshaveachievedanewhighscore. Payments. We provide an online payments infrastructure that enables Platform developers to receive payments fromourusersinaneasytouse,secure,andtrustedenvironment.In2011,ourPlatformdevelopersreceivedmore than$1.4billionfromtransactionsenabledbyourPaymentsinfrastructure.
HowWeCreateValueforAdvertisersandMarketers Weofferadvertisersandmarketersauniquecombinationofreach,relevance,socialcontext,andengagement: Reach. With over 900 million MAUs, Facebook offers the ability to reach a vast consumer audience with our advertisingsolutions.Forexample,amoviestudioseekingtoincreaseawarenessofanupcomingfilmreleasecan reachabroadaudienceofFacebookusersonthedayorweekbeforethefilmsopening.Byadvertisingtherelease ofTransformers:DarkoftheMoononFacebook,ParamountStudiosreached65millionusersintheUnitedStates inasingleday.
AdvertisingExampleReach
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Table of Contents Relevance.Advertiserscanspecifythatweshowtheiradstoasubsetofourusersbasedondemographicfactors suchasage,location,gender,education,workhistory,andspecificintereststhattheyhavechosentosharewithus on Facebook or by using the Like button around the web or on mobile devices. We allow advertisers to select relevant and appropriate audiences for their ads, ranging from millions of users in the case of global brands to hundredsofusersinthecaseofsmaller,localbusinesses.Webelievethatusershaveabetterexperiencewhenads areeffectivelytailoredtothem.ExamplesofFacebookadsthatallowedadvertiserstoreacharelevantaudience include: Procter & Gamble chose to advertise on Facebook to generate awareness for Secret deodorants Mean Stinksprogramandselectedafemaleaudiencelikelytobereceptivetothecampaign.Theadfeatureda confessionalstylevideoofagirladmittingthatshehadbulliedothers,realizingthedamageshehadcaused, and apologizing. In the 26 weeks after the Mean Stinks campaign launched, Secret experienced a 9% increaseinU.S.salesandanincreaseinengagementwithitsFacebookPage. CMPhotographics,aweddingphotographybusinessbasedinMinneapolis,Minnesota,usedFacebookads to reach the users it cared most about: women aged 24 to 30 living near Minneapolis who shared their relationshipstatusonFacebookasengaged.In2011,CMPhotographicsgeneratedasignificantincrease inrevenueafterspending$1,544topurchaseadvertisingonFacebook.
BecauseauthenticidentityiscoretotheuserexperienceonFacebookandusersgenerallyshareinformationthat reflects their real interests and demographics, we are able to deliver ads that reach the intended audience with higheraccuracyratescomparedtoonlineindustryaverages.Forbroadlytargetedcampaigns,forexample,adults between the ages of 25 and 49, we were able to reach the desired audience with 95% accuracy as measured by industrystandardanalyticstools.Thiscomparestoanindustryaverageof72%,aspubliclyreportedbyNielsenin 2011.Formorenarrowlytargetedcampaigns,forexample,femalesbetweentheagesof25and34,Facebookwas able to reach the desired audience with 90% accuracy compared to an industry average of 35%. As our users maintainandexpandtheirauthenticidentityonFacebook,theyareincreasinglychoosingtosharetheirinterests andpreferencesregardingproductsandservices.Weusethisinformationtoimproveourabilitytodeliverrelevant adsthatwebelievearemoreinterestingandcompellingforeachuser. SocialContext.Webelievethattherecommendationsoffriendshaveapowerfulinfluenceonconsumerinterest andpurchasedecisions.Weofferadvertiserstheabilitytoincludesocialcontextwiththeirmarketingmessages. Socialcontextisinformationthathighlightsafriendsconnectionswithaparticularbrandorbusiness.Webelieve that users find marketing messages more engaging when they include social context. Some current examples of socialcontextthatweofferincludethefollowing: SocialAds.Weoffertoolstoadvertiserstodisplaysocialcontextalongsidetheirads.Asaresult,advertisers are able to differentiate their products and complement their marketing messages with trusted recommendations from users friends. Our recent analysis of 79 advertising campaigns on Facebook demonstratedagreaterthan50%increaseinadrecallforFacebookadswithsocialcontextascomparedto Facebookadsthatdidnothavesocialcontext. 88
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AdvertisingExamplewithoutSocialContext AdvertisingExamplewithSocialContext
SponsoredStories.Sponsoredstoriesenablemarketerstoamplifythedistributionofstoriesthatusershave alreadysharedthatarerelevanttotheirmarketingefforts.Forexample,whenauserpostsonFacebookthat heorshehascheckedintoaStarbucksstore,thischeckincreatesastorythatcanbeshowninthefriends NewsFeeds.Althoughallofausersfriendsmaybeeligibletoviewthischeckinstory,onlyafractionofthe usersfriendswilltypicallyseeit(basedonfactorssuchaswhentheusersfriendschecktheirNewsFeeds and our ranking of all the content that is available to show to each of the users friends). Starbucks can purchasesponsoredstoriestosignificantlyincreasethereach,frequencyofdistribution,andprominenceof thisstorytotheusersfriends.Marketerscanalsousesponsoredstoriestopromotethestoriestheypublish fromtheirFacebookPagetouserswhohaveconnectedwiththePage.Sponsoredstoriesareshownonthe righthandsideofthepage,andinJanuary2012,webeganincludingtheminusersNewsFeedsonpersonal computers.InMarch2012,wealsobegantoincludesponsoredstoriesinusersmobileNewsFeeds.
Engagement.We believe that the shift to a more social web creates new opportunities for businesses to engage withinterestedcustomers.Manyofouradproductsoffernewandinnovativewaysforouradvertiserstointeract withourusers,suchasadsthatincludepolls,encouragecomments,orinviteuserstoanevent.Additionally,any brandorbusinesscanhaveapresenceonFacebookbycreatingaFacebookPage.ThroughPages,wegivebrands theopportunitytoformdirectandongoingrelationshipswiththeircustomers,withthepotentialtoturntheminto valuableadvocates.WhenaFacebookuserLikesaPage,thePageownerhastheopportunitytopublishstoriesto the users News Feed on an ongoing basis. We believe that this ongoing connection provides a significant advantageforFacebookPagesascomparedtotraditionalbusinesswebsites.Inaddition,businessescanusePages to influence fans and drive referral traffic to their ecommerce websites or physical stores. We do not charge businessesfortheirPages,nordowechargefortheresultingorganicdistribution.However,webelievethatPage owners can use Facebook ads and sponsored stories to increase awareness of and engagement with their Pages. ExamplesofbrandsutilizingFacebookPagesinclude: BurberryuseditsPageandaninnovativemarketingcampaignonFacebooktoannouncethelaunchofanew luxuryfragrancetoitsnearlytenmillionFacebookfansinordertodrivetraffictoandpurchasesatBurberry storesglobally,includingitsecommercesite.WhenusersLikedorCommentedontheBurberryPageorthe perfumestory,theusersactionsweresharedwiththeirfriendsviaNewsFeed,drivingawarenesstoawider circleofusersandincreasingbrandexposure,recognition,andengagement. 89
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Table of Contents PFChangscreatedacouponofferonitsPageforafreeLettuceWrapappetizerandpromotedtheofferwitha threeweek ad campaign. The Facebook ads targeted users who had connected to PF Changs Page, those users friends, and users in markets where PF Changs has a high density of restaurants. Over 50,000 customers,ofwhom40%werefirsttimecustomers,redeemedthecouponatPFChangsrestaurants.
OurMarketOpportunity OurAdvertisingMarketOpportunity Advertisersobjectivesrangefrombuildinglongtermbrandawarenesstostimulatinganimmediatepurchase.Weoffer advertising solutions that are designed to be engaging for users and personalized to users demographics and interests in order to help advertisers better achieve their goals. Facebooks combination of reach, relevance, social context, and engagementgivesadvertisersenhancedopportunitiestogeneratebrandawarenessandaffiliation,whilealsocreatingnew waystogenerateneartermdemandfortheirproductsfromconsumerslikelytohavepurchaseintent.AccordingtoanIDC report dated August 2011, total worldwide advertising spending in 2010 was $588 billion. Our addressable market opportunityincludesportionsofmanyexistingadvertisingmarkets,includingthetraditionalofflinebrandedadvertising, onlinedisplayadvertising,onlineperformancebasedadvertising,andmobileadvertisingmarkets. TraditionalOfflineBrandedAdvertising.Television,print,andradioaccountedfor$363billion,or62%ofthe totaladvertisingmarketin2010accordingtoanIDCreportdatedAugust2011.Historically,advertisersinterested ingeneratingawarenessofanddemandfortheirbrandshaveheavilyreliedontheseofflinemediatoreachtheir audiencesatscale.Webelievethatthesebrandadvertiserswillincreasinglydedicateaportionoftheiradvertising dollarstoFacebookbecausethebroadaudiencestheyaretryingtoreachareactiveonFacebookonadailybasis, becausewecanreachtheirdesiredaudienceswithprecision,andbecausetheycansparkwordofmouthmarketing throughFacebook.InDecember2011,anadvertisercouldreachanestimatedaudienceofmorethan65million U.S.usersinatypicaldayonFacebook.Bycomparison,the2011seasonfinaleofAmericanIdolwasviewedbyan estimatedU.S.audienceof29millionpeople.In2011,ouradvertisingcustomersincludedeachofthe100largest globaladvertisingspenders,asrankedbyAdvertisingAge.ExamplesofFacebookadvertisingcampaignsbylarge brandadvertisersinclude: Nike launched its Write the Future campaign on Facebook as an integral part of its 2010 World Cup marketing effort. The launch placement was seen by 140 million users in 20 countries and users engaged with the message more than seven million times by taking actions such as watching the threeminute embeddedvideo,orLiking,clicking,orCommentingonthead. American Express purchased ads on Facebook and put its Facebook Page at the center of its advertising campaign in November 2010 to introduce and promote Small Business Saturday, a new local initiative designedtoencourageshoppingatsmallbusinessesontheSaturdayafterThanksgiving.Theadsreached 84 million Facebook users over the three week campaign. American Express continued the campaign in 2011.Thecampaignreached91millionpeople,including74millionwhowereshownanadthatfeatureda connection with their Facebook friends, successfully leveraging social context at scale. We believe that advertisingonFacebookcontributedtothesuccessfulresultsoftheSmallBusinessSaturdaycampaignin 2011publicawarenessofSmallBusinessSaturdayroseto65%from37%in2010.Additionally,American Express saw a 23% increase in Cardmember transactions at small business merchants on Small Business Saturday.
OnlineAdvertising.From2010to2015,theworldwideonlineadvertisingmarket,excludingmobileadvertising,is projectedtoincreasefrom$68billionto$120billion,representing12%and16%,respectively,oftheworldwide advertising market according to an IDC report dated August 2011. Currently, the online advertising market is generallydividedbetweendisplayadvertising,wherethe 90
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Table of Contents advertiser is seeking impressions, and performancebased advertising, where the advertiser is seeking clicks or conversions. DisplayAdvertising.Onlinedisplayadvertisingtypicallyincludesbannerads,interstitials,videoads,and richmediaadsthataimtoreachlargenumbersofconsumerswithinaparticularaudiencesegment.Display advertisersrunimpressionbasedcampaignsonFacebookinordertoreachourlargeuserbaseandbecauseof theamountoftimethatusersspendwithus.FromJanuary2011throughJanuary2012,Facebook.comhas beenthenumberoneonlinepropertyaccessedthroughpersonalcomputersworldwideasmeasuredbytotal minutesspentandtotalpageviews,accordingtoacomScoreMediaMetrixreportdatedFebruary2012.On average, users in the aggregate spent more than 10.5 billion minutes per day on Facebook on personal computersduringJanuary2012.Aggregateminutesperdayincreased57%andaverageminutesperuserper dayincreased14%duringJanuary2012comparedtoJanuary2011.DisplayadvertisersalsouseFacebookin ordertomorepreciselyreachtheirtargetaudiencesamongourusersandtoleveragesocialcontextandour social distribution channels to increase engagement. Examples of display advertising campaigns on Facebookinclude: WalmartU.S.purchasedadvertisingonFacebooktargetingusersintheUnitedStatesbetweentheages of 18 and 49 during the days surrounding Black Friday in November 2011. The campaign, which encourageduserstodownloadaBlackFridayshoppingmapoftheirlocalWalmartU.S.storetohelp themfindgreatpricesfaster,reached60millionFacebookusers. Diageo,theworldslargestproducerofspirits,purchasedadvertisingonFacebookforaportfolioofits brands, including Captain Morgan rum and Smirnoff vodka, in order to increase market share for its productsbytargetingusersintheUnitedStatesovertheageof21.Thecampaignreached25million Facebookhouseholdsanddrovea20%increaseinofflinesalesinhouseholdsthatwereexposedtothe campaign compared to demographically similar households that were not exposed to the campaign. Theseresultsweredeterminedusinganalyticstoolsthatemployindustrystandardmethodologies.
Performancebased Advertising. Performancebased online advertising has typically involved advertisers seekingaspecificuserbehaviorsuchasaclickonasearchadorakeywordbasedcontentad,aresponseto an email campaign, or an online purchase. We enable new forms of performancebased advertising, where advertiserscanconnectwithuserswhoarelikelytohavedemandfortheirproductsbasedontheinformation that our users have chosen to share. We believe that performancebased campaigns on Facebook allow advertiserstooffertheirproductstouserswithinferredintentandenhanceusersexperiencesbyshowing them relevant ads tailored to their specific interests. Examples of performancebased advertising on Facebookinclude: Alocalconcertpromoteradvertisedavailableticketsforanupcomingconcerttouserswholivedinthe metropolitanareawheretheconcertwastobeheldandwhohadalsoLikedtheartist. 1800FLOWERS.COM purchased a Mothers Day advertising campaign on Facebook targeted at its fansandfriendsofitsfansinordertodrivetraffictoitswebsiteandincreasesales. Social game developers including Disney, Electronic Arts, and Zynga purchased performancebased advertising on Facebook to drive player acquisition by promoting new game launches and existing games.
MobileAdvertising.Theglobalmobileadvertisingmarketwas$1.5billionin2010andisexpectedtogrowata 64% compound annual rate to $17.6 billion in 2015 according to an IDC report dated August 2011. We had 488 million MAUs who used Facebook mobile products in March 2012. According to a January 2012 Nielsen report,theFacebookmobileapphadmoreuniquecombinedAndroidandiPhoneusersin2011intheUnitedStates thananyothermobileapp.Wehavehistoricallynotshown 91
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Table of Contents adstousersaccessingFacebookthroughmobileappsorourmobilewebsite.InMarch2012,webegantoinclude sponsoredstoriesinusersmobileNewsFeeds. Advertisingonthesocialwebisasignificantmarketopportunitythatisstillemergingandevolving.Webelievethat most advertisers are still learning and experimenting with the best ways to leverage reach, relevance, social context, and engagementofferedbyFacebook.Wewillcontinuetobalanceoureffortstobuildeffectiveproductsforadvertiserswhile also prioritizing the overall user experience, and this balancing effort will influence the number of ads we show and the formats and prominence of the ads. Our strategy centers on the belief that more social and relevant ad products are more valuableforbothusersandadvertisers. Currentlythesubstantialmajorityofourrevenueisgeneratedbyadvertisersfrommoredevelopedonlineadvertising marketsincludingtheUnitedStates,westernEurope,Canada,andAustralia.Therearealsomanyemergingadmarketsin which we sell ads and other commercial content, and we expect continued growth in advertiser demand as these markets mature,weachieveincreasedlevelsofuserpenetrationandengagement,andwefurtherexpandoursalesresourcesdedicated tothesemarkets. OurMarketOpportunityforPayments When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the socialgameFarmVille.AccordingtoanInStatreportdatedNovember2010,theworldwiderevenuegeneratedfromthesale ofvirtualgoodsonsocialnetworkingsites,onlineworlds,andcasualgamesincreasedfrom$2billionin2007to$7billion in2010,andisforecastedtoincreaseto$15billionby2014.PaymentsintegrationiscurrentlyrequiredinappsonFacebook thatarecategorizedasgames,andwemayseektoextendtheuseofPaymentstoothertypesofappsinthefuture.Ourfuture revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiencesthatengageusersandcreateuserdemandfortheirproducts,andthefeearrangementsweareabletonegotiatein thefuture. OurStrategy Weareintheearlydaysofpursuingourmissiontomaketheworldmoreopenandconnected.Wehaveasignificant opportunitytofurtherenhancethevaluewedelivertousers,developers,andadvertisers.Keyelementsofourstrategyare: ExpandOurGlobalUserCommunity.TherearemorethantwobillionglobalInternetusersaccordingtoanIDC report dated August 2011 and we aim to connect all of them. We had 901 million MAUs globally with approximately80%accessingFacebookfromoutsidetheUnitedStatesasofMarch31,2012.Wecontinuetofocus ongrowingouruserbaseacrossallgeographies,includingrelativelylesspenetrated,largemarketssuchasBrazil, Germany,India,Japan,Russia,andSouthKorea.Weintendtogrowouruserbasebycontinuingourmarketingand user acquisition efforts and enhancing our products, including mobile apps, in order to make Facebook more accessibleanduseful. Build Great Social Products to Increase Engagement. We prioritize product development investments that we believewillcreateengaginginteractionsbetweenourusers,developers,andadvertisersonFacebook,acrossthe web, and on mobile devices. We continue to invest significantly in improving our core products such as News Feed,Photos,andGroups,developingnewproductssuchasTimelineandTicker,andenablingnewPlatformapps andwebsiteintegrations. ProvideUserswiththeMostCompellingExperience.Facebookusersaresharingandreceivingmoreinformation across a broader range of devices. To provide the most compelling user experience, we continue to develop productsandtechnologiesfocusedonoptimizingoursocialdistributionchannels 92
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Table of Contents todeliverthemostusefulcontenttoeachuserbyanalyzingandorganizingvastamountsofinformationinreal time. Build Engaging Mobile Experiences. We are devoting substantial resources to developing engaging mobile productsandexperiencesforawiderangeofplatforms,includingsmartphonesandfeaturephones.Inaddition,we are working across the mobile industry with operators, hardware manufacturers, operating system providers, and developerstoimprovetheFacebookexperienceonmobiledevicesandmakeFacebookavailabletomorepeople aroundtheworld.Wehad488millionMAUswhousedFacebookmobileproductsinMarch2012.InApril2012, we entered into an agreement to acquire Instagram, Inc., which has built a mobile phonebased photosharing service.Followingtheclosingofthisacquisition,weplantomaintainInstagramsproductsasindependentmobile applications to enhance our photos product offerings and to enable users to increase their levels of mobile engagementandphotosharing.WebelievethatmobileusageofFacebookiscriticaltomaintainingusergrowth andengagementoverthelongterm,andweareactivelyseekingtogrowmobileusage,althoughsuchusagedoes notcurrentlydirectlygenerateanymeaningfulrevenue. Enable Developers to Build Great Social Products Using the Facebook Platform. The success of Platform developersandthevibrancyofourPlatformecosystemarekeytoincreasinguserengagement.Socialgameshave achievedsignificantlevelsofadoptionbyFacebookusers,andwearealsofocusedonenablingthedevelopment ofappsincategoriesbeyondgames.Forexample,ourlatestenhancementstotheFacebookPlatformhaveenabled new types of social apps that facilitate sharing and serendipitous discovery of music, news, movies, television programming, and other everyday interests such as cooking and running. User engagement with our Platform developersappsandwebsitescreatesvalueforFacebookinmultipleways:ourPlatformsupportsouradvertising businessbecauseappsonFacebookcreateuserengagementthatenablesustoshowadsourPlatformdevelopers purchaseadvertisingonFacebooktodrivetraffictotheirappsandwebsitesPlatformdevelopersuseourPayment systemtofacilitatetransactionswithusersandusersengagementwithPlatformappsandwebsitescontributesto ourunderstandingofusersinterestsandpreferences,improvingourabilitytopersonalizecontent.Wecontinueto investintoolsandAPIsthatenhancetheabilityofPlatformdeveloperstodeliverproductsthataremoresocialand personalizedandbetterengageusersonFacebook,acrosstheweb,andonmobiledevices.Additionally,weplanto investinenhancingourPaymentsofferingsandinmakingthePaymentsexperienceonFacebookasseamlessand convenientaspossibleforusersandPlatformdevelopers. ImproveAdProductsforAdvertisersandUsers.Weplantocontinuetoimproveouradproductsinordertocreate morevalueforadvertisersandenhancetheirabilitytomaketheiradvertisingmoresocialandrelevantforusers. Ouradvertisingstrategycentersonthebeliefthatadproductsthataresocial,relevant,andwellintegratedwith othercontentonFacebookcanenhancetheuserexperiencewhileprovidinganattractivereturnforadvertisers.We intend to invest in additional products for our advertisers and marketers, such as our recent introduction of sponsoredstoriesinusersNewsFeedsonpersonalcomputersandmobiledevices,whilecontinuingtobalanceour monetization objectives with our commitment to optimizing the user experience. We also continue to focus on analytics and measurement tools to evaluate, demonstrate, and improve the effectiveness of ad campaigns on Facebook.
OurProductsforUsers,Developers,andAdvertisers ProductsforUsers Ourproductdevelopmentapproachiscenteredonbuildingthemostusefultoolsthatenableuserstoconnect,share, discover,andcommunicatewitheachother.Ourproductsforusersarefreeofchargeandavailableontheweb,mobileweb, andmobileplatformssuchasAndroidandiOS. Timeline.WelaunchedTimelineinSeptember2011asanenhancedandupdatedversionoftheFacebookProfile toaddstructureandorganizationtothegrowingquantitiesofeachusersactivities 93
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Table of Contents and social content. Timeline allows users to organize and display the events and activities that matter most to them,enablingthemtocuratetheirmemoriesinasearchablepersonalnarrativethatisorganizedchronologically. UserschoosewhatinformationtoshareontheirTimeline,suchastheirinterests,photos,education,workhistory, relationshipstatus,andcontactinformation,anduserscancontrolwithwhomeachpieceofcontentissharedon theirTimeline. NewsFeed.TheFacebookNewsFeedisthecorefeatureofausershomepageandisaregularlyupdatinglistof storiesfromfriends,Pages,andotherentitiestowhichauserisconnectedonFacebook.Itincludesposts,photos, eventupdates,groupmemberships,appupdates,andotheractivities.EachusersNewsFeedispersonalizedbased onhisorherinterestsandthesharingactivityoftheusersfriends.StoriesinausersNewsFeedareprioritized basedonseveralfactors,includinghowmanyfriendshaveLikedorCommentedonacertainpieceofcontent,who posted the content, and what type of content it is. News Feed is a key component of our social distribution capability.
ExampleofFacebookNewsFeed
Photos and Videos. Facebook is the most popular photo uploading service on the web. On average, more than 300millionphotosperdaywereuploadedtoFacebookinthefirstquarterof2012.Userscanuploadanunlimited number of high resolution photos, create photo albums, and share them with their friends or any audience they choose. Users can also upload and share videos. Users can set specific privacy settings for each of their photo albums and videos, making them visible to everyone, or only to certain friends. Users can easily arrange their photos,addcaptions,andtagpeopleinaphotoorvideo.Taggingallowsuserstoidentifyapersoninaphotoor videoasoneoftheirfriends. Messages.Ourmessagingproductsincludeemail,chat,andtextmessaging.Thedeliveryofmessagesisoptimized forthedevicethroughwhichtheuserisaccessingFacebook.Forexample,usersontheir 94
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Table of Contents mobilephoneswillreceivemessagesviatextorFacebookmobilemessenger,whiletheconversationisalsostored intheirFacebookmessageinbox.Weaimtobethefastestandmostreliablewayforuserstocommunicatethrough: Email.Userscansetupafree@facebook.comaddress. Chat.Userscansendmessagestotheirfriendsinaninstantmessageformat. Text Messaging. Users can activate text messaging on Facebook, allowing the texts they exchange with friendstobeincorporatedintotheirrespectiveconversationsalongwiththeirmessageandchathistory.
Groups.GroupsaresharedFacebookpagesforgroupsofuserstodiscusscommoninterests.Forexample,members of a soccer team can plan the seasons schedule together and share photos with each other. Users are able to customizetheprivacysettingsforeachGrouptheycreate. Lists.ListsallowuserstoorganizetheirfriendsinordertofilterthestoriesshownintheirNewsFeedsandreachor excludespecificpeoplewhentheyshareonFacebook.Forexample,userscanseeNewsFeedpostsfromaListof justtheirclosestfriendsorannounceagaragesaletoaListoffriendswhoresideintheuserscurrentcity.Usersare abletocustomizetheprivacysettingsforeachListtheycreate. Events. Through Events, users can organize gatherings, manage invitations, and send event notifications and reminders to their friends. From the Events page, users can create a new event, check out upcoming events of interest to them and their friends, and view previous events. For example, users can use Events to invite their friendstoadinnerpartyororganizearunintheRacefortheCuretoraiseawarenessforbreastcancer.Thereare currentlymorethan16millioneventscreatedonFacebookeachmonth. Places.ThroughPlaces,userscansharetheirlocationandseewheretheirfriendsare.Theyareabletoseeifanyof theirfriendsarenearbyandconnectwiththemeasily.UserscanalsocheckintoPlacestotelltheirfriendswhere theyare,tagtheirfriendsinthePlacestheyvisit,orviewCommentstheirfriendshavemadeaboutthePlacesthey visit. Subscribe. Using Subscribe, users can sign up to receive public posts in their News Feeds from other Facebook usersofinterestsuchascelebrities,thoughtleaders,andotherpublicfigures. Ticker.TickerisalivestreamoftherealtimeactivitiesofausersfriendsandthePagesandotherentitiestowhich theuserisconnected. Notifications.OnthetopofeachFacebookpage,ahighlightediconisdisplayedtouserswhenthereisrelevant andnewinformationavailabletothem,suchasanewfriendrequest,anewmessagefromafriend,oranalertthat the user has been tagged in a photo posted by a friend. We believe that Notifications are an important part of Facebooksdistributioncapability. Facebook Pages. A Facebook Page is a public profile that allows anyone including artists, public figures, businesses,brands,organizations,andcharitiestocreateapresenceonFacebookandengagewiththeFacebook community.APageownercanconnectwithinterestedusersinordertoprovideupdates,answerquestions,receive feedback,orotherwisestimulateinterestintheownersmessages,products,andservices.WhenaFacebookuser LikesaPage,thePageownerhastheopportunitytopublishstoriestotheusersNewsFeedonanongoingbasis.In addition,whenaFacebookuserLikesorCommentsonapostbyaPageowner,thatusersactionmaybeshared withtheusersfriendsviaNewsFeedtodriveawarenesstoawidercircleofusers,increasingthePagesexposure, recognition,andengagement.WedonotchargeforPages,nordowechargefortheresultingorganicdistribution. However,webelievethatawarenessofandengagementwithPagescanbeamplifiedandcomplementedbytheuse ofFacebookadsandsponsoredstoriesbyPageowners.AsofMarch31,2012,thereweremorethan42million PageswithtenormoreLikes,includingHarvard,LadyGaga,TheMetropolitanMuseumofArt,Starbucks,andBoo (theWorldsCutestDog),aswellasmillionsoflocalbusinesses. 95
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Table of Contents ProductsforDevelopers The Facebook Platform is a set of tools and APIs that developers can use to build social apps on Facebook or to integratetheirwebsiteswithFacebook.AsofMarch31,2012,morethanninemillionappsandwebsiteswereintegratedwith Facebook.OurgoalistomakeiteasyforPlatformdeveloperstointegratewithFacebookandbuildvaluableproductsand businesses.KeyelementsoftheFacebookPlatforminclude: OpenGraph.OurOpenGraphisasetofAPIsthatdeveloperscanusetobuildappsandwebsitesthatenableusers to share their activities with friends on Facebook. For example, a user who is listening to music through a developersapporwebsitecanpublishhisorhermusicselectionstoFacebookwherethemusiccanbesharedwith friends. Social Plugins. Social plugins are social features that developers can easily integrate with their websites by incorporating a single line of HTML code. For example, a developer can put a box on its website that shows Facebook users what their friends have Liked and recommended on the site. Social plugins also allow users to easily share interesting content back to Facebook that can be distributed to their friends through News Feed, Timeline,andTicker.Thefollowingfeaturesareexamplesoffunctionalityprovidedthroughsocialplugins: LikeButton.AllowsuserstosharecontentfromathirdpartywebsitetoFacebookandtheirfriendswithone click. Recommendations.AllowsawebsitetodisplaytoFacebookuserswhattheirfriendshaverecommended. SingleSignOnRegistrationandLogIn.Allows users to easily sign up for access to thirdparty websites withtheirFacebookaccounts,eliminatingtheneedforuserstocreateanotherusernameandpassword. Comments.Allowsuserstoposttheirviews,questions,andcritiquesonanypieceofcontentonawebsite.
Payments.Facebookprovidesanonlinepaymentsinfrastructurethatenablesdeveloperstoreceivepaymentsfrom usersthroughanefficientandsecuresystem.Developerscanfocusoncreatingengagingappsandcontentrather thanspendingtimeandresourcestobuildpaymentprocessingandfraudmanagementcapabilities.Ouruserscan store their payment credentials with Facebook in a trusted and safe environment, facilitating easy and fast purchasesacrosstheFacebookPlatformratherthanhavingtoreauthenticateandreenterpaymentinformationfor eachdeveloper.WedesignedourPaymentsinfrastructuretostreamlinethebuyingprocessbetweenourusersand developers.OurPaymentssystemenablesuserstopurchasevirtualordigitalgoodsfromdevelopersandthirdparty websitesbyusingdebitandcreditcards,PayPal,mobilephonepayments,giftcardsorothermethods.Wehavealso extended our Payments infrastructure to support mobile web apps on certain mobile platforms. Currently, substantiallyallofourPaymentsrevenueisfromuserspurchasesofvirtualgoodsusedinsocialgames.Wereceive a fee of up to 30% when users make such purchases from our Platform developers using our Payments infrastructure.Inthefuture,ifweextendPaymentsoutsideofgames,thepercentagefeewereceivefromdevelopers mayvary. Zynga is the largest Platform developer, in terms of revenue generated for Facebook, using our Payments infrastructure.InMay2010,weenteredintoanaddendumtoourstandardtermsandconditionswithZyngathat governthepromotion,distribution,andoperationofZyngagamesontheFacebookPlatform,pursuanttowhich Zynga agreed to use Facebook Payments as the primary means of payment within its games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in ZyngasgamesontheFacebookPlatform.ThisaddendumexpiresinMay2015. 96
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Table of Contents Developers have used the Facebook Platform to build a variety of user experiences, including apps on Facebook, desktop apps, mobile apps, and Platformintegrated websites, each of which can take advantage of the capabilities of the FacebookPlatform. Apps on Facebook. Apps on Facebook run within the Facebook website. Social games are currently the most successful apps on Facebook. The Facebook Platform has also enabled new types of social apps on Facebook beyond games to facilitate social sharing and discovery of music, news, television programming, and everyday interests such as cooking, fitness, and travel. For example, The Washington Post Social Reader is an app on Facebookthatoffersapersonalizednewsreadingexperienceinwhicheachuserseesauniquesetofstoriestailored to the users interests and based on what his or her friends are reading. Assuming the user has given the app permission,storiesreadbyauserareinstantlysharedwithfriends,creatingasociallypowerednewswireofrelevant articles.AppsonFacebookgenerallyhaveFacebookadsvisibleontherightsideofthepageandcanintegrate withFacebookPayments. DesktopApps.Developerscanalsobuilddesktopappsthatrunontheoperatingsystemofapersonalcomputerand offerexperiencesthatareintegratedwiththeFacebookPlatform.Forexample,Spotify,anonlinemusicservice, provides a desktop app integrated with Facebook that offers a social listening experience by giving users the abilitytosharetheirplaylists,listentosongswithfriends,andexplorenewmusicthroughtheirfriends. Mobile Apps. The Facebook Platform for mobile has enabled developers to create engaging mobile apps that integratewithFacebookssocialandpersonalizationcapabilities. PlatformIntegratedWebsites.WebsitescanintegratewithFacebookusingsimplesocialpluginssuchastheLike buttonordesignmoredeeplyintegratedsocialexperiencesbuiltaroundusersandtheirfriends.Forexample,by tapping into our rich social data, TripAdvisor connects users to their friends and shares relevant content about where their friends have traveled and where they would like to visit in the future. While on the TripAdvisor website,friendscandiscusstheirtravelplansandrecommendationsandbuildoutpersonalprofilesofplacesthey havebeen.
ExampleofPlatformIntegratedThirdPartyWebsite:TripAdvisor
Userscanlogin withtheirFacebook accountandreceive personalizedreviews andrecommendations basedontheactivitiesof theirFacebookfriends
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Table of Contents ProductsforAdvertisersandMarketers Facebookoffersproductsthatenableadvertisersandmarketerstoleverageouruniquecombinationofreach,relevance, social context, and engagement. Customers can purchase advertising inventory through our selfservice ad platform or through a contractbased process from our global sales force. Advertisers using our selfservice ad platform launch and managetheiradvertisingcampaignsonline.Ourcontractbasedcustomersworkwithourglobalsalesforce,whichisfocused on attracting and retaining advertisers and providing support to them throughout the stages of the advertising campaign cycle.AdvertisingpurchasedthrougheithersalesmechanismisservedthroughtheFacebookadsystemdescribedbelow. FacebookAds.WhencreatingaFacebookad,advertiserscanspecifyatitle,content,image,anddestinationweb pageorFacebookPagetowhichauserisdirectedifheorsheclicksonthead.Becausewehaveastandardformat for Facebook ads, our users benefit from a consistent ad experience, and our advertisers are able to deploy and adjustcampaignsrapidly.Advertiserscanfurtherengagetheirintendedaudiencesbyincorporatingsocialcontext with their marketing messages. Social context includes actions a users friends have taken, such as Liking the advertisers Facebook Page. Ads with social context are shown only to a users friends, and the users privacy settingsapplytosocialads.Weofferarangeofadswithsocialcontext,fromanadwithasingleLikebuttontoour PremiumAdpairedwithsocialcontext,whichallowsadvertiserstohighlighttheinteractionsofausersfriends withabrandorproduct. SponsoredStories. Sponsored stories enable marketers to promote the stories they publish from their Facebook PagetouserswhohaveconnectedwiththePageortoamplifythedistributionofstoriesusersarealreadysharing thatarerelevanttotheirmarketingefforts.Forexample,whenauserLikesRedBull,RedBullcanpaytoamplify thereach,frequencyofdistribution,andprominencewithwhichthestoryisshowntofriendsofthatuser.
ExamplesofFacebookProductsforAdvertisersandMarketers
FacebookAdSystem.WhenadvertiserscreateanadcampaignwithFacebook,theyspecifythetypesofusersthey wouldliketoreachbasedoninformationthatuserschosetoshareabouttheirage,location,gender,relationship status,educationalhistory,workplace,andinterests.Forexample,aselfstoragecompanyranacampaigntoreach studentsoncollegecampusespriortosummerbreak.Additionally,advertisersindicatethemaximumpricetheyare willingtopayfortheiradandtheirmaximumbudget.Advertiserschoosetopayfortheiradsbasedoneithercost perthousandimpressions(CPM)onafixedorbiddedbasisorcostperclick(CPC)onabiddedbasis.Oursystem also supports guaranteed delivery of a fixed number of ad impressions for a fixed price. Facebooks ad serving technologydynamicallydeterminesthebestavailableadtoshoweachuserbasedonthecombinationoftheusers uniqueattributesandtherealtimecomparisonofbidsfromeligibleads. 98
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ExamplesofHowOurAdSystemMatchesRelevantAdstoInformationaUserhasChosentoShare
Informationuser choosestoshare
Potentialadsdisplayed basedoninformationthe userhasshared
Ad Analytics and Facebook Insights. Advertisers can use our analytics platform to track and optimize the performanceoftheircampaignsinrealtime.Facebookadanalyticsenableadvertiserstogaininsightsintowhich adsweredisplayedandclickedon.Theseanalyticshelpadvertisersmakemodificationstotheiradcampaignsin order to maximize results. For advertisers with Facebook Pages, Facebook Insights also provides realtime informationabouttheperformanceoftheirPageandrelatedpostswhetherthroughpaidororganicchannels.The data include the number of users who Liked and Commented on the Page as well as a metric, People Talking AboutThis,whichshowshowmanystoriesabouttheadvertisersbrandarebeingcreatedandshared.
BuildingandMaintainingUserTrust Trust is a cornerstone of our business. We dedicate significant resources to the goal of building user trust through developing and implementing programs designed to protect user privacy, promote a safe environment, and assure the security of user data. The resources we dedicate to this goal include engineers, analysts, lawyers, policy experts, and operationsspecialists,aswellashardwareandsoftwarefromleadingvendorsandsolutionswehavedesignedandbuilt. PrivacyandSharing.PeoplecometoFacebooktoconnectandshare.Protectinguserprivacyisanimportantpart ofourproductdevelopmentprocess.Ourobjectiveistogiveuserschoiceoverwhattheyshareandwithwhom theyshareit.Thiseffortisfundamentaltoourbusinessandfocusesoncontrol,transparency,andaccountability. 99
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Table of Contents Control. We believe that by providing our users with clear and easytouse controls, we will continue to promote trust in our products. For example, when a user posts a status update or uploads a photo to Facebook,ourinlinecontrolsallowtheusertoselecthisorheraudienceatthesametimethatheorsheis publishing the post. In addition, we have introduced other personal information control tools and techniques.ActivityLogwasrecentlyintroducedandisaunifiedtoolthatuserscanusetoreviewand managethecontenttheyhavepostedandtheactionstheyhavetakenonFacebook.Forexample,usingthe ActivityLog,ausercanviewhisorheractivitywithaparticularapp,deleteaspecificpost,changewhocan see a photo, or remove an app completely. Additionally, our Download Your Information tool enables userstoremoveorstoretheirpersonalinformationoffofFacebook. Transparency. Our Data Use Policy describes in plain language our data use practices and how privacy worksonFacebook.Wealsoofferanumberoftoolsandfeaturesthatprovideuserswithtransparencyabout theirinformationonFacebook.Ourapplicationsettingsfeatureenablesuserstovieweachoftheappsthey havechosentouse,theinformationneededbyeachapp,andtheaudiencewithwhomtheuserhaschosento sharehisorherinteractionswitheachapp.Webelievethatthistransparencyenablesuserstomakemore informeddecisionsabouttheiractivitiesonFacebook. Accountability. We continue to build new procedural safeguards as part of our comprehensive privacy program. These include a dedicated team of privacy professionals who are involved in new product and featuredevelopmentfromdesignthroughlaunchongoingreviewandmonitoringofthewaydataishandled byexistingfeaturesandappsandrigorousdatasecuritypractices.Weregularlyworkwithonlineprivacy andsafetyexpertsandregulatorsaroundtheworld.InNovember2011,weannounceda20yearagreement withtheFederalTradeCommissiontoenhanceourprivacyprogram.Wemadeaclearandformallongterm commitmenttogivinguserstoolstocontrolhowtheyshareonFacebook.Wealsohaveundergoneanaudit by the Office of the Irish Data Protection Commissioner. The audit comprehensively reviewed our compliancewithIrishdataprotectionlaw,whichisgroundedinEuropeandataprotectionprinciples.Aspart of the audit process, we agreed to enhance various data protection and privacy practices to ensure compliancewiththelawandadherencetoindustrybestpractices.
Safety.Wedesignourproductstoincluderobustsafetytools.Thesetoolsarecoupledwitheducationalresources andpartnershipswithonlinesafetyexpertstoofferprotectionsforallusers,particularlyteenagers.Wetakeinto accounttheuniqueneedsofteenagerswhouseourserviceandemployageappropriatesettingsthatrestricttheir visibility,limittheaudiencewithwhomtheycanshare,andhelppreventunwantedcontactfromstrangers. Our abuse reporting infrastructure allows anyone on Facebook to report inappropriate, offensive, or dangerous contentthroughreportlinksfoundonnearlyeverypageofoursite.Wehaveenhancedthisreportingsystemto include Social Reporting, which gives users the option to report content to us, to report content to a trusted friend, or to block the person who posted the content with one easyto use tool. Our Safety Advisory Board, comprised of five leading online safety organizations from around the world, advises us on product design and helpsustocreatecomprehensivesafetyresourcesforeveryonewhousesourservice.Theseresourcesarelocatedin ourmultimediaFamilySafetyCenteronourwebsite,whichalsooffersspecialinformationforparents,educators, teenagers,andmembersofthelawenforcementcommunity.Additionally,weworkwithlawenforcementtohelp promotethesafetyofourusersasrequiredbylaw.
Security. We invest in technology, processes, and people as part of our commitment to safeguarding our users information.Weuseavarietyoftechniquestoprotectthedatathatweareentrustedwith,andwerelyonmultiple layers of network segregation using firewalls to protect against attacks or unauthorized access. We also employ proprietary technologies to protect our users. For example, if we suspect that a users account may have been compromised,wemayuseaprocessthatwerefertoassocialauthenticationtovalidatethatthepersonaccessing theaccountistheactualaccount 100
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Table of Contents holder. The process of social authentication may include asking the person accessing the account to identify photos of the account holders friends. Our security team actively scans for security vulnerabilities using commercialtools,penetrationtests,codesecurityreviews,andinternalandexternalaudits.Wealsohaveanetwork ofgeographicallydistributedsingletenantdatacenters,andwetakemeasurestoprotecttheinformationstoredin thesedatacenters. Competition We face significant competition in almost every aspect of our business, including from companies such as Google, Microsoft,andTwitter,whichofferavarietyofInternetproducts,services,content,andonlineadvertisingofferings,aswell asfrommobilecompaniesandsmallerInternetcompaniesthatofferproductsandservicesthatmaycompetewithspecific Facebookfeatures.Wealsofacecompetitionfromtraditionalandonlinemediabusinessesforashareofadvertisersbudgets andinthedevelopmentofthetoolsandsystemsformanagingandoptimizingadvertisingcampaigns.Wecompetebroadly withGooglessocialnetworkingofferings,includingGoogle+,whichithasintegratedwithcertainofitsproducts,including search and Android. In addition, we compete with other, largely regional, social networks that have strong positions in particular countries, including Cyworld in Korea, Mixi in Japan, Orkut (owned by Google) in Brazil and India, and vKontakteinRussia.Asweintroducenewproducts,asourexistingproductsevolve,orasothercompaniesintroducenew productsandservices,wemaybecomesubjecttoadditionalcompetition. Theareasinwhichwecompeteinclude: UsersandEngagement.Wecompetetoattract,engage,andretainusers.Becauseourproductsforusersarefreeof charge,wecompetebasedontheutility,easeofuse,performance,andqualityofourproducts. Advertising. We compete to attract and retain advertisers. We distinguish our products by providing reach, relevance,socialcontext,andengagementtoamplifytheeffectivenessofadvertisersmessages. Platform.Wecompetetoattractandretaindeveloperstobuildcompellingappsandwebsitesthatintegratewith Facebook.WecompeteinthisareaprimarilybasedonthevalueofthetoolsandAPIsweprovidetodevelopersto enablethemtoaccessourlargeglobalbaseofengagedusersandtheirconnectionsandtodrivetraffictotheirapps andwebsites. Talent.Wecompetetoattractandretainhighlytalentedindividuals,especiallysoftwareengineers,designers,and productmanagers.CompetitionforemployeetalentisparticularlyintenseintheSanFranciscoBayArea,wherewe areheadquartered.Wecompeteforthesepotentialemployeesbyprovidingaworkenvironmentthatfostersand rewards creativity and innovation and by providing compensation packages that we believe will enable us to attractandretainkeyemployees.
Whileourindustryisevolvingrapidlyandisbecomingincreasinglycompetitive,webelievethatwecompetefavorably on the factors described above. For additional information, see Risk FactorsOur business is highly competitive. Competitionpresentsanongoingthreattothesuccessofourbusiness. Technology Wehaveassembledateamofhighlyskilledengineersandcomputerscientistswhoseexpertisespansabroadrangeof technicalareas.Wemakesignificantinvestmentsinproductandfeaturedevelopment,datamanagementandpersonalization technologies,largescalesystemsandscalableinfrastructure,andadvertisingtechnologies,asfollows: ProductandFeatureDevelopment.Weaimtocontinuouslyimproveourexistingproductsandtodevelopnew productsforourusers,developers,andadvertisers.Ourproductdevelopmentphilosophyiscenteredoncontinuous innovationincreatingproductsthataresocialbydesign,whichmeansthatourproductsaredesignedtoplaceour usersandtheirsocialinteractionsatthecoreoftheproductexperience. 101
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Table of Contents Data Management and Personalization Technologies. To provide each user with a personalized Facebook experience,wemustprocessandanalyzeavastandgrowingamountofcontentsharedbyourusers,developers, and advertisers and surface the most relevant content in real time. For example, loading a users home page typically requires accessing hundreds of servers, processing tens of thousands of individual pieces of data, and delivering the information selected in less than one second. In addition, the data relationships have grown exponentiallyandareconstantlychanging.Assuch,wehaveinvestedextensivelyindevelopingtechnologiesand analyticsinareasincluding: Contentoptimizationanddelivery.Weuseaproprietarydistributedsystemthatisabletoquerythousandsof pieces of content that may be of interest to an individual user to determine the most relevant and timely storiesanddeliverthemtotheuserinmilliseconds. Graph query. Our graph query technology enables us to efficiently process subjective queries about the SocialGraphbyutilizingaproprietarysetofsearchindices,queryprocessors,andcachingsystems. Mediastorageandserving.Westoremorethan100petabytes(100quadrillionbytes)ofphotosandvideos. Wehavebuiltanumberofstorageandservingtechnologies,suchasHaystack,whichallowustoefficiently serveandstorethedata. Largescaledatamanagement.WedevelopedApacheHive,adatawarehouseinfrastructurebuiltontopof Hadoop,toprovidetoolstoenableeasydatasummarization,adhocquerying,andanalysisoflargedatasets. Softwareperformance.Facebook.comislargelywritteninPHP,orHypertextPreprocessor,awidelyused, generalpurposescriptinglanguage.WedevelopedHipHop,whichprogrammaticallytransformsPHPsource code into highly optimized C++ code. HipHop offers significant performance gains when compared to traditionalPHP.
LargeScaleSystemsandScalableInfrastructure.Ourproductsarebuiltonasharedcomputinginfrastructure.We use a combination of offtheshelf and custom software running on clusters of commodity computers to amass substantialcomputingcapability.Ourinfrastructurehasenabledthestorageandprocessingoflargedatasetsand facilitatedthedeploymentofourproductsonaglobalscale.Asouruserbasegrows,andthelevelofengagement andsharingfromouruserscontinuestoincrease,ourcomputingneedscontinuetoexpand.Weaimtoprovideour products rapidly and reliably to all users around the world, including in countries where we do not expect significant shortterm monetization. We expect to benefit if and as the perunit pricing for computing power, memoryandstoragecapacitycontinuestodecrease.Wealsointendtocontinuetodevelopdatacenterandserver architecturesthatareoperationallyefficient,scalable,andreliable.Bybuildingcustomserversandconstructing ourowneddatacentersinPrineville,OregonandForestCity,NorthCarolina,weintroducednumeroustechnology advancementsthataredesignedto: eliminatenonessentialcomponents,therebyreducingthecostandimprovingtheserviceabilityofservers improve server cooling and power distribution across both the data center and servers to minimize power lossand optimize the power distribution system and server power supplies to operate at significantly higher efficiencyandfurtherreducepowerloss.
Together,ourcustomserveranddatacenterdesignsresultedinasignificantincreaseinenergyefficiencywhile significantlyreducingourcostscomparedtotheusageoftraditionalserversandleaseddatacenterfacilities.We areafoundingmemberoftheOpenComputeProjectthroughwhichwemakeourproprietarydatacenter,server hardware,andcertainsoftwaredesignsavailabletotheopensourcecommunity.Thisinitiativeaimstoaccelerate data center and server innovation and increase computing efficiency through collaboration on relevant best practicesandtechnicalspecifications. 102
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Table of Contents AdvertisingTechnologies.Webelievethatamorevaluableadvertiseranduserexperienceiscreatedthroughour ability to match the most relevant ads to each of our users based on his or her connections, demographics, and expressed interests. Our advertising technology serves billions of ad impressions every day, each of which is displayedtoselectedusersbasedupontheinformationthattheyhavechosentoshare. Advertisersspecifyabid,whichishowmuchtheyarewillingtopayforclicksorimpressionsoftheirads.The actual price paid for each click or impression is computed using an auction mechanism that automatically calculatestheminimumpriceanadvertisermustpaytowintheauctionandhaveitsadshown.Webelievethat our specific auction mechanism encourages advertisers to bid the maximum price they are willing to pay, understandingthatbecauseofthewayourauctionworkstheywillbechargedamarketdeterminedpricethatis neverhigherandtypicallylowerthantheirbid.Oursystemalsosupportsguaranteeddeliveryofafixednumberof adimpressionsforafixedprice. Oursystemmanagesourentiresetofads,theselectedaudiences,andtheadvertisersbidstodeterminewhichads to show each user and how to display them for every page on Facebook. We use an advanced click prediction system that weighs many realtime updated features using automated learning techniques. Our technology incorporatestheestimatedclickthroughratewithboththeadvertisersbidandauserrelevancysignaltoselectthe optimaladstoshow. Ourresearchanddevelopmentexpenseswere$87million,$144million,$388million,$57million,and$153million in2009,2010,and2011andthefirstquarterof2011and2012,respectively. SalesandOperations Many of our advertisers use our selfservice ad platform to establish accounts and to launch and manage their advertisingcampaigns.Wealsohaveaglobalsalesforcethatisfocusedonattractingandretainingadvertisersandproviding support to them throughout the stages of the advertising campaign cycle from prepurchase decision making to realtime optimizationstopostcampaignanalytics.Wecurrentlyoperatemorethan30salesofficesaroundtheglobe. Wehaveoperationsteamstoprovidesupportforourusers,developers,andadvertisersinfourregionalcenterslocated inMenloPark,CaliforniaAustin,TexasDublin,IrelandandHyderabad,India.Wealsoinvestinandrelyonselfservice toolstoprovidecustomersupporttoourusers,developers,andadvertisers. Marketing To date, the Facebook user community has grown virally with users inviting their friends to connect with them, supportedbyinternaleffortstostimulateuserawarenessandinterest.Wehavebeenabletobuildourbrandanduserbase around the world with relatively low marketing costs. We leverage the utility of our products and our social distribution channelsasourmosteffectivemarketingtools.Inaddition,weundertakevarioususeracquisitioneffortsandregularlyhost eventsandconferencestoengagewithdevelopersandadvertisers. IntellectualProperty Oursuccessdependsinpartuponourabilitytoprotectourcoretechnologyandintellectualproperty.Toestablishand protectourproprietaryrights,werelyonacombinationofpatents,patentapplications,trademarks,copyrights,tradesecrets, includingknowhow,licenseagreements,confidentialityprocedures,nondisclosureagreementswiththirdparties,employee disclosureandinventionassignmentagreements,andothercontractualrights. As of March 31, 2012, we had 774 issued patents and 546 filed patent applications in the United States and 96 correspondingpatentsand194filedpatentapplicationsinforeigncountriesrelatingtosocialnetworking,web 103
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Table of Contents technologiesandinfrastructure,andothertechnologies.Ourissuedpatentsexpirebetween2014and2030.Wecannotassure youthatanyofourpatentapplicationswillresultintheissuanceofapatentorwhethertheexaminationprocesswillrequire ustonarrowourclaims.Inaddition,anypatentsmaybecontested,circumvented,foundunenforceableorinvalid,andwe maynotbeabletopreventthirdpartiesfrominfringingthem.InApril2012,weenteredintoanagreementwithMicrosoft Corporation pursuant to which we will be assigned Microsofts rights to acquire approximately 650 patents and patent applicationsthataresubjecttotheagreementbetweenAOLInc.andMicrosoftenteredintoonApril5,2012andobtaina licensetotheotherAOLpatentsandpatentapplicationsbeingpurchasedbyMicrosoft. Wegenerallycontrolaccesstoanduseofourproprietarytechnologyandotherconfidentialinformationthroughthe useofinternalandexternalcontrols,includingcontractualprotectionswithemployees,contractors,customers,andpartners, andoursoftwareisprotectedbyU.S.andinternationalcopyrightlaws.Despiteoureffortstoprotectourtradesecretsand proprietary rights through intellectual property rights, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology. In addition, we intend to expand our international operations,andeffectivepatent,copyright,trademarkandtradesecretprotectionmaynotbeavailableormaybelimitedin foreigncountries. CompaniesintheInternet,technology,andmediaindustriesownlargenumbersofpatents,copyrights,trademarks,and tradesecretsandfrequentlyenterintolitigationbasedonallegationsofinfringement,misappropriation,orotherviolations ofintellectualpropertyorotherrights.Fromtimetotime,weface,andweexpecttofaceinthefuture,allegationsthatwe have infringed the trademarks, copyrights, patents, trade secrets and other intellectual property rights of third parties, includingourcompetitorsandnonpracticingentities.Aswefaceincreasingcompetitionandasourbusinessgrows,wewill likelyfacemoreclaimsofinfringement.Forexample,onMarch12,2012,YahoofiledalawsuitagainstusintheU.S.District CourtfortheNorthernDistrictofCaliforniathatallegesthatanumberofourproductsinfringetheclaimsoftenofYahoos patents. For additional information, see Risk FactorsWe are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, couldhaveasignificantimpactonourbusiness,financialcondition,orresultsofoperationsandLegalProceedings. GovernmentRegulation WearesubjecttoanumberofU.S.federalandstate,andforeignlawsandregulationsthataffectcompaniesconducting businessontheInternet,manyofwhicharestillevolvingandbeingtestedincourts,andcouldbeinterpretedinwaysthat couldharmourbusiness.Thesemayinvolveuserprivacy,rightsofpublicity,dataprotection,content,intellectualproperty, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxationandonlinepaymentservices.Inparticular,wearesubjecttofederal,state,andforeignlawsregardingprivacyand protectionofuserdata.Foreigndataprotection,privacy,andotherlawsandregulationsareoftenmorerestrictivethanthose intheUnitedStates.U.S.federalandstateandforeignlawsandregulationsareconstantlyevolvingandcanbesubjectto significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularlyinthenewandrapidlyevolvingindustryinwhichweoperate.Therearealsoanumberoflegislativeproposals pending before the U.S. Congress, various state legislative bodies, and foreign governments concerning data protection which could affect us. For example, a revision to the 1995 European Union Data Protection Directive is currently being consideredbylegislativebodiesthatmayincludemorestringentoperationalrequirementsfordataprocessorsandsignificant penaltiesfornoncompliance. InNovember2011,wereacheda20yearsettlementagreementwiththeFTCtoresolveaninvestigationintovarious practices,byenteringintoanagreementthat,amongotherthings,requiresustoestablishandrefinecertainpracticeswith respecttotreatmentofuserdataandprivacysettingsandalsorequireswecompletebiannualindependentprivacyaudits. Violationofexistingorfutureregulatoryordersorconsentdecreescouldsubjectustosubstantialmonetaryfinesandother penaltiesthatcouldnegativelyaffectourfinancialconditionandresultsofoperations. VariouslawsandregulationsintheUnitedStatesandabroad,suchastheBankSecrecyAct,theDoddFrankAct,the USAPATRIOTAct,andtheCreditCARDActimposecertainantimoneylaundering 104
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Table of Contents requirementsoncompaniesthatarefinancialinstitutionsorthatprovidefinancialproductsandservices.Undertheselaws andregulations,financialinstitutionsarebroadlydefinedtoincludemoneyservicesbusinessessuchasmoneytransmitters, checkcashers,andsellersorissuersofstoredvalue.Requirementsimposedonfinancialinstitutionsundertheselawsinclude customeridentificationandverificationprograms,recordretentionpolicies,andproceduresandtransactionreporting.Wedo notbelievethatweareafinancialinstitutionsubjecttotheselawsandregulations.However,itispossiblethatPaymentson theFacebookPlatformcouldbeconsideredafinancialproductandthatwecouldbedeemedafinancialinstitutionsubjectto applicable U.S., state, or foreign regulation under certain interpretations of laws governing businesses such as money transmitters, check cashers, and sellers or issuers of stored value. To increase flexibility in how our use of Payments may evolveandtomitigateregulatoryuncertainty,wehaveappliedorexpecttoapplythroughasubsidiaryforcertainmoney transmitter licenses in the United States, which will generally require us to show compliance with many domestic laws relating to money transmission, gift cards and other prepaid access instruments, electronics funds transfers, antimoney laundering,counterterroristfinancing,gambling,bankingandlending,andimportandexportrestrictions. ChinaisalargepotentialmarketforFacebook,butusersaregenerallyrestrictedfromaccessingFacebookfromChina. Wedonotknowifwewillbeabletofindanapproachtomanagingcontentandinformationthatwillbeacceptabletousand totheChinesegovernment.Itisalsopossiblethatgovernmentsofoneormoreothercountriesmayseektocensorcontent availableonourwebsite,restrictaccess,blockourwebsite,orimposeotherrestrictionsthatmayaffecttheaccessibilityof Facebookforanextendedperiodoftimeorindefinitely. We communicate with lawmakers and regulators in the countries and regions in which we do business. We have a dedicatedpolicyteamthatmonitorslegalandregulatorydevelopmentsandworkswithpolicymakersandregulatorsaround theworldtohelpensurethatourperspectiveisheardinmattersofimportancetous. LegalProceedings PaulD.CegliafiledsuitagainstusandMarkZuckerbergonoraboutJune30,2010,intheSupremeCourtoftheState of New York for the County of Allegheny claiming substantial ownership of our company based on a purported contract betweenMr.CegliaandMr.ZuckerbergallegedlyenteredintoinApril2003.WeremovedthecasetotheU.S.DistrictCourt fortheWesternDistrictofNewYork,wherethecaseisnowpending.Inhisfirstamendedcomplaint,filedonApril11,2011, Mr.CegliarevisedhisclaimstoincludeanallegedpartnershipwithMr.Zuckerberg,herevisedhisclaimsforrelieftoseeka substantialshareofMr.Zuckerbergsownershipinus,andheincludedquotationsfromsupposedemailsthatheclaimsto haveexchangedwithMr.Zuckerbergin2003and2004.OnJune2,2011,wefiledamotionforexpediteddiscoverybased on evidence we submitted to the court showing that the alleged contract and emails upon which Mr. Ceglia bases his complaintarefraudulent.OnJuly1,2011,thecourtgrantedourmotionandorderedMr.Cegliatoproduce,amongother things,allhardcopyandelectronicversionsofthepurportedcontractandemails.OnJanuary10,2012,thecourtgrantedour requestforsanctionsagainstMr.Cegliaforhisdelayincompliancewiththatorder.OnMarch26,2012,wefiledamotionto dismiss Mr. Ceglias complaint and a motion for judgment on the pleadings. We continue to believe that Mr. Ceglia is attemptingtoperpetrateafraudonthecourtandweintendtocontinuetodefendthecasevigorously. OnMarch12,2012,YahoofiledalawsuitagainstusintheU.S.DistrictCourtfortheNorthernDistrictofCalifornia, claiming that we infringe certain patents that Yahoo claims relate to advertising, social networking, privacy, customization, and messaging. Yahoo is seeking unspecified damages, a damage multiplier for alleged willful infringement,andaninjunction.Weintendtovigorouslydefendthislawsuit,andonApril3,2012,wefiledouranswerwith respecttothiscomplaintandassertedcounterclaimsthatYahoosproductsinfringetenofourpatents.Thislitigationisstill in its early stages and the final outcome, including our liability, if any, with respect to Yahoos claims, is uncertain. At present, we are unable to estimate a reasonably possible range of loss, if any, that may result from this matter. If an unfavorableoutcomeweretooccurinthislitigation,theimpactcouldbematerialtoourbusiness,financialcondition,or resultsofoperations. 105
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Table of Contents Wearealsocurrentlypartiestomultipleotherlawsuitsrelatedtoourproducts,includingpatentinfringementlawsuits brought by both other companies and nonpracticing entities as well as class action lawsuits brought by users and advertisers,andwemayinthefuturebesubjecttoadditionallawsuitsanddisputes.Wearealsoinvolvedinotherclaims, governmentinvestigations,andproceedingsarisingfromtheordinarycourseofourbusiness.Althoughtheresultsofthese other lawsuits, claims, government investigations, and proceedings in which we are involved cannot be predicted with certainty,wedonotbelievethatthefinaloutcomeoftheseothermatterswillhaveamaterialadverseeffectonourbusiness, financialcondition,orresultsofoperations. Regardlessofthefinaloutcome,defendinglawsuits,claims,governmentinvestigations,andproceedingsinwhichwe are involved is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminaryorinterimrulingsinthecourseoflitigation,andtherecanbenoassurancesthatfavorablefinaloutcomeswillbe obtained. CultureandEmployees Ouremployeesandourculturearecriticaltooursuccess.Wevalueourhackerculture,whichwedefineasawork environment that rewards creative problem solving and rapid decision making. We try to move fast in developing new productsandthencontinuallyiterateandoptimizetofurtherimproveourproducts.Weseekemployeeswhoaremotivated bytheabilitytohaveadirectimpactonhowhundredsofmillionsofpeoplearoundtheworldconnect,discover,andexpress themselves. Weencourageouremployeestothinkboldly.Wealsohavepostedthephrasethisjourneyis1%finishedacrossmany ofourofficewalls,toremindemployeesthatwebelievethatwehaveonlybegunfulfillingourmissiontomaketheworld moreopenandconnected. Wehavegrownrapidly,butataratethatwebelievewillallowustopreserveacultureofcollaboration,excellence,and movingfast.Wehad1,218fulltimeemployees,2,127fulltimeemployees,3,200fulltimeemployees,and3,539fulltime employeesattheendof2009,2010,2011,andthefirstquarterof2012,respectively. Facilities As of March 31, 2012, we leased office facilities around the world totaling approximately 2.2 million square feet, including one million square feet for our corporate headquarters in Menlo Park, California. We have data centers in the UnitedStates,includingdatacenterfacilitiesthatweowninNorthCarolinaandOregonandleaseddatacenterfacilitiesin CaliforniaandVirginia.Webelievethatourfacilitiesareadequateforourcurrentneeds. 106
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Table of Contents MANAGEMENT ExecutiveOfficersandDirectors ThefollowingtableprovidesinformationregardingourexecutiveofficersanddirectorsasofMarch31,2012:

Name Age Position(s)
MarkZuckerberg SherylK.Sandberg DavidA.Ebersman DavidB.Fischer MikeSchroepfer TheodoreW.Ullyot MarcL.Andreessen (1)(3) ErskineB.Bowles(1) JamesW.Breyer(2) DonaldE.Graham* (2)(3) ReedHastings(3) PeterA.Thiel(1)
* (1) (2) (3) LeadIndependentDirector. Memberoftheauditcommittee. Memberofthecompensationcommittee. Memberofthegovernancecommittee.
27 ChairmanandCEO 42 ChiefOperatingOfficer 42 ChiefFinancialOfficer 39 VicePresident,MarketingandBusinessPartnerships 37 VicePresidentofEngineering 44 VicePresident,GeneralCounsel,andSecretary 40 Director 66 Director 50 Director 66 Director 51 Director 44 Director
MarkZuckerbergisourfounderandhasservedasourCEOandasamemberofourboardofdirectorssinceJuly2004. Mr. Zuckerberg has served as Chairman of our board of directors since January 2012. Mr. Zuckerberg attended Harvard Universitywherehestudiedcomputerscience.WebelievethatMr.Zuckerbergshouldserveasamemberofourboardof directors due to the perspective and experience he brings as our founder, Chairman, and CEO, and as our largest and controllingstockholder. SherylK.SandberghasservedasourChiefOperatingOfficersinceMarch2008.FromNovember2001toMarch2008, Ms.SandbergservedinvariouspositionsatGoogle,Inc.,mostrecentlyasVicePresident,GlobalOnlineSales&Operations. Ms. Sandberg also is a former Chief of Staff of the U.S. Treasury Department and previously served as a consultant with McKinsey & Company, a management consulting company, and as an economist with The World Bank. In addition to serving as our Chief Operating Officer, Ms. Sandberg has been a member of the board of directors of the Walt Disney Company since December 2009. Ms. Sandberg holds an A.B. in economics from Harvard University and an M.B.A. from HarvardBusinessSchool. DavidA.EbersmanhasservedasourChiefFinancialOfficersinceSeptember2009.Priortojoiningus,Mr.Ebersman servedinvariouspositionsatGenentech,Inc.,abiotechnologycompany,includingasitsChiefFinancialOfficerfromMarch 2005 and as an Executive Vice President from January 2006 until April 2009, following Genentechs acquisition by F. HoffmannLaRocheLtd.inMarch2009.PriortojoiningGenentech,Mr.EbersmanwasaresearchanalystatOppenheimer& Company, Inc., an investment company. In addition to serving as our Chief Financial Officer, Mr. Ebersman has been a member of the board of directors of Ironwood Pharmaceuticals, Inc. since July 2009. Mr. Ebersman holds an A.B. in economicsandinternationalrelationsfromBrownUniversity. 107
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Table of Contents DavidB.FischerjoinedusinApril2010andservesasourVicePresident,MarketingandBusinessPartnerships.From July2002toMarch2010,Mr.FischerservedinvariouspositionsatGoogle,includingmostrecentlyasitsVicePresident, GlobalOnlineSales&Operations.PriortojoiningGoogle,Mr.FischerservedasDeputyChiefofStaffoftheU.S.Treasury DepartmentandwasanassociateeditorattheU.S.NewsWorldReport,L.P.,anewsmagazinecompany.Mr.Fischerholdsa B.A.ingovernmentfromCornellUniversityandanM.B.A.fromtheStanfordUniversityGraduateSchoolofBusiness. Mike Schroepfer has served as our Vice President of Engineering since September 2008. From December 2005 to August2008,Mr.SchroepferservedasVicePresidentofEngineeringatMozillaCorporation,anInternetcompany.Priorto Mozilla, Mr. Schroepfer served in various positions at Sun Microsystems, Inc., an information technology company, including as Chief Technology Officer of its data center automation division. He also cofounded CenterRun, Inc., a developerofapplicationprovisioningsoftware,whichwasacquiredbySunMicrosystems.InadditiontoservingasourVice President of Engineering, Mr. Schroepfer has been a member of the board of directors of Ancestry.com Inc. since January 2011.Mr.SchroepferholdsaB.S.andanM.S.incomputersciencefromStanfordUniversity. TheodoreW.UllyothasservedasourVicePresident,GeneralCounsel,andSecretarysinceOctober2008.FromMay 2008 to October 2008, Mr. Ullyot was a partner at Kirkland & Ellis LLP, a law firm. From October 2005 to April 2008, Mr.UllyotservedasExecutiveVicePresidentandGeneralCounselofESLInvestments,Inc.,aprivateinvestmentfirm.Prior tojoiningESLInvestments,Mr.UllyotservedinthefederalexecutivebranchunderPresidentGeorgeW.Bush,includingas ChiefofStaffattheU.S.JusticeDepartmentandasaDeputyAssistanttothePresident.Earlierinhiscareer,Mr.Ullyotwas anassociategeneralcounselatAOLTimeWarner,Inc.andservedasalawclerkforU.S.SupremeCourtJusticeAntonin ScaliaandforJudgeMichaelLuttigoftheU.S.CourtofAppealsfortheFourthCircuit.Mr.UllyotholdsanA.B.inHistory fromHarvardUniversityandaJ.D.fromtheUniversityofChicago. MarcL.AndreessenhasservedasamemberofourboardofdirectorssinceJune2008.Mr.Andreessenisacofounder andhasbeenaGeneralPartnerofAndreessenHorowitz,aventurecapitalfirm,sinceJuly2009.Previously,Mr.Andreessen cofounded and served as the Chairman of the board of directors of Opsware, Inc. (formerly known as Loudcloud Inc.), a software company. He also served as Chief Technology Officer of America Online, Inc., an Internet services company. Mr. Andreessen was a cofounder of Netscape Communications Corporation, a software company, serving in various positions,includingChiefTechnologyOfficerandExecutiveVicePresidentofProducts.Inadditiontoservingonourboard ofdirectors,Mr.AndreessencurrentlyservesasamemberoftheboardsofdirectorsofeBayInc.andtheHewlettPackard Company.Mr.AndreessenholdsaB.S.incomputersciencefromtheUniversityofIllinoisatUrbanaChampaign.Webelieve that Mr. Andreessen should serve as a member of our board of directors due to his extensive experience as an Internet entrepreneur,venturecapitalist,andtechnologist. ErskineB.Bowles has served as a member of our board of directors since September 2011. Mr. Bowles is President EmeritusoftheUniversityofNorthCarolinaandservedasPresidentfromJanuary2006throughDecember2010.Mr.Bowles hasalsobeenaSeniorAdvisorofBDTCapitalPartners,LLC,aprivateinvestmentfirm,sinceJanuary2012.FromFebruary 2010 until December 2010, he served as CoChair of the National Commission on Fiscal Responsibility and Reform. Mr.BowleshasbeenaSeniorAdvisorsince2001andwasManagingDirectorfrom1999to2001ofCarouselCapitalLLC,a privateinvestmentfirm.HewasalsoapartnerofForstmannLittle&Co.,aninvestmentfirm,from1999to2001.Mr.Bowles beganhiscareerincorporatefinanceatMorganStanleyandsubsequentlyhelpedfoundandultimatelyservedasChairman andChiefExecutiveOfficerofBowlesHollowellConnor&Co.,aninvestmentbankingfirm.HealsowasafounderofKitty HawkCapital,aventurecapitalfirm.Mr.BowlesservedasWhiteHouseChiefofStafffrom1996to1998andDeputyWhite HouseChiefofStafffrom1994to1995.Inadditiontoservingonourboardofdirectors,Mr.Bowlescurrentlyservesasa member of the boards of directors of Morgan Stanley, Belk, Inc., Cousins Properties Incorporated, and Norfolk Southern Corporation.Mr.BowleshaselectednottostandforreelectionatCousinsProperties2012annualmeeting.Mr.Bowlesalso servedasamemberoftheboardofdirectorsof 108
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Table of Contents GeneralMotorsCompanyfromJune2005toApril2009.Mr.BowlesholdsaB.S.inbusinessfromtheUniversityofNorth CarolinaatChapelHillandanM.B.A.fromColumbiaUniversityGraduateSchoolofBusiness.WebelievethatMr.Bowles shouldserveasamemberofourboardofdirectorsduetohisextensiveexperienceinthefinancialservicesindustryand academiaaswellashisdistinguishedpublicservice. JamesW.BreyerhasservedasamemberofourboardofdirectorssinceApril2005.Mr.BreyerhasbeenaPartnerof AccelPartners,aventurecapitalfirm,since1987.Mr.BreyerisalsothefounderandhasbeentheChiefExecutiveOfficerof BreyerCapital,aninvestmentfirm,sinceJuly2006.Mr.Breyerisalsoacofounderandhasbeencoleadonthestrategic investment committee since inception of the IDGAccel China Funds. In addition to serving on our board of directors, Mr.BreyercurrentlyservesasamemberoftheboardsofdirectorsofBrightcoveInc.,Dell,Inc.,NewsCorporation,Prosper Marketplace, Inc., and WalMart Stores, Inc., where he is the lead/presiding independent director. Mr. Breyer previously served as a member of the board of directors of Marvel Entertainment Inc. from June 2006 to December 2009 and RealNetworks, Inc. from October 1995 to June 2008. Mr. Breyer holds a B.S. in interdisciplinary studies from Stanford UniversityandanM.B.A.fromHarvardUniversity.WebelievethatMr.Breyershouldserveasamemberofourboardof directorsduetohisextensiveexperiencewithsocialmediaandtechnologycompanies,asaventurecapitalist,andasoneof ourearlyinvestors. DonaldE.GrahamhasservedasamemberofourboardofdirectorssinceMarch2009.Mr.Grahamhasservedasthe ChiefExecutiveOfficerofTheWashingtonPostCompany,aneducationandmediacompany,since1991andasChairman ofitsboardofdirectorssince1993.Mr.GrahamholdsanA.B.inEnglishhistoryandliteraturefromHarvardUniversity.We believethatMr.Grahamshouldserveasamemberofourboardofdirectorsduetohisextensiveexperienceinthemedia industry,includingservinginavarietyofseniorleadershiproleswithTheWashingtonPostCompany. ReedHastingshasservedasamemberofourboardofdirectorssinceJune2011.Mr.HastingshasservedastheChief ExecutiveOfficerandChairmanoftheboardofdirectorsofNetflix,Inc.,aproviderofanInternetsubscriptionservicefor movies and television shows, since 1999. Prior to Netflix, Mr. Hastings served as Chief Executive Officer of Technology Network,apoliticalserviceorganizationforthetechnologyindustry.Mr.HastingsservedasChiefExecutiveOfficerofPure AtriaSoftware,amakerofsoftwaredevelopmenttools,from1991untilitwasacquiredbyRationalSoftwareCorporation,a softwarecompany,in1997.Inadditiontoservingonourboardofdirectors,Mr.Hastingscurrentlyservesasamemberofthe board of directors of Microsoft Corporation. Mr. Hastings holds a B.A. in mathematics from Bowdoin College and an M.S.C.S.incomputersciencefromStanfordUniversity.WebelievethatMr.Hastingsshouldserveasamemberofourboard ofdirectorsduetohisextensiveexperiencewithtechnologycompanies. Peter A. Thiel has served as a member of our board of directors since April 2005. Since 2005, Mr. Thiel has been a Partner of Founders Fund, a venture capital firm. Mr. Thiel has also served as President of Clarium Capital Management, LLC, a global macro investment manager, since 2002. In 1998, Mr. Thiel cofounded PayPal, Inc., an online payment company,whereheservedasChiefExecutiveOfficer,PresidentandasChairmanofitsboardofdirectorsfrom2000untilits acquisitionbyeBayin2002.Priortothat,Mr.ThielworkedforCreditSuisse,aninvestmentfirm,andSullivan&Cromwell LLP,alawfirm.Mr.ThielholdsaB.A.inPhilosophyfromStanfordUniversityandaJ.D.fromStanfordLawSchool.We believethatMr.Thielshouldserveasamemberofourboardofdirectorsduetohisextensiveexperienceasanentrepreneur andventurecapitalist,andasoneofourearlyinvestors. ElectionofOfficers Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationshipsamonganyofourdirectorsorexecutiveofficers. 109
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Table of Contents BoardComposition Ourboardofdirectorsmayestablishtheauthorizednumberofdirectorsfromtimetotimebyresolution.Ourboardof directors currently consists of seven members. Our current certificate of incorporation and amended and restated voting agreementsprovideforcertainmembersofourboardofdirectorstobeelectedasdesigneesbyMr.Zuckerberg,theboardof directors,orbycertainclassesofourcapitalstock.Thecurrentmembersoftheboardofdirectorswereelectedasfollows: Messrs. Andreessen, Graham, and Zuckerberg were elected as designees of Mr. Zuckerberg, the holder of the majorityofthevotingpoweroftheoutstandingsharesofClassAcommonstockandClassBcommonstock Mr.Bowleswaselectedasthedesigneeoftheboardofdirectors Mr.HastingswaselectedasthedesigneeofMr.Zuckerberg,theholderofthemajorityofthevotingpowerofthe outstandingsharesofourcapitalstock Mr.ThielwaselectedasthedesigneeofstockholdersholdingamajorityoftheoutstandingsharesofourSeriesA preferredstock,however,pursuanttotheamendedandrestatedvotingagreement,amajorityofthemembersofour boardofdirectorsmaydesignateonememberoftheboardofdirectorstofillthisseatifitbecomesvacantand Mr.BreyerwaselectedasthedesigneeofstockholderswhoholdamajorityoftheoutstandingsharesofourSeries Bpreferredstock.
Theamendedandrestatedvotingagreementandtheprovisionsofourcertificateofincorporationbywhichthedirectors wereelectedwillterminateinconnectionwithourinitialpublicoffering,and,exceptasdescribedinDescriptionofCapital StockVoting Agreements, there will be no further contractual obligations regarding the election of our directors. Our currentdirectorswillcontinuetoserveasdirectorsuntiltheirresignationsoruntiltheirsuccessorsaredulyelectedbythe holdersofourcommonstock. ClassifiedBoard SolongastheoutstandingsharesofourClassBcommonstockrepresentamajorityofthecombinedvotingpowerof commonstock,wewillnothaveaclassifiedboardofdirectors,andalldirectorswillbeelectedforannualterms. WhentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvotingpower ofcommonstock,wewillhaveaclassifiedboardofdirectorsconsistingofthreeclassesofapproximatelyequalsize,each servingstaggeredthreeyearterms.Ourdirectorswillbeassignedbythethencurrentboardofdirectorstoaclass. Upon expiration of the term of a class of directors, directors for that class will be elected for threeyear terms at the annualmeetingofstockholdersintheyearinwhichthattermexpires.Asaresult,onlyoneclassofdirectorswillbeelected ateachannualmeetingofourstockholders,withtheotherclassescontinuingfortheremainderoftheirrespectivethreeyear terms.Eachdirectorstermcontinuesuntiltheelectionandqualificationofhisorhersuccessor,orhisorherearlierdeath, resignation,orremoval. So long as our board of directors is classified, only our board of directors may fill vacancies on our board. Any additionaldirectorshipsresultingfromanincreaseinthenumberofdirectorswillbedistributedamongthethreeclassesso that,asnearlyaspossible,eachclasswillconsistofonethirdofthetotalnumberofdirectors. The classification of our board of directors may have the effect of delaying or preventing changes in our control or management. See Description of Capital StockAntiTakeover ProvisionsRestated Certificate of Incorporation and BylawProvisions. 110
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Table of Contents DirectorIndependence TherulesoftheNASDAQStockMarketLLC(NASDAQ)generallyrequirethatamajorityofthemembersofalisted companysboardofdirectorsbeindependentwithinspecifiedperiodsfollowingtheclosingofaninitialpublicoffering.In addition,thelistingrulesgenerallyrequirethat,subjecttospecifiedexceptions,eachmemberofalistedcompanysaudit, compensation,andgovernancecommitteesbeindependent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A3 under the Securities ExchangeActof1934,asamended(ExchangeAct).InordertobeconsideredindependentforpurposesofRule10A3,a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee,theboardofdirectors,oranyotherboardcommittee:accept,directlyorindirectly,anyconsulting,advisory,or othercompensatoryfeefromthelistedcompanyoranyofitssubsidiariesorbeanaffiliatedpersonofthelistedcompanyor anyofitssubsidiaries. Ourboardofdirectorshasdeterminedthatnoneofournonemployeedirectorshasarelationshipthatwouldinterfere withtheexerciseofindependentjudgmentincarryingouttheresponsibilitiesofadirectorandthateachofthesedirectorsis independentasthattermisdefinedundertherulesofNASDAQ.OurboardofdirectorshasalsodeterminedthatMessrs. Andreessen, Bowles, and Thiel, who comprise our audit committee, Messrs. Breyer and Graham, who comprise our compensationcommittee,andMessrs.Andreessen,Graham,andHastings,whocompriseourgovernancecommittee,satisfy theindependencestandardsforthosecommitteesestablishedbyapplicableSECrulesandtherulesofNASDAQ. ControlledCompany BecauseMr.Zuckerbergcontrolsamajorityofouroutstandingvotingpower,weareacontrolledcompanyunderthe corporate governance rules of NASDAQ. Therefore, we are not required to have a majority of our board of directors be independent,norarewerequiredtohaveacompensationcommitteeoranindependentnominatingfunction.Inlightofour statusasacontrolledcompany,ourboardofdirectorshasdeterminednottohaveanindependentnominatingfunctionand tohavethefullboardofdirectorsbedirectlyresponsiblefornominatingmembersofourboard.Additionally,asdescribedin the section entitled Description of Capital StockAntiTakeover ProvisionsRestated Certificate of Incorporation and BylawProvisions,solongastheoutstandingsharesofourClassBcommonstockrepresentamajorityofthecombined voting power of our common stock, Mr. Zuckerberg will be able to effectively control all matters submitted to our stockholdersforavote,aswellastheoverallmanagementanddirectionofourcompany. BoardCommittees Ourboardofdirectorshasestablishedanauditcommittee,acompensationcommittee,andagovernancecommittee, eachofwhichwillhavethecompositionandresponsibilitiesdescribedbelowasoftheclosingofourinitialpublicoffering. Membersserveonthesecommitteesuntiltheirresignationsoruntilotherwisedeterminedbyourboardofdirectors. AuditCommittee OurauditcommitteeiscomprisedofMessrs.Andreessen,Bowles,andThiel.Mr.Bowlesisthechairmanofouraudit committee, is our audit committee financial expert, as that term is defined under SEC rules and possesses financial sophistication as defined under the rules of NASDAQ. The designation does not impose on Mr. Bowles any duties, obligationsorliabilitiesthataregreaterthanaregenerallyimposedonmembersofourauditcommitteeandourboardof directors.Ourauditcommitteeisdirectlyresponsiblefor,amongotherthings: selectingtheindependentregisteredpublicaccountingfirmtoauditourfinancialstatements 111
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Table of Contents ensuringtheindependenceoftheindependentregisteredpublicaccountingfirm discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing,withmanagementandthatfirm,ourinterimandyearendoperatingresults developingprocedurestoenablesubmissionofanonymousconcernsaboutaccountingorauditmatters consideringtheadequacyofourinternalaccountingcontrolsandauditprocedures reviewingrelatedpartytransactions approving or, as permitted, preapproving all audit and nonaudit services to be performed by the independent registeredpublicaccountingfirmand overseeingourinternalauditfunction.
CompensationCommittee Our compensation committee is comprised of Messrs. Breyer and Graham. Mr. Breyer is the chairman of our compensation committee. Each member of this committee is a nonemployee director, as defined pursuant to Rule 16b3 promulgatedundertheExchangeAct,andanoutsidedirector,asdefinedunderSection162(m)oftheInternalRevenueCode of1986,asamended.Ourcompensationcommitteeisresponsiblefor,amongotherthings: reviewingandapproving,orrecommendingthatourboardofdirectorsapprove,thecompensationofourexecutive officers reviewingandrecommendingtoourboardofdirectorsthecompensationofourdirectors reviewingandapprovingthetermsofanycompensatoryagreementswithourexecutiveofficers administeringourstockandequityincentiveplans reviewing and making recommendations to our board of directors with respect to incentive compensation and equityplansand establishingandreviewingouroverallcompensationphilosophy.
GovernanceCommittee OurgovernancecommitteeiscomprisedofMessrs.Andreessen,Graham,andHastings.Mr.Grahamisthechairmanof ourgovernancecommittee.Ourgovernancecommitteeisresponsiblefor,amongotherthings: reviewingdevelopmentsincorporategovernancepractices developingandrecommendingourcorporategovernanceguidelinesandpolicies,andevaluatingtheirsufficiency reviewingproposedwaiversofthecodeofconduct overseeingtheprocessofevaluatingtheperformanceofourboardofdirectorsand advisingourboardofdirectorsoncorporategovernancematters.
Eachoftheabovecommitteeshasawrittencharterapprovedbyourboardofdirectors.Followingtheclosingofour initialpublicoffering,copiesofeachcharterwillbepostedontheInvestorRelationssectionofourwebsite. CompensationCommitteeInterlocksandInsiderParticipation During2011,ourcompensationcommitteeconsistedofMessrs.BreyerandGraham.Neitherofthemhasatanytimein the last fiscal year been one of our officers or employees. During 2009, 2010, 2011, and the first quarter of 2012, The WashingtonPostCompanyanditsrelatedcompaniespurchased$0.6million,$4.8million,$4.2million,and$0.8million, respectively,ofadvertisementsonourwebsite.Mr.GrahamistheChiefExecutiveOfficerofTheWashingtonPostCompany. The purchases by The Washington Post Company and its related entities were made in the ordinary course of business pursuanttoourstandardonlinetermsandconditionsandwereallmadethroughourselfserviceadsystem. 112
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Table of Contents Noneofourexecutiveofficershasservedasamemberoftheboardofdirectors,orasamemberofthecompensationor similar committee, of any entity that has one or more executive officers who served on our board of directors or compensationcommitteeduring2011. CodeofBusinessConductandEthics Ourboardofdirectorshasadoptedacodeofbusinessconductandethicsthatappliestoallofouremployees,officers, anddirectors.ThefulltextofourcodeofbusinessconductandethicswillbepostedontheInvestorRelationssectionofour website. We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waiversoftheseprovisions,onourwebsiteorinfilingsundertheExchangeAct. DirectorCompensation InSeptember2011,ourboardofdirectorsapprovedanannualretainerfeeof$50,000foreachofournonemployee directors. Our nonemployee directors received a prorated fee during 2011. In addition, starting on January 1, 2012, the chairmanofourauditcommitteewillreceiveanannualretainerfeeof$20,000.Priortoourinitialpublicoffering,therewas noformalpolicyinplacetoprovideourdirectorswithequitycompensationfortheirservicesasmembersofourboardof directors or any committee of our board of directors. In June 2011, our board of directors approved the grant of 20,000 restrictedstockunits(RSUs)toMr.Hastings,ascompensationforMr.Hastingsserviceasamemberofourboardofdirectors. In September 2011, our board of directors approved the grant of 20,000 RSUs to Mr. Bowles, as compensation for Mr.Bowlesserviceasamemberofourboardofdirectors.TheRSUsgrantedtoMessrs.BowlesandHastingsaresubjectto vestingbasedontheircontinuedservicestousthrougheachvestingdate,whichismorefullydescribedbelow. Althoughtherewasnoformalpolicyinplacerelatingtothegrantingofequityawardstoourdirectors,thefollowing tablepresentsthetotalcompensationforeachpersonwhoservedasamemberofourboardofdirectorsduring2011.Other thanassetforthinthetableanddescribedmorefullybelow,in2011wedidnotpayanyfeesto,makeanyequityawardsor nonequityawardsto,orpayanyothercompensationtothemembersofourboardofdirectors.Mr.Zuckerberg,ourfounder, Chairman,andCEO,receivesnocompensationforhisserviceasadirector,andisnotincludedinthetablebelow.
FeesEarnedor Paid inCash($) Stock Awards ($)(1)(2)
DirectorName
Total($)
MarcL.Andreessen (3) ErskineB.Bowles(4) JamesW.Breyer DonaldE.Graham(5) ReedHastings(6) PeterA.Thiel
16,667 16,667 16,667 16,667 16,667 16,667
601,400 593,400
16,667 618,067 16,667 16,667 610,067 16,667
(1) AmountsreportedrepresenttheaggregategrantdatefairvalueofRSUswithoutregardstoforfeituresgrantedtotheindependentmembersofourboardofdirectors during2011underour2005StockPlan,computedinaccordancewithASC718.ThevaluationassumptionsusedincalculatingthefairvalueoftheRSUsisset forth in Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and EstimatesSharebased Compensation.Thisamountdoesnotreflecttheactualeconomicvaluerealizedbythedirector. (2) Messrs. Andreessen and Graham hold RSUs granted prior to January 1, 2011 (Pre2011 RSUs). Pre2011 RSUs only vest upon the satisfaction of both (i) a servicebased vesting condition and (ii) a liquiditybased vesting condition. The liquiditybased vesting condition for Pre2011 RSUs is: (a) the date that is six monthsaftertheeffectivedateofourinitialpublicofferingor(b)achangeofcontrol(asdefinedinour2005StockPlan).Theservicebasedvestingconditionfor thePre2011RSUsheldbyMessrs.AndreessenandGrahamarefurtherdescribedinfootnotes(3)and(5)below.RSUsgrantedonorafterJanuary1,2011(Post 2011RSUs)vestbasedoncontinuousservicetous,asfurtherdescribedinfootnotes(4)and(6)below. (3) AsofDecember31,2011,Mr.Andreessenheld5,247,490RSUs.Theservicebasedvestingconditionwassatisfiedasto1/48thofthetotalsharesunderlyingthe RSUs on July 30, 2008. The remaining shares underlying the RSUs vest at a rate of 1/48th of the total number of shares underlying the RSUs on each month thereafter,subjecttocontinuedservicetousthrougheachvestingdate.
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(4) As of December 31, 2011, Mr. Bowles held 20,000 RSUs. The vesting condition will be satisfied as to 13/48 of the total shares underlying the RSUs on October15,2012.TheremainingsharesunderlyingtheRSUsvestatarateof1/16thofthetotalnumberofsharesunderlyingtheRSUsinquarterlyinstallments thereafter, not to exceed eleven quarterly installments, and 2/48th on October 15, 2015, subject to continued service to us through each vesting date. None of Mr. Bowles RSUs will settle until the earliest to occur of: (i) December 31, 2013 (ii) an earlier date between January 1, 2013 and December 31, 2013 that is specifiedbyusand(iii)thedateofachangeofcontrol(asdefinedinour2005StockPlan). (5) As of December 31, 2011, Mr. Graham held 1,000,000 RSUs. The servicebased vesting condition was satisfied as to 1/4th of the total shares underlying the RSUs on April 1, 2010. The remaining shares underlying the RSUs vest at a rate of 1/48th of the total number of shares underlying the RSUs on each month thereafter,subjecttocontinuedservicetousthrougheachvestingdate. (6) AsofDecember31,2011,Mr.Hastingsheld20,000RSUs.Thevestingconditionwillbesatisfiedasto1/4ofthetotalsharesunderlyingtheRSUsonJuly15, 2012. The remaining shares underlying the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs in quarterly installments thereafter, subjecttocontinuedservicetousthrougheachvestingdate.NoneofMr.HastingsRSUswillsettleuntiltheearliesttooccurof:(i)December31,2013(ii)an earlierdatebetweenJanuary1,2013andDecember31,2013thatisspecifiedbyusand(iii)thedateofachangeofcontrol(asdefinedinour2005StockPlan).
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Table of Contents EXECUTIVECOMPENSATION CompensationDiscussionandAnalysis Overview This section explains our executive compensation philosophy, objectives, and design our compensationsetting process our executive compensation program components and the decisions made in 2011 with respect to the compensationofeachofournamedexecutiveofficers.Ournamedexecutiveofficersfor2011,whichconsistoftheexecutive officerswhoappearin2011SummaryCompensationTablebelow,are: MarkZuckerberg,ourfounder,ChairmanandChiefExecutiveOfficer(CEO) SherylK.Sandberg,ourChiefOperatingOfficer(COO) DavidA.Ebersman,ourChiefFinancialOfficer MikeSchroepfer,ourVicePresident,Engineeringand TheodoreW.Ullyot,ourVicePresident,GeneralCounsel,andSecretary.
ExecutiveCompensationPhilosophy,ObjectivesandDesign Philosophy.Wearefocusedonourmissiontomaketheworldmoreopenandconnected.WebelievethatFacebookisat thebeginningofthisjourneyandthatforustobesuccessfulwemusthireandretainpeoplewhocancontinuetodevelopour strategy,quicklyinnovateandbuildnewproducts,bolsterthegrowthofouruserbaseanduserengagement,andconstantly enhanceourbusinessmodel.Toachievetheseobjectives,weneedahighlytalentedteamcomprisedofengineering,product, sales,andgeneralandadministrativeprofessionals.Wealsoexpectourexecutiveteamtopossessanddemonstratestrong leadershipandmanagementcapabilities. Objectives.Ourcompensationprogramsforournamedexecutiveofficersarebuilttosupportthefollowingobjectives: attract the top talent in our leadership positions and motivate our executives to deliver the highest level of individualandteamimpactandresults encourageourexecutivestomodeltheimportantaspectsofourculture,whichincludemovingfast,beingbold, communicatingopenlyandbuildingtrustwitheachotherandouremployees ensureeachoneofournamedexecutiveofficersreceivesatotalcompensationpackagethatencourageshisorher longtermretention rewardhighlevelsofperformancewithcommensuratelevelsofcompensationand align the interests of our executives with those of our stockholders in the overall success of Facebook by emphasizinglongtermincentives.
Design. As a privatelyheld company, our executive compensation program is heavily weighted towards equity, includingstockoptionsandrestrictedstockunits(RSUs),withcashcompensationthatisconsiderablybelowmarketrelative toexecutivecompensationatourpeercompanies.Webelievethatequitycompensationoffersthebestvehicletofocusour executiveofficersonourmissionandtheachievementofourlongtermstrategicandfinancialobjectivesandtoalignour executiveofficerswiththelongterminterestsofourstockholders. Forourexecutiveofficerswhoreceivedasubstantialinitialequityawardinconnectionwiththecommencementoftheir employment,wehavegrantedadditionalequityawardswithservicebasedvestingconditionswherethecommencementof vestingisdeferreduntiladatesomeyearsinthefuture,asdiscussedfurtherinElementsofExecutiveCompensation EquityCompensationbelow.Whencombinedwiththeexecutivesinitialequityawards,webelievethattheseadditional grantsrepresentastronglongtermretentiontoolandprovidetheexecutiveofficerswithlongtermequityincentives. 115
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Table of Contents Aswetransitionfrombeingaprivatelyheldcompanytoapubliclytradedcompany,wewillevaluateourexecutive compensationprograms,includingourmixofcashandequitycompensation,atleastannuallyorascircumstancesrequire basedonourbusinessobjectivesandthecompetitiveenvironmentfortalent.Weanticipatecontinuingouremphasisonpay forperformanceandlongtermincentivecompensationforourexecutiveofficers. CompensationSettingProcess RoleofOurCompensationCommittee. The compensation committee is responsible for overseeing all aspects of our executivecompensationprograms,includingexecutivesalaries,payoutsunderourannualbonusplan,thesizeandstructure of equity awards, and any executive perquisites. The compensation committee is solely responsible for determining the compensationofourCEOandreviewsandapprovescompensationofotherexecutiveofficers. RoleofCompensationConsultant.Thecompensationcommitteehastheauthoritytoengageitsownadvisorstoassist in carrying out its responsibilities. The compensation committee did not retain the services of an outside compensation consultant to provide advice with respect to our executive compensation programs for 2011. In January 2012, the compensationcommitteeengagedtheservicesofCompensia,Inc.,anationalcompensationconsultingfirm.Compensiamay provide the compensation committee and the board of directors with guidance regarding the amount and types of compensationthatweprovidetoourexecutives,howourcompensationpracticescomparetothecompensationpracticesof other companies, and other compensationrelated matters. Compensia reports directly to the compensation committee, althoughCompensiamaymeetwithmembersofmanagementforthepurposesofgatheringinformationonproposalsthat management may make to the compensation committee. The compensation committee may replace Compensia or hire additional advisors at any time. Compensia does not provide any services to us other than the services provided to the compensationcommittee. RoleofManagement.Insettingcompensationfor2011,ourCEO,ourCOO,andourVicePresident,HumanResources, workedcloselywiththecompensationcommitteeinmanagingourexecutivecompensationprogramandattendedmeetings ofthecompensationcommittee.Fromtimetotime,ourChiefFinancialOfficerandourGeneralCounselattendedmeetings of the compensation committee to present information and answer questions. Our CEO made recommendations to the compensation committee regarding compensation for our executive officers other than himself because of his daily involvementwithourexecutiveteam.Noexecutiveofficerparticipateddirectlyinthefinaldeliberationsordeterminations regardinghisorherowncompensationpackage. Ourmanagementteamandthecompensationcommitteeeachplayaroleinevaluatingandmitigatinganyriskthatmay existrelatingtoourcompensationplans,practicesandpoliciesforallemployees,includingournamedexecutiveofficers,as furtherdescribedinCompensationRiskAssessmentbelow. UseofComparativeMarketData.Weaimtocompensateourexecutiveofficersatlevelsthatareatleastcommensurate withthemostcompetitivelevelsofcompensationofexecutiveofficerswithexecutivesinsimilarpositionsatagroupofpeer companies set forth below with whom we compete for hiring and retaining executive talent (our Peer Group). The compensation committee also considered the scope of responsibility of each executive officer, our current practice of maintaining minimal differentiation between the cash packages of our executive officers, the unvested balances of stock awards for each executive officer, as well as the compensation committees assessment of each executive officers performanceandimpacttotheorganization.Indetermining2011compensation,wedidnotuseaformulafortakinginto accountthesedifferentfactors. ManagementprovidesthecompensationcommitteewithbothcashandequitycompensationdataforourPeerGroup. Weanalyzemarketdataforexecutivecompensationatleastannuallyusingthemostrelevantpublishedsurveysourcesand public filings. For 2011, our market analysis focused on technology companies with $1 billion to $3 billion in annual revenueintheRadfordGlobalTechnologyandGlobalSalesSurvey 116
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Table of Contents publishedbyAON(RadfordSurvey).Inthefirstquarterof2011,thecompensationcommitteealsoreviewedcompensation datafromthepublicfilingsforthefollowingPeerGroup,withannualrevenuerangingfrom$1.7billionto$108.3billionin fiscal2011: Accenture AdobeSystems Amazon.com AOL Apple CiscoSystems eBay ElectronicArts Google Intuit Microsoft NetApp Oracle salesforce.com VMware Yahoo!
ThecompensationcommitteeexpectstoperiodicallyreviewandupdatethisPeerGroup. Inthefirstquarterof2011,ourcompensationcommitteereviewedourexecutivecompensationagainstthisPeerGroup, toensurethatourexecutiveofficercompensationiscompetitiveandsufficienttorecruitandretainourexecutiveofficers. Managementprovidedthecompensationcommitteewithtotalcashcompensationdata(basesalariesandcashbonusawards attarget)atvariouspercentilesandtotalcompensationdata(totalcashcompensationandequitycompensation)atthe90th percentile.However,whilethecompensationcommitteeconsideredthisdataindeterminingexecutiveofficercompensation, wedidnotseektobenchmarkourexecutivecompensationtoanyparticularlevel.Thetotalcompensationforournamed executiveofficerswasnotdeterminedbasedonanypresettargetpercentileofmarket.Rather,wesoughttocompensate our executive officers at a level which would allow us to successfully recruit and retain the best possible talent for our executiveteam.Wereliedheavilyontheknowledgeandexperienceofthecompensationcommitteeandourmanagementin determiningtheappropriatecompensationlevelsforourexecutiveofficers.Overall,basedonourPeerGroupanalysis,total cashcompensationforourexecutiveofficerswasbelowthe25thpercentileofourpeers.Whenequitycompensationwas factored in, without taking into account the effect of the servicebased vesting conditions that begin several years in the future and that are applicable to the equity compensation of our executive officers, total compensation for our named executiveofficers,otherthanourCEO,approximatedthe99thpercentilerelativetothecompaniesintheRadfordSurvey. In the second quarter of 2011, the compensation committee further refined our approach to reviewing market compensationdataforournamedexecutiveofficersandapprovedasetofselectioncriteriafordeterminingourpeergroup companiesaslistedbelow,withtheunderstandingthatthecriteriawillberevisitedasourbusinessandmarketenvironment change.Goingforward,companiesmustmeetallorsomeofthefollowingcriteriatobeincludedinourcompensationpeer group: hightechnologyormediacompany keytalentcompetitor minimumrevenueof$4billionor minimummarketcapitalizationof$50billion.
Thissetofselectioncriterialedustorevisethepeergroupagainstwhomwebenchmarkourexecutivecompensation. We plan to use the following companies in our peer group for the 2012 executive compensation process: Amazon.com AppleCiscoSystemseBayGoogleLinkedInMicrosoftNetflixOraclesalesforce.comVMwareYahoo!andZynga. 117
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Table of Contents ElementsofExecutiveCompensation Ourexecutiveofficercompensationpackagesgenerallyinclude: basesalary performancebasedcashincentivesand equitybasedcompensationintheformofRSUsorothersharebasedcompensation.
Webelievethatourcompensationmixsupportsourobjectiveoffocusingonatriskcompensationhavingsignificant financialupsidebasedoncompanyandindividualperformance.Weexpecttocontinuetoemphasizeequityawardsbecause ofthedirectlinkthatequitycompensationprovidesbetweenstockholderinterestsandtheinterestsofourexecutiveofficers, therebymotivatingourexecutiveofficerstofocusonincreasingourvalueoverthelongterm. BaseSalary.Thecompensationcommitteebelievesbasesalariesareanecessaryelementofcompensationinorderto attractandretainhighlyqualifiedexecutiveofficers.Historically,ourexecutiveofficershavereceivedbasesalarieswithina verynarrowrangethatwasestablishedwhenwewereasmallercompanywithcashconstraintsandbasedonourdesireto maintain internal pay equity between executive officers and also relative to other key employees. As we have grown, we havegraduallyincreasedbasesalariesforourexecutiveofficerswiththegoalofbringingsalariesclosertomarketovertime. In2011,wecontinuedtopayexecutivebasesalariesthatwerebelowmarketrelativetoourPeerGroup,bothtoretainthe ethosofastartupcompanyandbecauseofouremphasisonequitybasedcompensation.Asnotedabove,in2011,basedon ourPeerGroupanalysis,ourtotalcashcompensationforourexecutiveofficerswasbelowthe25thpercentileofthePeer Group. Thecompensationcommitteereviewsbasesalariesforourexecutiveofficersatleastannuallyandmayadjustthemfrom timetotime,ifneeded,toreflectchangesinmarketconditionsorotherfactors.Inthefirstquarterof2011,thecompensation committeedecidedtoincreasethebasesalariesofourexecutiveofficersinordertocontinuetobringtheirsalariescloserto thosepaidbyourPeerGroupcompaniesforsimilarpositions.Accordingly,ourcompensationcommitteeincreasedthebase salary of our CEO by $100,000 and of each other executive officer by $25,000. Following this 2011 salary increase, our executive officer salaries were still below the 25th percentile of the salaries provided by our Peer Group companies for executivesinsimilarpositions. Inthefirstquarterof2012,ourcompensationcommitteediscussedandapprovedarequestbyourCEOtoreducehis basesalaryto$1peryear,effectiveJanuary1,2013.
NamedExecutiveOfficer 2011BaseSalary
MarkZuckerberg SherylK.Sandberg DavidA.Ebersman MikeSchroepfer TheodoreW.Ullyot
$500,000 300,000 300,000 275,000 275,000
CashBonuses.Our2011Bonus/RetentionPlan(BonusPlan)providesvariablecashincentives,payablesemiannually, thataredesignedtomotivateourexecutiveofficerstofocusoncompanywideprioritiesandtorewardthemforindividual resultsandachievements.AllofourexecutiveofficersparticipateintheBonusPlan. For2011,thereweretwosixmonthperformanceperiodsunderourBonusPlan,whichwerefertoasFirstHalf2011and Second Half 2011. For each performance period in 2011, the compensation committee approved a set of companywide prioritiesinordertofocusourexecutiveofficersonkeyareasofperformancefortheperiodinquestion.TheFirstandSecond Half 2011 company priorities reflect operational and nonoperational objectives established by our compensation committee, in consultation with our CEO and Chief Financial Officer. The companywide priorities do not have specific targets associated with them for purposes of determining performance under the Bonus Plan, and our compensation committeehascompletediscretiontodeterminethelevelofbonuspayoutforeachperformanceperiod. 118
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Table of Contents 2011GoalsandCompanyPerformanceMultipliers(BonusPlanPools).OurFirstHalf2011companywidepriorities wereasfollows:growouruserbaseanduserengagement,improveoursitequalityandefficiency,expandtheimpactofour Platform,continuestrongrevenuegrowth,improveourProfileproduct,buildourmobileplatform,expandourpartnerships, andcontinueourinternationalexpansion.Noneoftheseprioritieswereassignedanyspecificweightingordollaramountof bonus.Thecompensationcommitteeapplieddiscretionindeterminingthecompanyperformancemultiplieronaqualitative basis, taking into account our delivery of results in the areas identified by the companywide priorities approved by the compensation committee, as well as our overall business, engineering, and product development achievements. The compensationcommitteealsodidnotdetermineanypresetrangesforthecompanyperformancemultiplier.TheFirstHalf 2011companyperformancemultiplierapprovedbythecompensationcommitteewas105%.Inparticular,thecompensation committeefocusedonourstrongusergrowthandrevenuegrowthforFirstHalf2011. Our Second Half 2011 companywide priorities were as follows: grow our user base and user engagement, increase distribution of our Platform, and continue strong revenue growth. None of these priorities were assigned any specific weighting or dollar amount of bonus. The compensation committee applied discretion in determining the company performance multiplier on a qualitative basis, taking into account our delivery of results in the areas identified by the companywideprioritiesapprovedbythecompensationcommittee,aswellasouroverallbusiness,engineering,andproduct development achievements. The compensation committee also did not determine any preset ranges for the company performancemultiplier.TheSecondHalf2011companyperformancemultiplierapprovedbythecompensationcommittee was 100%. The compensation committee focused on our performance in all of the areas identified by the companywide priorities,aswellasourintroductionofTimelineandothernewproductsinSecondHalf2011. BonusPlanPayouts.WecalculateBonusPlanpayoutstoeachparticipantusingthefollowingformula: Base Salary($)
Individual Bonus Target(%)
Individual Performance Multiplier(%)
Company Performance Multiplier(%)
Individual Bonus Payout($)
Inthefirstquarterof2011,thecompensationcommitteedecidedtoincreaseindividualbonustargetsforeachexecutive officerfrom30%to45%inordertocontinuetomovebonusesclosertomarketratespaidbyourPeerGroup.Evenfollowing this bonus target increase, in 2011, our executive officer bonuses and total cash compensation was still generally below thoseprovidedbyourPeerGroupcompaniesforexecutivesinsimilarpositions. IndividualPerformanceMultiplier.Theindividualperformancemultiplierisbaseduponeachexecutivesindividual performanceassessmentfortheperformanceperiodunderconsideration.Inlinewithourpayforperformancephilosophy,a higherperformanceassessmentdrivesahigherindividualmultiplier(andviceversa)suchthatitispossibleforanexecutive with a low assessment to get less than their target bonus payout, or no bonus payout whatsoever. In 2011, potential individualperformancemultipliersunderourBonusPlanwere0%,85%,100%,125%,200%,or300%.Executivesmeeting ourexpectedhighlevelofperformanceexpectationsreceivinganindividualbonusmultiplierof100%. Individualperformanceassessmentsforeachexecutiveofficerweredeterminedatthediscretionofthecompensation committeeincloseconsultationwithourCEOandourCOO(exceptineachcasewhentheirownperformanceassessmentis being determined). The CEOs and COOs executive officer performance assessment recommendations were based on an overallsubjectiveassessmentofeachofficersperformanceandnosinglefactorwasdeterminativeinsettingbonuslevels, nor was the impact of any individual factor on the bonus quantifiable. We operate in a rapidly evolving and highly competitive industry and we set a high bar for performance expectations for each one of our executive officers. The compensationcommitteeevaluatesourexecutiveofficersbasedontheiroverallperformance,impactandresults,aswellas theirdemonstrationofstrong 119
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Table of Contents leadership,longtermvision,effectiveexecutionandmanagementcapabilities.FirstHalf2011andSecondHalf2011payout levelsandachievementsandconsiderationsforeachexecutivewereasfollows: MarkZuckerberg.Mr.Zuckerbergreceived$220,500fortheFirstHalf2011bonus,whichreflectedtheimpactofhis performanceinleadingourproductdevelopmentefforts,oursuccessingrowingFacebooksglobaluserbaseanddeveloping developerandcommercialrelationships.Mr.Zuckerbergreceived$225,000fortheSecondHalf2011bonus,whichreflected the impact of his leadership and product vision, which contributed to the development and launch of new products, includingOpenGraphandTimeline. SherylK.Sandberg.Ms.Sandbergreceived$86,133fortheFirstHalf2011bonus,whichreflectedhercontributionto growingrevenue,buildingcommercialanddeveloperrelationships,growingtheFacebookteamandexcellenceinexecution in all businessrelated matters. Ms. Sandberg received $84,375 for the Second Half 2011 bonus, which reflected her leadership in growing our revenue year over year and her strategic guidance on key policy issues both domestically and abroad. DavidA.Ebersman.Mr.Ebersmanreceived$86,133fortheFirstHalf2011bonus,whichreflectedhiscontributionsin completing our 2010 financial statements, completing our private placement financing, and preparing our financial operations for this offering. Mr. Ebersman received $84,375 for the Second Half 2011 bonus, which reflected his contributions in managing preparations for our initial public offering and his strategic leadership in building a strong financialfoundationforourbusiness. MikeSchroepfer.Mr.Schroepferreceived$63,000fortheFirstHalf2011bonus,whichreflectedhiscontributionin developing and overseeing our engineering team, software development efforts, and engineering infrastructure. Mr. Schroepferreceived$77,344fortheSecondHalf2011bonus,whichreflectedhisstrongleadershipoftheengineeringteam, resultingindevelopmentofnewproductsforusers,developers,andadvertisers. TheodoreW.Ullyot.Mr.Ullyotreceived$78,750fortheFirstHalf2011bonusand$123,750forhisSecondHalf2011 bonus,bothofwhichreflectedhisroleincertainkeylitigationandregulatorymattersinvolvingourcompany. The following table summarizes the calculations that were used in determining the cash bonus paid to each of our namedexecutiveofficers:
Individual BonusTarget (%) Individual Bonus Multiplier(%) Company Bonus Multiplier (%) Individual Bonus Payout($)
Performance Period
BaseSalary ($)(1)
MarkZuckerberg
FirstHalf2011 SecondHalf2011 FirstHalf2011 SecondHalf2011 FirstHalf2011 SecondHalf2011 FirstHalf2011 SecondHalf2011 FirstHalf2011 SecondHalf2011
233,333 250,000 145,833 150,000 145,833 150,000 133,333 137,500 133,333 137,500
45 45 45 45 45 45 45 45 45 45
200 200 125 125 125 125 100 125 125 200
105 100 105 100 105 100 105 100 105 100
220,500 225,000 445,500 86,133 84,375 170,508 86,133 84,375 170,508 63,000 77,344 140,344 78,750 123,750 202,500
SherylK.Sandberg
DavidA.Ebersman
MikeSchroepfer
TheodoreW.Ullyot
(1) Reflectsactualearningsfor2011whichmaydifferfromapproved2011basesalaryduetotheMarch1,2011effectivedateofthesalaryincrease.
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Table of Contents RetentionBonus.AspartofournegotiationofhisinitialemploymentarrangementandasaninducementforMr.Ullyot to become our Vice President and General Counsel, we agreed to pay him an annual retention bonus in the amount of $400,000peryearforeachofhisfirstfiveyearsofemployment.Hewillcontinuetoreceivethisbonusuntil2013,pursuant tothetermsofhisamendedandrestatedemploymentagreement. EquityCompensation.Mostofourexecutiveofficerscompensationisdeliveredthroughequityawards.Weuseequity compensationtoalignourexecutiveofficersfinancialinterestswiththoseofourstockholders,toattractindustryleadersof thehighestcaliber,andtoretainthemforthelongterm.Inadditiontotheequitygrantthateachexecutivereceivesaspartof hisorhernewhirepackage,thecompensationcommitteehasgrantedourexecutivesadditionalequityawardsincertainof theyearsaftertheyjoined.Additionalequitygrantsforeachofourexecutiveofficersaredeterminedonadiscretionarybasis takingintoaccountthefollowingfactors: delivering equity values that are highly competitive when compared against those our peers would grant to executiveswithsimilarresponsibility eachexecutiveofficersindividualperformanceassessment,theresultsandcontributionsdeliveredduringtheyear, aswellastheanticipatedpotentialfutureimpactofeachindividualexecutive thesizeandvestingscheduleofexistingequitygrantsinordertomaximizethelongtermretentivepowerofall additionalgrantsand thesizeofeachexecutiveofficerstotalcashcompensation(basesalarypluscashbonusawardsattarget),whichis generallylowerthanthecashcompensationforexecutiveswithsimilarresponsibilitiesatourpeercompanies.
Basedontheforegoingfactors,in2011,ourcompensationcommitteeawardedeachofourexecutiveofficers(otherthan ourCEO)agrantofRSUswithaspecificinitialequityvaluebasedonanestimatedtotalvalueforeachgrantbeforetaking into account the deferred vesting considerations described below. The compensation committee applied discretion in determiningthespecificindividualequityvaluesanddeferredvestingstartdates.Basedonthesequalitativedecisions,the compensationcommitteethencalculatedtheexactnumberofRSUstobegrantedbydividingthisinitialequityvalueby $20.85pershare,whichwasthefairvalueofourClassBcommonstockasoftheendof2010. DeferredVestingof2011RSUGrants.Thecompensationcommitteedeferredthevestingstartdatesofall2011RSU grantsmadetoourexecutiveofficerstoafuturedatedeterminedindividuallyforeachexecutive.Asaresult,the2011RSU grants will not begin to vest unless the recipient remains continuously employed by Facebook through future dates as described in 2011 Grants of PlanBased Awards Table below. The compensation committee reviewed the size and vesting schedule for the remaining unvested portion of all outstanding equity award holdings of each of our executive officersandagreedwiththerecommendationofourCEOandCOO(exceptthatourCOOdidnotparticipateindiscussions regardingherownequitycompensation)thattheexistingequityawardsappropriatelysatisfiedourretentionandincentive goalsfortheimmediatefutureforeachofourexecutiveofficers.Accordingly,theadditionalequityawardsgrantedin2011 startvestingonlyafterasignificantportionofeachexecutivesoutstandingequityawardshavevested,andthesevesting startdatesrangefromthefourthquarterof2013tothefourthquarterof2014.Thesegrantshavefouryearvestingschedules that result in vesting end dates ranging from the fourth quarter of 2017 to the fourth quarter of 2018. The compensation committeebelievesthatthesevestingschedulesmaketheequityawardsmorevaluableforretainingourexecutiveofficers forthelongterm.FormoreinformationrelatingtothevestingschedulesoftheseRSUgrants,see2011GrantsofPlan BasedAwardsTablebelow. 2011EquityGrants.Mr.Zuckerbergdidnotreceiveanyadditionalequitygrantsin2011becauseourcompensation committee believed that his existing equity ownership position sufficiently aligns his interests with those of our stockholders. 121
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Table of Contents OurothernamedexecutiveofficersreceivedthefollowingRSUgrantsin2011: SherylK.Sandberg.Ms.Sandbergreceivedanadditionalequitygrantintheamountof1,199,041RSUs.Thisgranthad aninitialequityvalueof$25.0million.TheseRSUsaresubjecttoquarterlyvestingbasedoncontinuedemploymentover fouryearswithadeferredvestingstartdateofOctober15,2013. DavidA.Ebersman.Mr.Ebersmanreceivedanadditionalequitygrantintheamountof719,424RSUs.Thisgranthad aninitialequityvalueof$15.0million.TheseRSUsaresubjecttoquarterlyvestingbasedoncontinuedemploymentover fouryearswithadeferredvestingstartdateofOctober15,2014. MikeSchroepfer.Mr.Schroepferreceivedanadditionalequitygrantintheamountof959,233RSUs.Thisgranthadan initialequityvalueof$20.0million.TheseRSUsaresubjecttoquarterlyvestingbasedoncontinuedemploymentoverfour yearswithadeferredvestingstartdateofOctober15,2013. TheodoreW.Ullyot.Mr.Ullyotreceivedanadditionalequitygrantintheamountof239,808RSUs.Thisgranthadan initialequityvalueof$5.0million.TheseRSUsaresubjecttoquarterlyvestingbasedoncontinuedemploymentoverfour yearswithadeferredvestingstartdateofJuly15,2014. CompensationGovernance The compensation committee seeks to ensure sound executive compensation practices to adhere to our payfor performance philosophy while appropriately managing risk and aligning our compensation programs with longterm stockholderinterests.Thefollowingpracticeswereineffectduring2011: thecompensationcommitteeiscomprisedsolelyofindependentdirectors thecompensationcommitteeconductsanannualreviewandapprovalofourcompensationstrategy,includinga review of our compensationrelated risk profile to ensure that our compensationrelated risks are not reasonably likelytohaveamaterialadverseeffectonourcompany thecompensationcommitteeretainsdiscretiononbonuspayoutstoenableittorespondtounforeseeneventsand adjustbonuspayoutsasappropriate wedonotofferpostemploymentbenefits,exceptinthecaseofcertainnewhiresinprioryearsand ourcompensationphilosophyandrelatedgovernancefeaturesarecomplementedbyseveralspecificpracticesthat aredesignedtoalignourexecutivecompensationwithlongtermstockholderinterests,includingthefollowing: weofferlimitedperquisitesthatareforbusinessrelatedpurposesornecessaryforthesecurityofourCEO and ourexecutivesparticipateinbroadbasedcompanysponsoredhealthandwelfarebenefitsprogramsonthe samebasisasourotherfulltime,salariedemployees.
PostEmploymentCompensation The material terms of postemployment compensation for Ms. Sandberg and Mr. Ullyot are described below in EmploymentAgreementsandOfferLettersandPotentialPaymentsuponTerminationorChangeinControl. PerquisitesandOtherBenefits Consistent with the practices of many companies in our Peer Group, we provide perquisites to our named executive officersforthereasonsdescribedbelow. 122
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Table of Contents Because of the high visibility of our company we have implemented a comprehensive security program for Mr.Zuckerbergtoaddresssafetyconcernsresultingfromhispositionasourfounder,Chairman,andCEO.Werequirethese securitymeasuresforthecompanysbenefitbecauseoftheimportanceofMr.ZuckerbergtoFacebook,andwebelievethat the costs of this comprehensive security program are appropriate and necessary. We paid for the initial procurement, installationandmaintenanceofsecuritymeasuresforMr.Zuckerbergspersonalresidence,andwepayfortheannualcostsof securitypersonnel,neitherofwhichconstitutestaxableincometoMr.Zuckerberg. OurcompensationcommitteehasalsoauthorizedourCEOandCOOtouseprivateaircraftforbusinesspurposes.This practicemaximizessuchexecutivesproductivetimeandensurestheirquickavailability.Inaddition,Mr.Zuckerbergmay use private aircraft for personal purposes in connection with his comprehensive security program. On certain occasions, Mr. Zuckerberg may be accompanied by family members or others when using private aircraft. For flights involving passengers flying for personal purposes, the aggregate incremental cost of such personal usage is reported as other compensation to Mr. Zuckerberg. The reported aggregate incremental cost is based on costs provided by the applicable charter company, and includes passenger fees, fuel, crew and catering costs. The incremental cost attributable to Mr.Zuckerbergsuseofprivateaircraftin2011isdisclosedintheAllOtherCompensationcolumnin2011Summary CompensationTablebelow. In addition, we have historically paid for certain of our named executive officers to receive financial, tax and estate planning advice to assist them in obtaining professional advice on managing the compensation they receive. We have discontinuedthispracticeforperiodsafterApril15,2012. 162(m)TaxDeductibility Section162(m)oftheInternalRevenueCodeof1986,asamended(Code),limitstheamountthatwemaydeductfrom ourfederalincometaxesforremunerationpaidtoournamedexecutiveofficers(otherthanourChiefFinancialOfficer)to$1 milliondollarsperexecutiveofficerperyear,unlesscertainrequirementsaremet.Section162(m)providesanexceptionfrom this deduction limitation for certain forms of performancebased compensation, as well as for the gain recognized by coveredexecutiveofficersupontheexerciseofqualifyingcompensatorystockoptions.Inaddition,grandfatherprovisions mayapplytocertaincompensationarrangementsthatwereenteredintobyacorporationbeforeitwaspubliclyheld.Todate, allofourcompensationthathasbeengrantedhasbeenexemptfromtheSection162(m)deductionlimitation.Whileour compensation committee is mindful of the benefit to us of the full deductibility of compensation, our compensation committeebelievesthatitshouldnotbeconstrainedbytherequirementsofSection162(m)wherethoserequirementswould impair flexibility in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, our compensation committee has not adopted a policy that requires that all compensation be deductible. Our compensation committee intends to continue to compensate our executive officers in a manner consistent with the best interestsofourcompanyandourstockholders. CompensationRiskAssessment Ourmanagementteamandthecompensationcommitteeeachplayaroleinevaluatingandmitigatinganyriskthatmay existrelatingtoourcompensationplans,practicesandpoliciesforallemployees,includingournamedexecutiveofficers.In connectionwiththisoffering,Compensia,thecompensationcommitteesindependentcompensationconsultant,performed an assessment, in conjunction with management, of our compensation plans and practices and concluded that our compensationprogramsdonotcreaterisksthatarereasonablylikelytohaveamaterialadverseeffectonthecompany.The compensationcommitteehasreviewedthisreportandagreedwiththeconclusion.Theobjectiveoftheassessmentwasto identifyanycompensationplansorpracticesthatmayencourageemployeestotakeunnecessaryriskthatcouldthreatenthe company.Nosuchplansorpracticeswereidentified.Theriskassessmentprocessincluded,amongotherthings,areviewof ourcashandequityincentivebasedcompensationplanstoensurethattheyarealignedwithourcompanyperformancegoals and the overall compensation to ensure an appropriate balance between fixed and variable pay components and between shortandlongtermincentives. 123
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Table of Contents 2011SummaryCompensationTable Thefollowingtablepresentssummaryinformationregardingthetotalcompensationawardedto,earnedby,orpaidto eachofthenamedexecutiveofficersforservicesrenderedtousfortheyearendedDecember31,2011.

Fiscal Year Salary ($) Bonus ($)(1) Stock Awards ($)(2) AllOther Compensation ($) Total ($)
NameandPrincipalPosition
MarkZuckerberg, CEO SherylK.Sandberg, ChiefOperatingOfficer DavidA.Ebersman, ChiefFinancialOfficer MikeSchroepfer, VicePresidentofEngineering TheodoreW.Ullyot, VicePresident,GeneralCounseland Secretary
2011 483,333 445,500 2011 295,833 170,508 2011 295,833 170,508 2011 270,833 140,344
783,529 (3) 1,712,362 30,957,954 18,761,293 24,804,472
30,491,613 18,294,952 24,393,295
2011 270,833 602,500 (4) 6,098,317
110,644 (5) 7,082,294
(1) TheamountsreportedinthebonuscolumnrepresentdiscretionarybonusesearnedpursuanttoourBonusPlan.Formoreinformationaboutourexecutiveofficers discretionarybonuses,seeCompensationDiscussionandAnalysisElementsofExecutiveCompensationCashBonusesabove. (2) AmountsreflecttheaggregategrantdatefairvalueoftheRSUswithoutregardstoforfeitures,computedinaccordancewithASC718.Thevaluationassumptions used in calculating the grant date fair value of these RSUs are set forth in Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and EstimatesSharebased Compensation. This amount does not reflect the actual economic value realized by the namedexecutiveofficer.TheRSUsissuedtoourexecutiveofficersduring2011provideforquarterlyvestingbasedoncontinuedemploymentoverfouryearswith adeferredvestingstartdateofOctober15,2013forMs.Sandberg,October15,2014forMr.Ebersman,October15,2013forMr.Schroepfer,andJuly15,2014 forMr.Ullyot. (3) Theamountreportedrepresentapproximately$692,679forcostsrelatedtopersonaluseofaircraftcharteredinconnectionwithhiscomprehensivesecurityprogram and on which family and friends flew during 2011. For purposes of reporting the value of such personal usage in this table, we use costs provided by the applicable charter company, which include passenger fees, fuel, crew and catering costs. The amount reported also represents approximately $90,850 for costs relatedtoestateandfinancialplanningduring2011. (4) ConsistsofadiscretionarybonusunderourBonusPlanasdescribedinfootnote(1)aboveandanannualretentionbonusintheamountof$400,000.Mr.Ullyots retentionbonusismorefullydescribedinCompensationDiscussionandAnalysisElementsofExecutiveCompensationRetentionBonusabove. (5) Consists of relocation reimbursements, including a related grossup for taxes, paid to Mr. Ullyot pursuant to his employment agreement in effect as of December 31, 2011. For more information about Mr. Ullyots amended and restated employment agreement, see Employment Agreements and Offer Letters below.
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Table of Contents 2011GrantsofPlanBasedAwardsTable Thefollowingtablepresents,foreachofthenamedexecutiveofficers,informationconcerningeachgrantofanequity awardmadeduringtheyearendedDecember31,2011.Thisinformationsupplementstheinformationabouttheseawardsset forthinthe2011SummaryCompensationTable.

AllOtherStock Awards:Number ofSharesof StockorUnits(#)(1) GrantDate FairValue ofStockAwards ($)(2)(3)
Name
Grant Date
3/25/2011 3/25/2011 3/25/2011 3/25/2011
1,199,041 719,424 959,233 239,808
30,491,613 18,294,952 24,393,295 6,098,317
(1) Theseawardsaresubjecttovesting,asdescribedindetailin2011OutstandingEquityAwardsatYearEndTablebelow. (2) Amounts reflect the grant date fair value of the RSUs without regards to forfeitures, computed in accordance with ASC 718. The valuation assumptions used in calculating the grant date fair value of these awards are set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations CriticalAccountingPoliciesandEstimatesSharebasedCompensation.Thisamountdoesnotreflecttheactualeconomicvaluerealizedbythenamedexecutive officer. (3) TheRSUsissuedtoourexecutiveofficersduring2011provideforquarterlyvestingbasedoncontinuedemploymentoverfouryearswithadeferredvestingstart dateofOctober15,2013forMs.Sandberg,October15,2014forMr.Ebersman,October15,2013forMr.Schroepfer,andJuly15,2014forMr.Ullyot.
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Table of Contents 2011OutstandingEquityAwardsatYearEndTable Thefollowingtablepresents,foreachofthenamedexecutiveofficers,informationregardingoutstandingstockoptions andRSUsheldasofDecember31,2011.

OptionAwards Numberof Securities Underlying Unexercised Options(#) Exercisable Numberof Securities Underlying Unexercised Options(#) Unexercisable StockAwards Market Valueof Numberof Sharesor Shares Unitsof orUnitsof StockThat StockThat HaveNot HaveNot Vested Vested(#)(3) ($)(4)
Name
GrantDate(1)
Option Exercise Price($)(2)
Option Expiration Date
MarkZuckerberg SherylK.Sandberg
11/8/2005 8/1/2008 7/23/2010 10/18/2010 3/25/2011 10/26/2009 10/26/2009 3/25/2011 1/12/2009 (14) 1/12/2009 1/12/2009 1/12/2009 8/19/2009 8/26/2009 8/26/2010 3/25/2011 1/12/2009 (23) 1/12/2009 2/26/2010 3/25/2011
120,000,000 (5) 2,025,000 1,141,160 290,307 543,750 1,720,331
0.06
11/7/2015
3,500,000 (7) 1,200,000 (8)
10.39 7/22/2020 15.00 (9) 10/17/2020 3.23 1.85 1.85 2.95 1.85
38,122,000 (6) 1,199,041 (10)
DavidA.Ebersman
2,475,000 (11) 570,585 (15) 353,048 (16) 581,250 (19) 1,184,990 (24)
10/25/2019 6,750,000 (12) 719,424 (13) 1/11/2019 1/11/2019 1,497,775 (17) 1,176,825 (18) 8/18/2019 1,125,000 (20) 1,385,355 (21) 959,233 (22) 1/11/2019 3,231,780 (25) 311,230 (26) 239,808 (27)
MikeSchroepfer
TheodoreW.Ullyot
(1) (2) (3) (4) (5) (6) (7) (8) (9)
WiththeexceptionofthestockoptiongrantedtoMr.Zuckerbergdescribedinfootnote(5)below,whichwasgrantedunderour2005OfficersStockPlan,allof theoutstandingequityawardsdescribedbelowweregrantedunderour2005StockPlan. With the exception of the stock option granted to Ms. Sandberg described in footnote (9) below, this column represents the fair value of a share of Class B commonstockonthedateofgrant,asdeterminedbyourboardofdirectors. RSUs granted prior to January 1, 2011 (Pre2011 RSUs) issued to our executive officers only vest upon the satisfaction of both (i) a servicebased vesting condition and (ii) a liquiditybased vesting condition. The liquiditybased vesting condition for Pre2011 RSUs is: (a) the date that is six months after the effectivedateofourinitialpublicofferingor(b)achangeofcontrol(asdefinedinour2005StockPlan). The market price for our Class B common stock is based on the assumed initial public offering price of the Class A common stock of $ per share, the midpointofthepricerangeonthecoverpageofthisprospectus. ThesharessubjecttothisoptionwerefullyvestedasofNovember1,2010. Theservicebasedvestingconditionwassatisfiedasto57%ofthetotalsharesunderlyingtheRSUsonApril1,2011.BetweenApril1,2011andApril1,2012, an additional 1.75% of the total number of shares underlying the RSUs will vest per month, subject to continued service to us through each vesting date. The servicebasedvestingconditionwillbesatisfiedastoallofthesharesunderlyingtheRSUsonApril1,2013. 1/48thofthetotalnumberofsharessubjecttotheoptionwillvestonMay1,2013andtheremainingsharessubjecttotheoptionvestatarateof1/48thofthe totalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. 260,000ofthetotalnumberofsharessubjecttotheoptionwillvestonMay1,2013inequalmonthlyinstallmentsforaperiodof48months,and,thereafter, the remaining shares subject to the option will vest in equal monthly installments for a period of 12 months, subject to continued service to us through each vestingdate. Thecompensationcommitteesettheoptionexercisepriceforthisgrantat$15.00pershare,apremiumtothefairmarketvalueofashareofClassBcommon stockonthedateofgrantwhichwasdeterminedbyourcompensationcommitteetobe$12.56pershare.
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(10) The vesting condition will be satisfied as to 1/16th of the total shares underlying the RSUs on January 15, 2014. The remaining shares underlying the RSUs vestatarateof1/16thofthetotalnumberofsharesunderlyingtheRSUsoneachquarterthereafter,subjecttocontinuedservicetousthrougheachvestingdate. (11) 1/5thofthetotalnumberofsharessubjecttotheoptionvestedonSeptember8,2010andtheremainingsharessubjecttotheoptionvestatarateof1/60thof thetotalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. (12) Theservicebasedvestingconditionwassatisfiedasto1/5thofthetotalsharesunderlyingtheRSUsonSeptember15,2010.Theremainingsharesunderlying the RSUs vest at a rate of 1/60th of the total number of shares underlying the RSUs on each month thereafter, subject to continued service to us through each vestingdate. (13) The vesting condition will be satisfied as to 1/16th of the total shares underlying the RSUs on January 15, 2015. The remaining shares underlying the RSUs vestatarateof1/16thofthetotalnumberofsharessubjecttotheRSUsoneachquarterthereafter,subjecttocontinuedservicetousthrougheachvestingdate. (14) InJune2011,inconnectionwithcertainestateplanning,Mr.Schroepfertransferredoptionstopurchase400,000sharesofClassBcommonstocktoeachoftwo familytrusts. (15) 1/5thofthetotalnumberofsharessubjecttotheoptionvestedonAugust25,2009andtheremainingsharessubjecttotheoptionvestatarateof1/60thofthe totalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. (16) 1/5thofthetotalnumberofsharessubjecttotheoptionvestedonOctober29,2009andtheremainingsharessubjecttotheoptionvestatarateof1/60thofthe totalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. (17) Theservicebasedvestingconditionwassatisfiedasto1/5thofthetotalsharesunderlyingtheRSUsonSeptember1,2009.Theremainingsharesunderlyingthe RSUs vest at a rate of 1/60th of the total number of shares underlying the RSUs on each month thereafter, subject to continued service to us through each vestingdate. (18) Theservicebasedvestingconditionwassatisfiedasto1/5thofthetotalsharesunderlyingtheRSUsonNovember1,2009.Theremainingsharesunderlyingthe RSUs vest at a rate of 1/60th of the total number of shares underlying the RSUs on each month thereafter, subject to continued service to us through each vestingdate. (19) 1/5th of the total number of shares subject to the option vested on July 15, 2010 and the remaining shares subject to the option vest at a rate of 1/60th of the totalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. (20) The servicebased vesting condition was satisfied as to 1/5th of the total shares underlying the RSUs on July 15, 2010. The remaining shares underlying the RSUs vest at a rate of 1/60th of the total number of shares underlying the RSUs on each month thereafter, subject to continued service to us through each vestingdate. (21) Theservicebasedvestingconditionwillbesatisfiedasto1/16thofthetotalsharesunderlyingtheRSUsonAugust15,2014.Theremainingsharesunderlying the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs on each quarter thereafter, subject to continued service to us through each vestingdate. (22) The vesting condition will be satisfied as to 1/16th of the total shares underlying the RSUs on January 15, 2014. The remaining shares underlying the RSUs vestatarateof1/16thofthetotalnumberofsharesunderlyingtheRSUsoneachquarterthereafter,subjecttocontinuedservicetousthrougheachvestingdate. (23) InDecember2011,inconnectionwithcertainestateplanning,Mr.Ullyottransferredoptionstopurchase400,000sharesofClassBcommonstocktoafamily trust. (24) 1/5thofthetotalnumberofsharessubjecttotheoptionvestedonOctober20,2009andtheremainingsharessubjecttotheoptionvestatarateof1/60thofthe totalnumberofsharessubjecttotheoptiononeachmonththereafter,subjecttocontinuedservicetousthrougheachvestingdate. (25) Theservicebasedvestingconditionwassatisfiedasto1/5thofthetotalsharesunderlyingtheRSUsonNovember1,2009.Theremainingsharesunderlyingthe RSUs vest at a rate of 1/60th of the total number of shares underlying the RSUs on each month thereafter, subject to continued service to us through each vestingdate. (26) Theservicebasedvestingconditionwillbesatisfiedasto1/4thofthetotalsharesunderlyingtheRSUsonAugust15,2014.Theremainingsharesunderlying the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs on each quarter thereafter, subject to continued service to us through each vestingdate. (27) The vesting condition will be satisfied as to 1/16th of the total shares underlying the RSUs on October 15, 2014. The remaining shares underlying the RSUs vestatarateof1/16thofthetotalnumberofsharesunderlyingtheRSUsoneachquarterthereafter,subjecttocontinuedservicetousthrougheachvestingdate.
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Table of Contents 2011OptionExercises The following table presents, for each of the named executive officers, the number of shares of our common stock acquired upon the exercises of stock options during 2011 and the aggregate value realized upon the exercises. No RSUs vestedin2011.
OptionAwards NumberofShares Acquiredon ValueRealizedon Exercise(#) Exercise($)(1)
Name
319,500 326,459
7,417,512 7,579,072
(1) TheseoptionswereexercisedinconnectionwiththesalebyMessrs.SchroepferandUllyotofcertainofthesesharestothirdparties.Theaggregatevaluerealized upon the exercise of the options represents the amount by which $25.07, which was the price per share at which Messrs. Schroepfer and Ullyot sold certain of theseshares,exceededtheaggregateexercisepriceoftheoptions,whichwas$1.854pershare.
EmploymentAgreementsandOfferLetters We have entered into employment agreements or offer letters with each of the named executive officers. These agreements provide for atwill employment and generally include the named executive officers initial base salary, an indicationofeligibilityforanannualcashincentiveawardopportunity,and,insomecases,arrangementswithrespecttothe acceleratedvestingofequityawards.Inaddition,eachofournamedexecutiveofficershasexecutedaformofourstandard confidentialinformationandinventionassignmentagreement.Anypotentialpaymentsandbenefitsdueuponatermination of employment or a change in control of us are further described and quantified below in Potential Payments upon TerminationorChangeinControl. MarkZuckerberg We entered into an amended and restated offer letter with Mr. Zuckerberg, our founder, Chairman, and CEO, in January2012.Thisofferletteragreementhasnospecifictermandconstitutesatwillemployment.Mr.Zuckerbergscurrent annualbasesalaryis$500,000andheiseligibletoreceiveannualbonuscompensationunderourBonusPlan.Effective January1,2013,Mr.Zuckerbergsannualbasesalarywillbereducedto$1. SherylK.Sandberg WeenteredintoanamendedandrestatedemploymentagreementwithMs.Sandberg,ourChiefOperatingOfficer,in January2012.Theemploymentagreementhasnospecifictermandconstitutesatwillemployment.Ms.Sandbergscurrent annualbasesalaryis$300,000,andsheiseligibletoreceiveannualbonuscompensationunderourBonusPlan.Intheevent Ms. Sandberg is either involuntarily terminated without cause (other than as a result of death or disability) or is constructivelyterminated,ineithercasewithinonemonthpriortoorsixmonthsfollowingachangeincontrol,shewillbe entitledtoacceleratedvestingof100%oftheunvestedRSUsinherinitialgrant,subjecttoexecutingareleaseofclaims.In addition,theemploymentagreementprovidesthatintheeventofachangeincontrolwheretheRSUsarenotassumedor substitutedforanequivalentaward,anyunvestedRSUswillvestimmediatelypriortotheconsummationofthechangein control.TheemploymentagreementalsoprovidesthatifMs.Sandbergisterminatedwithoutcause(otherthanasaresultof deathordisability),andotherthaninconnectionwithachangeincontrol,shewillbeentitledtoacceleratedvestingofthe unvestedRSUsinherinitialgrantinanamountequaltothenumberofRSUsthatwouldhavevestedhadheremployment continued for the first half of the months remaining between the date of her termination and April 1, 2013, subject to executing a release of claims, and if she is terminated as a result of death or disability, she will be entitled to continued vestingofherunvestedRSUsforoneyear. 128
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Table of Contents DavidA.Ebersman WeenteredintoanamendedandrestatedofferletterwithMr.Ebersman,ourChiefFinancialOfficer,inJanuary2012. The offer letter agreement has no specific term and constitutes atwill employment. Mr. Ebersmans current annual base salaryis$300,000,andheiseligibletoreceiveannualbonuscompensationunderourBonusPlan. MikeSchroepfer WeenteredintoanamendedandrestatedofferletterwithMr.Schroepfer,ourVicePresident,Engineering,inJanuary 2012.Theofferletteragreementhasnospecifictermandconstitutesatwillemployment.Mr.Schroepferscurrentannual basesalaryis$275,000,andheiseligibletoreceiveannualbonuscompensationunderourBonusPlan. TheodoreW.Ullyot WeenteredintoanamendedandrestatedemploymentagreementwithMr.Ullyot,ourVicePresident,GeneralCounsel, and Secretary, in January 2012. The employment agreement has no specific term and constitutes atwill employment. Mr. Ullyots current annual base salary is $275,000, and he is eligible to receive annual bonus compensation under our Bonus Plan. In addition, the employment agreement provides that Mr. Ullyot is entitled to an annual retention bonus of $400,000forthefirstfiveyearsofhisemployment(Mr.UllyotsemploymentcommencedinOctober2008).Intheeventthat Mr.Ullyotiseitherinvoluntarilyterminatedwithoutcause(otherthanasaresultofdeathordisability)orisconstructively terminated, in either case within one month prior to or six months following a change in control, he will be entitled to acceleratedvestingof100%oftheunvestedRSUsandoptionsinhisinitialgrants,subjecttoexecutingareleaseofclaims. Inaddition,theemploymentagreementprovidesthatintheeventthatif,inconnectionwithachangeincontrol,theRSUs andsharessubjecttooptionsarenotassumedorsubstitutedforequivalentawards,thenanyunvestedRSUsorsharessubject to options will vest immediately prior to the consummation of the change in control. The employment agreement also providesthatifMr.Ullyotisinvoluntarilyterminatedinthefourthorfifthyearsofhisemploymenteitherwithoutcause (other than as a result of death or disability) or is constructively terminated, other than in connection with a change in control,hewillbeentitledtoacceleratedvestingof50%oftheremainingunvestedRSUsandsharessubjecttooptionsinhis initialgrants,subjecttoexecutingareleaseofclaims.Theemploymentagreementalsoprovidesthathewillbeentitledtoa severancepaymentequaltooneyearofbasesalaryandhisannualretentionbonusifheisinvoluntarilyterminatedeither withoutcause(otherthanasaresultofdeathordisability)orisconstructivelyterminated,inconnectionwithachangein controlorotherwise,subjecttoexecutingareleaseofclaims. PotentialPaymentsuponTerminationorChangeinControl Under the terms and conditions of their individual agreements, as described in detail above, Ms. Sandberg and Mr.Ullyotareeligibletoreceivecertainbenefitsinconnectionwithhisorherterminationofemployment,dependingonthe circumstances,includingfollowingachangeincontrolofus(suchasasaleofallorsubstantiallyallofourassetsoramerger involvingthesaleofamajorityoftheoutstandingsharesofourvotingcapitalstock). Theactualamountsthatwouldbepaidordistributedtothesenamedexecutiveofficersasaresultofaterminationevent occurringinthefuturemaybedifferentthanthosepresentedbelowasmanyfactorswillaffecttheamountofanypayments and benefits upon a termination of employment. For example, some of the factors that could affect the amounts payable includethenamedexecutiveofficersbasesalaryandthemarketpriceofourcommonstock.Althoughwehave,insome instances, entered into written arrangements to provide benefits to the named executive officers in connection with a terminationofemploymentunderparticularcircumstances,we,oranacquirer,maymutuallyagreewiththenamedexecutive officersonseverancetermsthatvaryfromthoseprovidedinthesepreexistingarrangements.Formoreinformationaboutthe namedexecutiveofficersoutstandingequityawardsasofDecember31,2011,see2011OutstandingEquityAwardsat YearEndTableabove. 129
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Table of Contents ForpurposesofthetablesbelowastoMs.SandbergandMr.Ullyot,aninvoluntaryterminationgenerallymeansthe termination of the executives employment by us without cause or such individuals voluntary resignation following a materialadversechangeinhisorhercompensation,responsibility,orthelocationofhisorherservices.Causeisgenerally definedtoincludeactsofmaterialdishonestyorgrossnegligence,failurestocomplywithourpoliciesoragreements,orany convictionofafelonyorcrimeofmoralturpitude. SherylK.Sandberg ThetablebelowsummarizesthevalueofthevestingaccelerationtowhichMs.Sandbergwouldbeentitled,assuminga qualifyingterminationasofDecember31,2011.
NoChange inControl(3) Involuntary Termination ChangeinControl(4) No Involuntary Termination Termination
Benefit
VestingAcceleration (1)(2)
(1) Calculatedbasedontheassumedinitialpublicofferingpriceof$pershare,themidpointofthepricerangeonthecoverpageofthisprospectus. (2) As of December 31, 2011, the servicebased vesting condition on 8,258,748 shares underlying Ms. Sandbergs initial RSUs would be accelerated if she was terminated as a result of her death or disability, which is the number of initial RSUs that would have vested if Ms. Sandberg had remained employed for an additionaltwelvemonthsfromthedateofherdeathordisability.Thevalueofthisvestingaccelerationwas$asofDecember31,2011whencalculatedas describedinfootnote(1)above. (3) As of December 31, 2011, the servicebased vesting condition on 5,463,644 shares underlying Ms. Sandbergs initial RSUs would be accelerated if she was terminated without cause, other than as a result of her death or disability, which is the number of initial RSUs that would have vested if Ms. Sandberg had remainedemployedforthefirsthalfofthemonthsremainingbetweenthedateofterminationandApril1,2013. (4) AsofDecember31,2011,11,055,380sharesunderlyingMs.SandbergsinitialRSUswouldbeacceleratedifshewaseitherinvoluntarilyterminated,otherthan as a result of her death or disability, within one month prior to or within six months following a change in control, or her initial RSUs were not assumed or substitutedforanequivalentaward,suchthat100%ofthesharesunderlyingMs.SandbergsinitialRSUswouldbevested.
TheodoreW.Ullyot ThetablebelowsummarizesthevalueofvestingaccelerationandseverancepaymentstowhichMr.Ullyotwouldbe entitled,assumingaqualifyingterminationasofDecember31,2011.

NoChange inControl(2) Involuntary Termination ChangeinControl(3) No Involuntary Termination Termination
Benefit
Severance VestingAcceleration (1) TotalValue
$ 675,000 $
$ 675,000 $
(1) CalculatedbasedontheassumedinitialpublicofferingpriceoftheClassAcommonstockof$pershare,themidpointofthepricerangeonthecoverpage ofthisprospectus. (2) As of December 31, 2011, 592,495 shares subject to Mr. Ullyots initial option and the servicebased vesting condition on 619,425 shares underlying Mr.UllyotsinitialRSUswouldbeacceleratedifhewasinvoluntarilyterminated,otherthanasaresultofhisdeathordisability,whichis50%oftheremaining unvestedsharesunderlyingMr.UllyotsinitialoptionandRSUs.Inaddition,Mr.Ullyotwouldbeentitledtoseveranceequaltohisbasesalaryof$275,000and hisretentionbonusof$400,000. (3) AsofDecember31,2011,1,184,990sharessubjecttoMr.Ullyotsinitialoptionand1,238,850sharesunderlyingMr.UllyotsinitialRSUswouldbeaccelerated ifhewasinvoluntarilyterminated,otherthanasaresultofhisdeathordisability,withinonemonthpriortoorwithinsixmonthsfollowingachangeincontrol, orifhisinitialoptionandRSUswerenotassumedorsubstitutedforanequivalentaward,suchthat100%ofthesharesunderlyingMr.Ullyotsinitialoptionand RSUswouldbevested.
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Table of Contents EmployeeBenefitPlans 2005StockPlan Our board of directors adopted our 2005 Stock Plan on January 7, 2005, which our stockholders approved on January14,2005.Our2005StockPlanprovidesforthegrantofincentivestockoptions,withinthemeaningofSection422 oftheCode,toouremployeesoranyparentorsubsidiarysemployees,andforthegrantofnonstatutorystockoptionstoour employees,directors,andconsultantsandanyparent,subsidiary,oraffiliatecorporationsemployeesandconsultants.Stock purchaserightsandrestrictedstockunitsmayalsobegrantedunderthe2005StockPlan.Wewillceaseissuingawardsunder the2005StockPlanupontheimplementationofthe2012EquityIncentivePlan,whichisdescribedbelow.Likewise,we willnotgrantanyadditionalawardsunderour2005StockPlanfollowingourinitialpublicoffering.Instead,wewillgrant equityawardsunderour2012EquityIncentivePlan. ShareReserve.AsofMarch31,2012,wehadreserved971,314,985sharesofourClassBcommonstockforissuance under our 2005 Stock Plan. As of March 31, 2012, options to purchase 441,023,978 of these shares had been exercised, optionstopurchase116,756,442ofthesesharesremainedoutstandingand52,466,293ofthesesharesremainedavailablefor future grant. The options outstanding as of March 31, 2012 had a weighted average exercise price of $0.94 per share. In addition, as of March 31, 2012, we had 378,429,048 RSUs outstanding under the 2005 Stock Plan. However, any outstandingawardsgrantedunderthe2005StockPlanwillremainoutstanding,subjecttothetermsofour2005StockPlan andapplicableawardagreements,untiltheyareexercisedorsettledoruntiltheyterminateorexpirebytheirterms.Sharesof ClassBcommonstockavailableforissuancepursuanttothe2005StockPlanwillberolledintoour2012EquityIncentive Planonthedateofthisprospectusasfurtherdescribedbelow. Administration.Ourcompensationcommitteecurrentlyadministersour2005StockPlan.Ourcompensationcommittee hascompletediscretiontomakealldecisionsimplementingthe2005StockPlan,includingthepowerto(1)determinewho willreceivetheawards,(2)determinethefairmarketvalueoftheClassBcommonstock,(3)interpretthetermsofthe2005 StockPlanandtheawardsthereunder,and(4)specifythetermsandconditionsofsuchawards,suchastheexerciseprice,the number of shares subject to each award, the vesting schedule and exercisability of awards and the form of consideration payableuponexercise. StockOptions.TheexercisepriceofincentivestockoptionsmustbeatleastequaltothefairmarketvalueofourClass Bcommonstockonthedateofgrantandthetermoftheincentivestockoptionsmaynotexceedtenyears.Withrespectto incentive stock options granted to any employee who owns 10% or more of the voting power of all classes of our outstandingstockasofthegrantdate,thetermmustnotexceedfiveyearsandtheexercisepricemustequalatleast110%of thefairmarketvalueonthegrantdate. Whenanemployeeceasestoprovidecontinuousservicestous(oranyparent,subsidiary,oraffiliate),heorshemay exercisehisorherincentivestockoptionfortheperiodoftimestatedintheincentivestockoptionagreement,totheextent hisorherincentivestockoptionisvestedonthedateoftermination.Subjecttotherequirementsofallapplicablelaws,rules or regulations, each nonstatutory stock option agreement shall contain provisions relating to early termination of the nonstatutory stock option based upon termination of the holders service to us as determined by our compensation committee. In the event of a termination of a service provider for cause, all options held by such service provider will immediately terminate. In addition, any vested shares that were acquired upon the exercise of a stock option may be repurchasedbyus.Astockoptionmayneverbeexercisedlaterthantheexpirationofitsterm. StockPurchaseRights.ThecompensationcommitteemayofferrightstopurchasesharesofourClassBcommonstock underthe2005StockPlanand,totheextentpermittedbyapplicablelaw,shalldeterminethepurchasepriceoftheshares subjecttoeachstockpurchaseright.Theoffertopurchasesharesunderlyingthisstockpurchaserightshallbeacceptedby theoffereesexecutionofarestrictedstockpurchaseagreement,intheformprescribedbythecompensationcommittee.This restrictedstockpurchaseagreementmaysubjectthe 131
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Table of Contents acquired shares to a repurchase option, which we could exercise upon the voluntary or involuntary termination of the purchasersservicesforanyreason.Inaddition,intheeventofaterminationofaserviceproviderforcause,vestedstock purchasedtoastockpurchaserightmayalsoberepurchasedbyus. RestrictedStockUnits.Our2005StockPlanalsopermitstheissuanceofRSUs,toourserviceproviders.RSUsgranted underour2005StockPlanrepresenttherighttoreceivesharesofourClassBcommonstockorcashpaymentataspecified futuredateandmaybesubjecttovestingrequirements. Transferability.Incentivestockoptionsmaynotbetransferred,exceptbywillorbythelawsofdescentordistribution. However, the compensation committee may, in its sole discretion, grant nonstatutory stock options or RSUs that may be transferredintheeventofdeathordisability,ortoimmediatefamilymembers. EffectofCertainCorporateTransactions.Intheeventweexperienceasaleofallorsubstantiallyallofourassets,a mergerorcertainothercorporatetransactionsincludingachangeincontrol,allawardsgrantedunderthe2005StockPlan shallbesubjecttotheagreementevidencingsuchmergerorconsolidationandsuchagreementshallprovideforoneormore ofthefollowing: thecontinuationorassumptionofsuchoutstandingawardsbythesurvivingcorporationoritsparent thesubstitutionbythesurvivingcorporationoritsparentofequivalentawardsforsuchoutstandingawardsor terminationoftheoutstandingawardsuponconsummationofthecorporatetransaction.
The2005StockPlanprovidesforproportionaladjustmentofawardsintheeventofastocksplit,stockdividendand certainothersimilarcorporateevents. Payment. The compensation committee may permit any of the following methods of payments for the exercise of options: cashorcashequivalents a promissory note having such recourse, interest, redemption and security provisions as determined by the compensationcommittee sharesofClassBcommonstockthattheoptioneealreadyowns cancellationofindebtednessor animmediatesaleoftheoptionsharesthroughabrokerdesignatedbyusinacashlessexercise,providedthatsuch aprogramisadoptedbyourcompensationcommittee.
AdditionalProvisions.Ourcompensationcommitteehastheauthoritytoamend,suspendorterminatethe2005Stock Plan,providedthatnoamendmentmaymateriallyoradverselyaffectawardsalreadygrantedwithoutthewrittenconsentof theholderoftheaffectedaward.Ourstockholdersapproveactionsthatrequirestockholderapprovalunderapplicablelaw andapproveanyincreaseinthenumberofsharesreservedforissuanceunderthe2005StockPlan. 2005OfficersStockPlan OnNovember8,2005,ourboardofdirectorsadoptedthe2005OfficersStockPlan(OfficersPlan).TheOfficersPlan permitstheissuanceofsharesofourClassBcommonstockoroptionstopurchasesuchsharestocertainofouremployees and officers. The total number of shares of our Class B common stock that may be sold under the Officers Plan is 120,000,000.Allsharesunderthisplanaresubjecttoanoutstandingawardheldbyourfounder,Chairman,andCEO.We willnotgrantanyadditionalawardsundertheOfficersPlanfollowingourinitialpublicoffering. 132
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Table of Contents Ourboardofdirectors,oracommitteedesignatedbytheboard,determineswhowillreceivegrantsunderthisOfficers Planandthetermsandconditionsofsuchgrants.TherightsoroptionstopurchasesharesundertheOfficersPlanshallbe nontransferable,otherthanbywillorbythelawsofdescentordistribution.PursuanttothetermsoftheOfficersPlan,andif requiredbyapplicablelaw,wemustprovideannualfinancialstatementstoeachgrantee,unlesssuchgranteehasaccessto equivalent information through other means. Shares issued pursuant to this Officers Plan are subject to our right of repurchase. 2012EquityIncentivePlan Ourboardofdirectorsandstockholdersadoptedour2012EquityIncentivePlan,whichwillbecomeeffectiveonthe dateofthisprospectusandwillserveasthesuccessortoour2005StockPlan. ShareReserve.Wehavereserved25,000,000sharesofourClassAcommonstockforissuanceunderour2012Equity IncentivePlanplusanadditionalnumberofsharesofClassAcommonstockequaltoanysharesreservedbutnotissuedor subjecttooutstandingawardsunderour2005StockPlanonthedateofthisprospectus,plus,onandafterthedateofthis prospectus,(i)sharesthataresubjecttooutstandingawardsunderthe2005StockPlanwhichceasetobesubjecttosuch awards, (ii) shares issued under the 2005 Stock Plan which are forfeited or repurchased at their original issue price, and (iii)sharessubjecttoawardsunderthe2005StockPlanthatareusedtopaytheexercisepriceofanoptionorwithheldto satisfy the tax withholding obligations related to any award. The number of shares reserved for issuance under our 2012 EquityIncentivePlanwillincreaseautomaticallyonthefirstdayofJanuaryofeachof2013through2022byanumberof sharesofClassAcommonstockequalto(i)thelesserof2.5%ofthetotaloutstandingsharesourcommonstockasofthe immediately preceding December 31st or (ii) a number of shares determined by the board of directors. In addition, the followingsharesofourClassAcommonstockwillagainbeavailableforgrantorissuanceunderour2012EquityIncentive Plan: sharessubjecttooptionsgrantedunderour2012EquityIncentivePlanthatceasetobesubjecttotheoptionfor anyreasonotherthanexerciseoftheoption shares subject to awards granted under our 2012 Equity Incentive Plan that are subsequently forfeited or repurchasedbyusattheoriginalissueprice shares subject to awards granted under our 2012 Equity Incentive Plan that otherwise terminate without shares beingissuedand sharessurrendered,cancelled,orexchangedforcash.
Term.Weanticipatethatour2012EquityIncentivePlanwillterminatetenyearsfromthedateourboardofdirectors approvestheplan,unlessitisterminatedearlierbyourboardofdirectors. Eligibility.Weanticipatethatour2012EquityIncentivePlanwillauthorizetheawardofstockoptions,restrictedstock awards,stockappreciationrights,restrictedstockunits,performancesharesandstockbonuses.Nopersonwillbeeligibleto receivemorethan2,500,000sharesinanycalendaryearunderour2012EquityIncentivePlanotherthananewemployeeof ours, who will be eligible to receive no more than 5,000,000 shares under the plan in the calendar year in which the employeecommencesemployment. Administration. Our 2012 Equity Incentive Plan will be administered by our compensation committee, all of the membersofwhicharenonemployeedirectorsunderapplicablefederalsecuritieslawsandoutsidedirectorsasdefinedunder applicablefederaltaxlaws.Thecompensationcommitteewillhavetheauthoritytoconstrueandinterpretour2012Equity Incentive Plan, grant awards and make all other determinations necessary or advisable for the administration of the plan. Awards under the 2012 Equity Incentive Plan may be made subject to performance factors and other terms in order to qualifyasperformancebasedcompensationforthepurposesof162(m)oftheCode. 133
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Table of Contents StockOptions.Our2012EquityIncentivePlanwillprovideforthegrantofincentivestockoptionsthatqualifyunder Section 422 of the Code only to our employees. All awards other than incentive stock options may be granted to our employees,directors,consultants,independentcontractorsandadvisors,providedtheconsultants,independentcontractors and advisors render services not in connection with the offer and sale of securities in a capitalraising transaction. The exercisepriceofeachstockoptionmustbeatleastequaltothefairmarketvalueofourClassAcommonstockonthedateof grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. Our compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest. In general,optionswillvestoverafouryearperiod.Themaximumtermofoptionsgrantedunderour2012EquityIncentive Planistenyears. Restricted Stock. A restricted stock award is an offer by us to sell shares of our Class A common stock subject to restrictions. The price (if any) of a restricted stock award will be determined by the compensation committee. Unless otherwisedeterminedbythecompensationcommitteeatthetimeofaward,vestingwillceaseonthedatetheparticipantno longerprovidesservicestousandunvestedshareswillbeforfeitedtoorrepurchasedbyus. Stock Appreciation Rights. Stock appreciation rights provide for a payment, or payments, in cash or shares of our ClassAcommonstock,totheholderbaseduponthedifferencebetweenthefairmarketvalueofourClassAcommonstock onthedateofexerciseandthestatedexercisepriceuptoamaximumamountofcashornumberofshares.Stockappreciation rightsmayvestbasedontimeorachievementofperformanceconditions. RestrictedStockUnits.AnRSUisanawardthatcoversanumberofsharesofourClassAcommonstockthatmaybe settleduponvestingincash,bytheissuanceoftheunderlyingsharesoracombinationofboth.Theseawardsaresubjectto forfeiturepriortosettlementbecauseofterminationofemploymentorfailuretoachievecertainperformanceconditions. PerformanceShares.AperformanceshareisanawardthatcoversanumberofsharesofourClassAcommonstockthat maybesettleduponachievementofthepreestablishedperformanceconditionsincashorbyissuanceoftheunderlying shares.Theseawardsaresubjecttoforfeiturepriortosettlementbecauseofterminationofemploymentorfailuretoachieve theperformanceconditions. StockBonusAwards.Stockbonusawardsmaybegrantedasadditionalcompensationforservicesorperformance,and therefore,maynotbeissuedinexchangeforcash. AdditionalProvisions.Awards granted under our 2012 Equity Incentive Plan may not be transferred in any manner other than by will or by the laws of descent and distribution, or as determined by our compensation committee. Unless otherwiserestrictedbyourcompensationcommittee,awardsthatarenonstatutorystockoptionsmaybeexercisedduringthe lifetime of the optionee only by the optionee, the optionees guardian or legal representative, or a family member of the optionee who has acquired the option by a permitted transfer. Awards that are incentive stock options may be exercised duringthelifetimeoftheoptioneeonlybytheoptioneeortheoptioneesguardianorlegalrepresentative.Optionsgranted underour2012EquityIncentivePlangenerallymaybeexercisedforaperiodofthreemonthsaftertheterminationofthe optioneesservicetous,exceptinthecaseofdeathorpermanentdisability,inwhichcasetheoptionsmaybeexercisedfor upto12monthsorsixmonths,respectively,followingterminationoftheoptioneesservicetous. Ifweexperienceachangeincontroltransaction,outstandingawards,includinganyvestingprovisions,maybeassumed orsubstitutedbythesuccessorcompany.Outstandingawardsthatarenotassumedorsubstitutedwillbeexercisablefora periodoftimeandwillexpireupontheclosingofachangeincontroltransaction.Inthediscretionofourcompensation committee,thevestingoftheseawardsmaybeacceleratedupontheoccurrenceofthesetypesoftransactions. 134
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Table of Contents LimitationsonLiabilityandIndemnificationMatters Our restated certificate of incorporation that will be in effect at the closing of our initial public offering contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by the Delaware GeneralCorporationLaw.Consequently,ourdirectorswillnotbepersonallyliabletousorourstockholdersformonetary damagesforanybreachoffiduciarydutiesasdirectors,exceptliabilityfor: anybreachofthedirectorsdutyofloyaltytousorourstockholders anyactoromissionnotingoodfaithorthatinvolvesintentionalmisconductoraknowingviolationoflaw unlawfulpaymentsofdividendsorunlawfulstockrepurchasesorredemptionsasprovidedinSection174ofthe DelawareGeneralCorporationLawor anytransactionfromwhichthedirectorderivedanimproperpersonalbenefit.
Our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering require us to indemnify our directors, executive officers and other key employees to the maximum extent not prohibitedbytheDelawareGeneralCorporationLaworanyotherapplicablelawandallowustoindemnifyotherofficers, employeesandotheragentsassetforthintheDelawareGeneralCorporationLaworanyotherapplicablelaw. We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, executiveofficersandotherkeyemployees,inadditiontotheindemnificationprovidedforinourrestatedbylaws.These agreements,amongotherthings,requireustoindemnifyourdirectors,executiveofficersandotherkeyemployeesforcertain expenses,includingattorneysfees,judgments,penaltiesfinesandsettlementamountsactuallyandreasonablyincurredbya director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers,oranyofoursubsidiariesoranyothercompanyorenterprisetowhichthepersonprovidesservicesatourrequest, includingliabilityarisingoutofnegligenceoractiveorpassivewrongdoingbytheofficerordirector.Webelievethatthese charter provisions and indemnification agreements are necessary to attract and retain qualified persons such as directors, officersandkeyemployees.Wealsomaintaindirectorsandofficersliabilityinsurance. The limitation of liability and indemnification provisions in our restated certificate of incorporation and restated bylawsmaydiscouragestockholdersfrombringingalawsuitagainstourdirectorsandofficersforbreachoftheirfiduciary duty.Theymayalsoreducethelikelihoodofderivativelitigationagainstourdirectorsandofficers,eventhoughanaction,if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnificationprovisions. Atpresent,thereisnopendinglitigationorproceedinginvolvinganyofourdirectorsorexecutiveofficersastowhich indemnificationisrequiredorpermitted,andwearenotawareofanythreatenedlitigationorproceedingthatmayresultina claimforindemnification. InsofarasindemnificationforliabilitiesarisingundertheSecuritiesActof1933,asamended(SecuritiesAct),maybe permittedtodirectors,executiveofficersorpersonscontrollingus,wehavebeeninformedthatintheopinionoftheSEC suchindemnificationisagainstpublicpolicyasexpressedintheSecuritiesActandisthereforeunenforceable. 135
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Table of Contents RELATEDPARTYTRANSACTIONS InadditiontotheexecutiveofficeranddirectorcompensationarrangementsdiscussedinExecutiveCompensation, belowwedescribetransactionssinceJanuary1,2009,towhichwehavebeenaparticipant,inwhichtheamountinvolvedin thetransactionexceedsorwillexceed$120,000andinwhichanyofourdirectors,executiveofficersorholdersofmorethan 5%ofourcapitalstock,oranyimmediatefamilymemberof,orpersonsharingthehouseholdwith,anyoftheseindividuals, hadorwillhaveadirectorindirectmaterialinterest. AmendedandRestatedInvestorsRightsAgreement Wehaveenteredintoaninvestorsrightsagreementwithcertainholdersofourconvertiblepreferredstockandcommon stock,includingentitiesaffiliatedwithMr.Andreessen,Mr.Thiel,Mr.BreyerandAccelPartners,andDSTGlobalLimited. CertainholdersofsharesofourClassAcommonstockandClassBcommonstockareentitledtorightswithrespecttothe registration of their shares following our initial public offering under the Securities Act. For a description of these registrationrights,seeDescriptionofCapitalStockRegistrationRights. SeriesEPreferredStockFinancing InMay2009,wesoldanaggregateof44,037,540shares(aftergivingeffecttoa5for1stockspliteffectedinOctober 2010)ofourSeriesEpreferredstocktoMail.ruGroupLimited(f/k/aDigitalSkyTechnologiesLimited),atapurchaseprice pershareof$4.54(aftergivingeffecttoa5for1stockspliteffectedinOctober2010),foranaggregatepurchasepriceof approximately $200 million. Following this sale, and the purchase of additional shares from our existing stockholders, Mail.ru Group Limited and its affiliates beneficially owned more than 5% of our outstanding capital stock. We have no ongoingobligationsundertheSeriesEpreferredstockpurchaseagreement. ConversionAgreement InconnectionwiththeirpurchaseofsharesfromcertainexistingstockholdersinFebruary2010,Mail.ruGroupLimited andDSTGlobalLimitedandtheirrespectiveaffiliatesenteredintoaconversionagreementwithusbecauseweandtheother parties had agreed such parties aggregate voting power would be maintained at less than 10% of our total outstanding votingpower.Theconversionagreementcontainsthefollowingprovisions: Lockup Pursuanttothisagreement,Mail.ruGroupLimitedandDSTGlobalLimitedandtheirrespectiveaffiliateshaveagreed nottosellsharesofourcapitalstock,otherthananysharestheymaysellinourinitialpublicoffering,forcertainperiodsof timefollowingthedateofthisprospectus.Astosharesheldbythemasofthedateofthisprospectus,thisagreementwill expireasfollows:(1)asto50%ofthesharessixmonthsaftertheeffectivedateoftheregistrationstatement,(2)astoan additional25%ofthesharesone(1)yearaftertheeffectivedateoftheregistrationstatement,and(3)astoanadditional25% oftheshares18monthsaftertheeffectivedateoftheregistrationstatement,suchthatallofthesharesheldbyMail.ruGroup LimitedandDSTGlobalLimitedandtheirrespectiveaffiliateswillbefreelytradable18monthsaftertheeffectivedateof theregistrationstatement. AutomaticConversionofSharesupontheOccurrenceofCertainEvents Inaddition,Mail.ruGroupLimitedandDSTGlobalLimitedhaveagreed,pursuanttotheconversionagreement,thatif either of their respective voting agreements with Mr. Zuckerberg is terminated because of his death or his failure to be actively engaged in our management, that they and their respective affiliates shall automatically convert their Class B common stock to Class A common stock pursuant to the optional conversion provision of our restated certificate of incorporation. For information regarding Mr. Zuckerbergs voting agreements, see Description of Capital StockVoting Agreements. 136
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Table of Contents Mail.ru Group Limited, which was affiliated with DST Global Limited on the date the parties entered into the conversionagreement,underwentacorporaterestructuringinNovember2010inconnectionwithitsinitialpublicoffering ontheLondonStockExchange.Followingthecorporaterestructuring,Mail.ruGroupLimitedwasnolongeraffiliatedwith DSTGlobalLimitedanditsaffiliatesDSTGlobalII,L.P.,DSTGlobalIII,L.P.,DSTUSALimited,andDSTUSAIILimited. Mail.ru Group Limited no longer beneficially owns more than 5% of our outstanding capital stock. For additional information regarding beneficial ownership of our capital stock as of December 31, 2011, see Principal and Selling Stockholders. ClassBCommonStockRestrictionAgreement In2004and2005,Mr.Zuckerbergsfatherprovideduswithinitialworkingcapital.Inconsiderationforthisassistance, weissuedhimanoptiontopurchase2,000,000shares,asadjustedforsplitsandreclassifications,ofourClassBcommon stock. The option initially expired by its terms one year following the date of grant without having been exercised. Our boardofdirectors(withoutMr.Zuckerberg)determinedthattheoptiondidnotreflecttheintentofthepartieswithrespectto the equity to be issued to him in consideration of the financial assistance and a release from potential related claims. Accordingly,inDecember2009,weissuedanaggregateof2,000,000sharesofourClassBcommonstocktoGlateLLC,an entityownedbyMr.Zuckerbergsfather.Wehavenoongoingobligationsunderthisagreement. RightofFirstRefusal Pursuanttoourbylawsandcertainagreementswithourstockholders,weorourassigneeshavetherighttopurchase shares of our capital stock, including shares of Class B common stock issued under our 2005 Stock Plan, which these stockholdersproposetoselltootherparties.Theserightsarecustomaryforventurecapitalbackedcompaniesinourindustry andwillterminateuponthecompletionofourinitialpublicoffering.In2009and2010,inconnectionwithproposedsales bycertainstockholders,weassignedourrighttopurchase28,403,845sharesofourClassBcommonstocktocertainentities affiliatedwithMail.ruGroupLimitedandDSTGlobalLimited.Mail.ruGroupLimitedandDSTGlobalLimitedpurchased 27,182,595sharesofourClassBcommonstockinconnectionwithsuchassignments.Foradditionalinformationregarding beneficialownershipofourcapitalstockasofDecember31,2011,seePrincipalandSellingStockholders. ClassACommonStockFinancing InDecember2010,wesoldanaggregateof2,398,081sharesofourClassAcommonstocktoDSTGlobalLimitedata purchasepricepershareof$20.85,foranaggregatepurchasepriceofapproximately$50million. EquityAwards,EmploymentAgreementsandOfferLetters WehavegrantedstockoptionsorRSUstoourexecutiveofficersandourdirectors.Foradescriptionoftheseequity awards,seeExecutiveCompensation2011OutstandingEquityAwardsatYearEndTableandManagementDirector Compensation. We have entered into employment agreements or offer letters with each of our named executive officers. For more informationregardingtheseagreements,seeExecutiveCompensationEmploymentAgreementsandOfferLetters. EmploymentArrangementsWithImmediateFamilyMembersofOurExecutiveOfficersandDirectors MollyGraham,thedaughterofDonaldE.Graham,amemberofourboardofdirectors,isemployedbyus.During2009, 2010,and2011,Ms.Grahamhadtotalcashcompensation,includingbasesalary,bonusandothercompensation,of$98,058, $133,620,and$189,168. RandiZuckerberg,thesisterofMarkZuckerberg,ourfounder,Chairman,andCEO,wasemployedbyusuntilAugust 2011.During2009,2010,and2011,Ms.Zuckerberghadtotalcashcompensation,includingbasesalary,bonusandother compensation,of$128,750,$139,578,and$89,536. 137
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Table of Contents The compensation levels of Mmes. Graham and Zuckerberg were based on reference to external market practice of similarpositionsorinternalpayequitywhencomparedtothecompensationpaidtoemployeesinsimilarpositionsthatwere notrelatedtoourexecutiveofficersanddirectors.Theywerealsoeligibleforequityawardsonthesamegeneraltermsand conditionsasapplicabletootheremployeesinsimilarpositionswhowerenotrelatedtoourexecutiveofficersanddirectors. IndemnificationAgreements We have entered into indemnification agreements with each of our directors, executive officers and other key employees.Theindemnificationagreementsandouramendedandrestatedbylawswillrequireustoindemnifyourdirectors to the fullest extent permitted by Delaware law. For more information regarding these agreements, see Executive CompensationLimitationsonLiabilityandIndemnificationMatters. CommercialAgreements During 2009, 2010, 2011, and the first quarter of 2012, The Washington Post Company and its related companies purchased $0.6 million, $4.8 million, $4.2 million, and $0.8 million, respectively, of advertisements on our website. Mr. Graham, a member of our board of directors, is the Chief Executive Officer of The Washington Post Company. The purchasesbyTheWashingtonPostCompanyanditsrelatedentitiesweremadeintheordinarycourseofbusinesspursuantto our standard online terms and conditions and were all made through our selfservice ad system. In addition, Social Code LLC, a whollyowned subsidiary of The Washington Post Company, is an advertising agency that has clients that do businesswithus. During2009,2010,2011,andthefirstquarterof2012,Netflixpurchased$1.9million,$1.6million,$3.8million,and $1.2million,respectively,ofadvertisementsonourwebsite.Mr.Hastings,amemberofourboardofdirectors,istheChief ExecutiveOfficerofNetflix.ThepurchasesbyNetflixweremadeintheordinarycourseofbusinesspursuanttoourstandard termsandconditions. During 2010 and 2011, we made payments to GMG Lifestyle Entertainment Inc. (GMG) of $0.9 million and $0.7 million, respectively, for certain sales and marketing services. Rob Goldberg, the founder and Chief Executive Officer of GMG, is the brotherinlaw of Ms. Sandberg, our Chief Operating Officer. The GMG relationship was entered into in the ordinary course of business pursuant to a negotiated agreement after we evaluated other commercial alternatives and concludedthatGMGwasthemostsuitablealternative.Ms.Sandbergdidnotparticipateinthedecisiontonegotiatewith GMGorinthenegotiationsthemselves.GMGwasacquiredbyTheToppsCompanyinJuly2011. Review,ApprovalorRatificationofTransactionswithRelatedParties Wehaveadoptedarelatedpartytransactionspolicyunderwhichourexecutiveofficers,directors,nomineesforelection asadirector,beneficialownersofmorethan5%ofanyclassofourcommonstock,andanymembersoftheimmediatefamily ofanyoftheforegoingpersonsarenotpermittedtoenterintoarelatedpartytransactionwithuswithouttheconsentofour audit committee. If the related party is, or is associated with, a member of our audit committee, the transaction must be reviewed and approved by another independent body of our board of directors, such as our governance committee. Any requestforustoenterintoatransactionwitharelatedpartyinwhichtheamountinvolvedexceeds$120,000andsuchparty wouldhaveadirectorindirectinterestmustfirstbepresentedtoourauditcommitteeforreview,considerationandapproval. Ifadvanceapprovalofarelatedpartytransactionwasnotfeasibleorwasnotobtained,therelatedpartytransactionmustbe submittedtotheauditcommitteeassoonasreasonablypracticable,atwhichtimetheauditcommitteeshallconsiderwhether to ratify and continue, amend and ratify, or terminate or rescind such relatedparty transaction. All of the transactions describedabovewerereviewedandconsideredby,andwereenteredintowiththeapprovalof,orratificationby,ourboardof directors. 138
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Table of Contents PRINCIPALANDSELLINGSTOCKHOLDERS Thefollowingtablesetsforthcertaininformationwithrespecttothebeneficialownershipofourcommonstockasof March31,2012,andasadjustedtoreflectthesaleofClassAcommonstockofferedbyusandthesellingstockholdersinour initialpublicoffering,for: eachstockholderknownbyustobethebeneficialownerofmorethan5%ofouroutstandingsharesofClassA commonstockorClassBcommonstock eachofourdirectors eachofournamedexecutiveofficers allofourdirectorsandexecutiveofficersasagroupand eachsellingstockholder.
WehavedeterminedbeneficialownershipinaccordancewiththerulesoftheSEC.Exceptasindicatedbythefootnotes below,webelieve,basedontheinformationfurnishedtous,thatthepersonsandentitiesnamedinthetablebelowhavesole voting and investment power with respect to all shares of Class A common stock or Class B common stock that they beneficiallyown,subjecttoapplicablecommunitypropertylaws. Applicablepercentageownershipisbasedon117,549,393sharesofClassAcommonstockand1,780,535,644sharesof ClassBcommonstockoutstandingatMarch31,2012,assumingconversionofalloutstandingsharesofpreferredstockinto anaggregateof545,401,443sharesofourClassBcommonstock.Forpurposesofcomputingpercentageownershipafterour initialpublicoffering,wehaveassumedthatsharesofClassAcommonstockwillbeissuedbyusinourinitialpublic offering, that 120,000,000 shares of Class B common stock will be issued by us in connection with the exercise of an outstanding stock option by Mark Zuckerberg, our founder, Chairman, and CEO, and that certain of our existing stockholderswillconvertanaggregateofsharesofourClassBcommonstockintoanequivalentnumberofsharesof ourClassAcommonstockinconnectionwithourinitialpublicoffering.Incomputingthenumberofsharesofcommon stockbeneficiallyownedbyapersonandthepercentageownershipofthatperson,wedeemedtobeoutstandingallsharesof common stock subject to options, RSUs or other convertible securities held by that person or entity that are currently exercisableorreleasableorthatwillbecomeexercisableorreleasablewithin60daysofMarch31,2012.Wedidnotdeem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwiseindicated,theaddressofeachbeneficialownerlistedinthetablebelowisc/oFacebook,Inc.,1601WillowRoad, MenloPark,California94025. 139
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SharesBeneficiallyOwned PriortothisOffering ClassA ClassB %ofTotal Voting Power BeforeOur Initial Public Offering(2) SharesBeneficially OwnedAfterthisOffering %ofTotal Voting ClassA ClassB PowerAfter OurInitial Public Shares % Shares % Offering(2)
Number of Shares Being Offered
NameofBeneficialOwner NamedExecutiveOfficersandDirectors: MarkZuckerberg(3) Sharessubjecttovotingproxy(5) Total(3)(5) SherylK.Sandberg(6) DavidA.Ebersman(7) MikeSchroepfer(8) TheodoreW.Ullyot(9) MarcL.Andreessen(10) ErskineB.Bowles(11) JamesW.Breyer(12) DonaldE.Graham(13) ReedHastings(14) PeterA.Thiel(15) Allexecutiveofficersanddirectorsasa group(12persons)(16) Other5%Stockholders: EntitiesaffiliatedwithAccelPartners(12) EntitiesaffiliatedwithDSTGlobal Limited(17) DustinMoskovitz(18) EntitiesaffiliatedwithGoldmanSachs(19) T.RowePriceAssociates,Inc. (20) OtherSellingStockholders: * (1) (2) (3)
Shares 42,395,203 42,395,203
% 36.1 36.1
Shares(1) 533,801,850 541,994,071 1,075,795,921 1,899,986 2,399,999 2,291,849 2,025,244 6,607,131 201,378,349 44,724,100
% 28.1 30.4 56.6 * * * * * * 11.3 * * 2.5
27.9 (4) 30.5 56.5 * * * * * * 11.2 * * 2.5 69.4 11.2 5.5 7.5 * *
42,395,203 36.1 1,326,579,470 69.6 201,378,349 11.3 31.2 56.1 5.1 94,567,945 5.3 133,698,645 7.5 * 12,158,743 *
36,711,928 65,947,241 6,033,630
(4) (5)
(6) (7) (8) (9)
Lessthan1%. There are currently no RSUs which will become releasable within 60 days of March 31, 2012 to the benefit of the individuals and entities listed in the table above. PercentageoftotalvotingpowerrepresentsvotingpowerwithrespecttoallsharesofourClassAandClassBcommonstock,asasingleclass.Theholdersof ourClassBcommonstockareentitledtotenvotespershare,andholdersofourClassAcommonstockareentitledtoonevotepershare.Formoreinformation aboutthevotingrightsofourClassAandClassBcommonstock,seeDescriptionofCapitalStockCommonStock. Consists of (i) 632,765 shares of Class B common stock held of record by Mr. Zuckerberg (ii) 3,416,823 shares of Class B common stock held of record by MarkZuckerberg,TrusteeofTheMarkZuckerberg2008AnnuityTrustdatedMarch13,2008(iii)409,752,262sharesofClassBcommonstockheldofrecord byMarkZuckerberg,TrusteeofTheMarkZuckerbergTrustdatedJuly7,2006and(iv)120,000,000sharesofClassBcommonstockissuableuponexerciseof optionsexercisablewithin60daysofMarch31,2012. WeexpectthatMarkZuckerberg,ourfounder,Chairman,andCEO,willofferandsellsharesinourinitialpublicoffering.Weexpectthatsubstantially allofthenetproceedsMr.Zuckerbergwillreceiveuponsuchsalewillbeusedtosatisfytaxesthathewillincurupontheexerciseofanoutstandingstockoption topurchase120,000,000sharesofourClassBcommonstock. ConsistsofsharesofourClassAandClassBcommonstockheldbyotherstockholdersoverwhich,exceptunderlimitedcircumstances,Mr.Zuckerbergholds an irrevocable proxy, pursuant to voting agreements between Mr. Zuckerberg, us and such stockholders, including certain of our directors and holders of more than 5% of our capital stock with respect to certain matters, as indicated in the footnotes below. We do not believe that the parties to these voting agreements constitute a group under Section 13 of the Securities Exchange Act of 1934, as amended, as Mr. Zuckerberg exercises voting control over these shares. For moreinformationaboutthevotingagreements,seeDescriptionofCapitalStockVotingAgreements. Consists of 1,899,986 shares of Class B common stock held of record by Sheryl K. Sandberg, Trustee of the Sheryl K. Sandberg 2008 Annuity Trust dated April15,2008.Ms.Sandbergalsoholds39,321,041RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. Consists of 2,399,999 shares of Class B common stock issuable upon exercise of options exercisable within 60 days of March 31, 2012. Mr. Ebersman also holds7,469,424RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. Consists of 2,291,849 shares of Class B common stock issuable upon exercise of options exercisable within 60 days of March 31, 2012. Mr. Schroepfer also holds6,144,188RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. Consistsof(i)35,600sharesofClassBcommonstockheldofrecordbyMr.Ullyotand(ii)1,989,644sharesofClassBcommonstockissuableuponexercise ofoptionsexercisablewithin60daysofMarch31,2012.Mr.Ullyotalsoholds3,782,818RSUswhicharesubjecttovestingconditionsnotexpectedtooccur within60daysofMarch31,2012.
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(10) Consistsof3,571,431sharesofClassBcommonstockheldofrecordbyAndreessenHorowitzFundII,L.P.,asnominee(AHFund),and3,035,700sharesof ClassBcommonstockheldofrecordbyFBAH,L.P.(FBAH).DoesnotincludeuptosharesofourcommonstockissuabletoAndreessen Horowitz Fund I, L.P. upon the closing of our acquisition of Instagram, Inc., including shares to be held in escrow. AH Equity Partners I, L.L.C. (AHEP)isthegeneralpartnerofAHFundandhassolevotingandinvestmentpoweroverthesecuritiesheldbyAHFundandFBAH.Mr.Andreessenisoneof the Managing Members of AHEP, and, therefore, may be deemed to share voting and investment power over the securities held in AH Fund and FBAH. The addressofAHEP,AHFund,andFBAHis2865SandHillRoad,Suite101,MenloPark,California94025.Mr.Andreessenalsoholds5,247,490RSUswhich aresubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. (11) Mr.Bowlesholds20,000RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. (12) Consistsof(i)11,703,132sharesofClassBcommonstockheldofrecordbyJamesW.Breyer,TrusteeofJamesW.Breyer2005TrustdatedMarch25,2005 (Breyer2005Trust)(ii)149,527,730sharesofClassBcommonstockheldofrecordbyAccelIXL.P.(AccelIX)(iii)15,931,653sharesofClassBcommon stock held of record by Accel IX Strategic Partners L.P. (Accel SP) (iv) 13,939,214 shares of Class B common stock held of record Accel Investors 2005 L.L.C.(Accel2005)(v)9,949,820sharesofClassBcommonstockheldofrecordbyAccelGrowthFundL.P.(AccelGrowth)(vi)194,230sharesofClassB common stock held of record by Accel Growth Fund Strategic Partners L.P. (Accel Growth SP) and (vii) 132,570 shares of Class B common stock held of record by Accel Growth Fund Investors 2009 L.L.C. (Accel Growth 2009). We have received notices of conversion from the holders of record, which provide thatinconnectionwithourinitialpublicoffering11,548,527ofthesharesofourClassBcommonstockheldofrecordbytheBreyer2005Trust,149,527,730 ofthesharesofourClassBcommonstockheldofrecordbyAccelIX,15,931,653ofthesharesofourClassBcommonstockheldofrecordbyAccelSP,and 13,939,214 of the shares of our Class B common stock held of record by Accel 2005 will be converted into an equivalent number of shares of our Class A common stock. Accel IX Associates L.L.C. (A9A) is the general partner of Accel IX and Accel SP and has sole voting and investment power over the shares held by these limited partnerships. Accel Growth Fund Associates L.L.C. (AGFA) is the general partner of Accel Growth and Accel Growth SP and has sole votingandinvestmentpoweroverthesharesheldbytheselimitedpartnerships.Mr.BreyerisoneofthemanagingmembersofA9A,AGFA,Accel2005,and Accel Growth 2009, and, therefore, may be deemed to share voting and investment power over the securities held by these entities. The address of A9A and AGFAandtheiraffiliatedentitiesis428UniversityAvenue,PaloAlto,California94301.Mr.BreyeristrusteeoftheBreyer2005Trust.10,431,225sharesof ClassBcommonstockaresubjecttoavotingagreementinfavorofMr.Zuckerbergreferredtoinfootnote(5)above. (13) Mr.Grahamholds1,000,000RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. (14) Mr.Hastingsholds20,000RSUswhicharesubjecttovestingconditionsnotexpectedtooccurwithin60daysofMarch31,2012. (15) Consistsof(i)32,875,670sharesofClassBcommonstockheldofrecordbyRivendellOneLLC(Rivendell)(ii)5,978,140sharesofClassBcommonstock heldofrecordbyTheFoundersFund,LP(FF)(iii)740,960sharesofClassBcommonstockheldofrecordbyTheFoundersFundII,LP(FFII)(iv)36,640 shares of Class B common stock held of record by The Founders Fund II Principals Fund, LP (FFPF) (v) 22,400 shares of Class B common stock held of recordbyTheFoundersFundIIEntrepreneursFund,LP(FFEF)and(vi)5,070,290sharesofClassBcommonstockheldofrecordbyLembas,LLC(Lembas). We have received a notice of conversion from Rivendell, which provides that in connection with our initial public offering all of the shares of our Class B common stock held of record by Rivendell will be converted into an equivalent number of shares of our Class A common stock. Mr. Thiel is the beneficial ownerofRivendellandhasvotingandinvestmentpoweroverthesecuritiesheldbyRivendell.Mr.Thielisamanagingmemberofthegeneralpartnerofeachof FF, FF II, FFPF, and FFEF, and, therefore, may be deemed to have voting and investment power over the securities held by these entities. Mr. Thiel is the managingmemberofLembasandhasvotingandinvestmentpoweroverthesecuritiesheldbyLembas.111,884sharesofClassBcommonstockaresubjectto avotingagreementinfavorofMr.Zuckerbergreferredtoinfootnote(5)above. (16) Consists of (i) 42,395,203 shares of Class A common stock (ii) 1,199,897,978 shares of Class B common stock and (iii) 126,681,492 shares of Class B commonstockissuableuponexerciseofoptionsexercisablewithin60daysofMarch31,2012. (17) Consists of (i) 17,213,540 shares of Class B common stock held of record by DST Global Limited (ii) 5,995,203 shares of Class A common stock held of record by DST Global II, L.P. (iii) 1,697,217 shares of Class A common stock held of record by DST Global III, L.P. (iv) 3,945,582 shares of Class A commonstockand24,290,447sharesofClassBcommonstockheldofrecordbyDSTUSALimitedand(v)25,073,926sharesofClassAcommonstockand 53,063,958 shares of Class B common stock held of record by DST USA II Limited. Yuri Milner holds ultimate voting and investment power over the securitiesheldbytheseentities.TheaddressofDSTGlobalLimited,DSTGlobalII,L.P.,DSTGlobalIII,L.P.,DSTUSALimited,andDSTUSAIILimited is c/o Tulloch & Co., 4 Hill Street, London W1J 5NE, United Kingdom. 36,711,928 shares of Class A common stock and 94,567,945 shares of Class B commonstockaresubjecttoavotingagreementinfavorofMr.Zuckerbergreferredtoinfootnote(5)above.DSTGlobalLimitedanditsaffiliatesarenolonger affiliated with Mail.ru Group Limited (f/k/a Digital Sky Technologies Limited). For more information, see Related Party TransactionsConversion Agreement. (18) Consists of (i) 174,165 shares of Class B common stock held of record by Dustin A. Moskovitz, Trustee of The Justin M. Rosenstein 2009 Trust, a trust establishedpursuanttotheJustinM.Rosenstein2009TrustAgreement(ii)114,256,629sharesofClassBcommonstockheldofrecordbyDustinMoskovitz, Trustee of The Dustin A. Moskovitz Trust dated December 27, 2005 (iii) 14,404,516 shares of Class B common stock held of record by Dustin Moskovitz, TrusteeofTheDustinMoskovitz2008AnnuityTrustdatedMarch10,2008and(iv)4,863,335sharesofClassBcommonstockheldofrecordbyJustinM. Rosenstein, Trustee of The Dustin A. Moskovitz 2009 Trust, a trust established pursuant to the Dustin A. Moskovitz 2009 Trust Agreement dated January 1, 2009.Mr.MoskovitzistrusteeorbeneficiaryofTheJustinM.Rosenstein2009Trust,TheDustinA.MoskovitzTrustdatedDecember27,2005,TheDustin Moskovitz 2008 Annuity Trust dated March 10, 2008, and The Dustin A. Moskovitz 2009 Trust. The address of Mr. Moskovitz is P.O. Box 2929, San Francisco,California94126.133,698,645sharesofClassBcommonstockaresubjecttoavotingagreementinfavorofMr.Zuckerbergreferredtoinfootnote (5)above.
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(19) Consistsof(i)14,214,807sharesofClassAcommonstockheldofrecordbyTheGoldmanSachsGroup,Inc.(ii)2,598,652sharesofClassAcommonstock held of record by Goldman Sachs Investment Partners Master Fund, L.P. (iii) 1,010,587 shares of Class A common stock held of record by Goldman Sachs Investment Partners Private Opportunities Holdings, L.P. and (iv) 48,123,195 shares of Class A common stock held of record by FBDC Investors Offshore Holdings, L.P. ((ii)(iv), collectively, the Goldman Sachs Limited Partnerships). Affiliates of The Goldman Sachs Group, Inc. are the general partners of the Goldman Sachs Limited Partnerships. GS Investment Strategies, LLC is the investment manager of the Goldman Sachs Limited Partnerships. GS Investment Strategies,LLCisawhollyownedsubsidiaryofTheGoldmanSachsGroup,Inc.Decisionsregardingthevotingordispositionofthesharesin(i)aboveheldby TheGoldmanSachsGroup,Inc.aremadebyaninvestmentcommittee(oranauthorizedsubcommitteeordesigneethereof).Thecurrentvotingmembersofthis committeeare:CraigBroderick,DavidSolomon,GaryCohn,Liz(Beshel)Robinson,MichaelS.Sherwood,SarahSmith,EstaStecher,andDavidViniar.GS InvestmentStrategies,LLCexercisesvotingandinvestmentpowerwithrespecttothesharesin(ii)(iv)aboveheldbytheGoldmanSachsLimitedPartnerships. TheinvestmentcommitteewithinGSInvestmentStrategies,LLCthatadvisestheGoldmanSachsLimitedPartnershipscurrentlyincludesthefollowingvoting members:RaananAgus,KennethEberts,HidekiKinuhata,GauravBhandari,TerenceTing,NickAdvani,SabrinaLiak,andJoelSchwartz.TheaddressofThe GoldmanSachsGroup,Inc.,GSInvestmentStrategies,LLC,andtheGoldmanSachsLimitedPartnershipsis200WestStreet,NewYork,NY10282. (20) Consistsof(i)6,033,630sharesofClassAcommonstockheldofrecordby80fundsandaccountsadvisedorsubadvisedbyT.RowePriceAssociates,Inc. and(ii)12,158,743sharesofClassBcommonstockheldofrecordby76fundsandaccountsadvisedorsubadvisedbyT.RowePriceAssociates,Inc.T.Rowe PriceAssociates,Inc.servesasinvestmentadviserwithpowertodirectinvestmentsand/orsolepowertovotethesecuritiesownedbythesefundsandaccounts. The T. Rowe Price Proxy Committee develops the firms positions on all major proxy voting issues, creates guidelines, and oversees the voting process. The funds and accounts that hold our securities are each managed by a T. Rowe Price portfolio manager. Ultimately, the T. Rowe Price portfolio manager of each fundoraccounthassoleorsharedvotingpower(sharedwithanaccount)andsoleinvestmentpowerinrespectofcompaniesinhisportfolio.TheT.RowePrice portfolio managers of the funds and accounts that hold our securities are collectively listed as follows: Joseph Milano, Paul R. Bartolo, Robert Sharps, Daniel Martino, David Eiswert, Kennard Allen, Donald Peters, Thomas Huber, Larry Puglia, and Robert Gensler. For purposes of reporting requirements of the Securities Exchange Act of 1934, T. Rowe Price Associates, Inc. may be deemed to be the beneficial owner of all the shares listed. T. Rowe Price Associates, Inc.isthewhollyownedsubsidiaryofT.RowePriceGroup,Inc.,whichisapubliclytradedfinancialservicesholdingcompany.TheaddressforT.RowePrice Associates,Inc.is100EastPrattStreet,Baltimore,MD21202.T.RowePriceInvestmentServices,Inc.(TRPIS),aregisteredbrokerdealer,isasubsidiaryof T.RowePriceAssociates,Inc.TRPISwasformedprimarilyforthelimitedpurposeofactingastheprincipalunderwriterofsharesofthefundsintheT.Rowe Pricefundfamily.TRPISdoesnotengageinunderwritingormarketmakingactivitiesinvolvingindividualsecurities.
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Table of Contents DESCRIPTIONOFCAPITALSTOCK Uponthecompletionofourinitialpublicoffering,ourauthorizedcapitalstockwillconsistof5,000,000,000sharesof ClassAcommonstock,$0.000006parvaluepershare,4,141,000,000sharesofClassBcommonstock,$0.000006parvalue per share, and 100,000,000 shares of undesignated preferred stock, $0.000006 par value per share. A description of the material terms and provisions of our restated certificate of incorporation and restated bylaws that will be in effect at the closingourinitialpublicofferingandaffectingtherightsofholdersofourcapitalstockissetforthbelow.Thedescriptionis intendedasasummary,andisqualifiedinitsentiretybyreferencetotheformofourrestatedcertificateofincorporationand the form of our restated bylaws to be adopted in connection with our initial public offering that will be filed with the registrationstatementrelatingtothisprospectus. AsofMarch31,2012,andaftergivingeffecttotheautomaticconversionofallofouroutstandingpreferredstockinto ClassBcommonstockinconnectionwithourinitialpublicoffering,therewereoutstanding: 117,549,393sharesofourClassAcommonstockheldbyapproximately115stockholders 1,780,535,644sharesofourClassBcommonstockheldbyapproximately1,305stockholders 236,756,442sharesissuableuponexerciseofoutstandingstockoptionsand 378,429,048sharessubjecttooutstandingrestrictedstockunits(RSUs).
CommonStock DividendRights Subjecttopreferencesthatmayapplytosharesofpreferredstockoutstandingatthetime,theholdersofoutstanding sharesofourcommonstockareentitledtoreceivedividendsoutoffundslegallyavailableifourboardofdirectors,inits discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine.SeeDividendPolicyformoreinformation. VotingRights TheholdersofourClassBcommonstockareentitledtotenvotespershare,andholdersofourClassAcommonstock areentitledtoonevotepershare.TheholdersofourClassAcommonstockandClassBcommonstockvotetogetherasa singleclass,unlessotherwiserequiredbylaw.DelawarelawcouldrequireeitherholdersofourClassAcommonstockorour ClassBcommonstocktovoteseparatelyasasingleclassinthefollowingcircumstances: ifweweretoseektoamendourcertificateofincorporationtoincreasetheauthorizednumberofsharesofaclassof stock, or to increase or decrease the par value of a class of stock, then that class would be required to vote separatelytoapprovetheproposedamendmentand if we were to seek to amend our certificate of incorporation in a manner that alters or changes the powers, preferencesorspecialrightsofaclassofstockinamannerthataffecteditsholdersadversely,thenthatclasswould berequiredtovoteseparatelytoapprovetheproposedamendment.
Stockholders do not have the ability to cumulate votes for the election of directors. Our restated certificate of incorporationandrestatedbylawsthatwillbeineffectattheclosingofourinitialpublicofferingwillprovideforaclassified boardofdirectorsconsistingofthreeclassesofapproximatelyequalsize,eachservingstaggeredthreeyearterms,whenthe outstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvotingpowerofourcommon stock.OurdirectorswillbeassignedbythethencurrentboardofdirectorstoaclasswhentheoutstandingsharesofourClass Bcommonstockrepresentlessthanamajorityofthecombinedvotingpowerofourcommonstock. 143
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Table of Contents NoPreemptiveorSimilarRights Ourcommonstockisnotentitledtopreemptiverightsandisnotsubjecttoconversion,redemptionorsinkingfund provisions. RighttoReceiveLiquidationDistributions Upon our dissolution, liquidation or windingup, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilitiesandthepreferentialrightsandpaymentofliquidationpreferences,ifany,onanyoutstandingsharesofpreferred stock. Conversion TheoutstandingsharesofClassBcommonstockareconvertibleatanytimeasfollows:(1)attheoptionoftheholder,a share of Class B common stock may be converted at any time into one share of Class A common stock or (2) upon the electionoftheholdersofamajorityofthethenoutstandingsharesofClassBcommonstock,alloutstandingsharesofClass BcommonstockmaybeconvertedintosharesofClassAcommonstock.Inaddition,eachshareofClassBcommonstock willconvertautomaticallyintooneshareofClassAcommonstockuponanytransfer,whetherornotforvalue,exceptfor certaintransfersdescribedinourrestatedcertificateofincorporation,includingtransferstofamilymembers,trustssolelyfor thebenefitofthestockholderortheirfamilymembers,andpartnerships,corporations,andotherentitiesexclusivelyowned by the stockholder or their family members, and certain transfers to organizations that are exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Once converted or transferred and converted into ClassAcommonstock,theClassBcommonstockwillnotbereissued. PreferredStock Upon the closing of our initial public offering, no shares of preferred stock will be outstanding, but we will be authorized,subjecttolimitationsprescribedbyDelawarelaw,toissuepreferredstockinoneormoreseries,toestablishfrom timetotimethenumberofsharestobeincludedineachseriesandtofixthedesignation,powers,preferencesandrightsof thesharesofeachseriesandanyofitsqualifications,limitationsorrestrictions.Ourboardofdirectorsalsocanincreaseor decreasethenumberofsharesofanyseries,butnotbelowthenumberofsharesofthatseriesthenoutstanding,withoutany furthervoteoractionbyourstockholders.Ourboardofdirectorsmayauthorizetheissuanceofpreferredstockwithvotingor conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes,could,amongotherthings,havetheeffectofdelaying,deferringorpreventingachangeincontrolofourcompany andmayadverselyaffectthemarketpriceofourClassAcommonstockandthevotingandotherrightsoftheholdersofour commonstock.Wehavenocurrentplantoissueanysharesofpreferredstock. Options As of March 31, 2012, we had options to purchase 236,756,442 shares of our Class B common stock outstanding pursuanttoour2005StockPlanandtheOfficersPlan. RSUs AsofMarch31,2012,wehad378,429,048sharesofClassBcommonstocksubjecttoRSUsoutstandingpursuantto our2005StockPlan. 144
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Table of Contents VotingAgreements OurCEOhasenteredintovotingagreementswithcertainofourstockholders,whichvotingagreementswillremainin effect after the completion of this offering. These voting agreements cover approximately 42,395,203 shares of Class A commonstockand488,860,711sharesofClassBcommonstock,whichwillrepresentapproximately%oftheoutstanding votingpowerofourcapitalstockafterourinitialpublicoffering. Underonetypeofvotingagreement(whichisfiledasanexhibittotheregistrationstatementofwhichthisprospectusis apartasaType1HolderVotingAgreement),stockholdersagreedtovotealloftheirsharesasdirectedby,andgrantedan irrevocable proxy to, Mr. Zuckerberg at his discretion on all matters to be voted upon by stockholders. The following individualsandentitiesholdsharesofourcapitalstockthataresubjecttothistypeofvotingagreement:ARPI2,LLCMatt CohlerandcertainaffiliatedentitiesGregoryDruckmanMichaelDruckmanRichardDruckmanStevenDruckmanThe FoundersFund,LPGlynnPartnersHommelsHoldingGmbHAdamMoskovitzDustinMoskovitzandcertainaffiliated entities Nancy and Richard Moskovitz and certain affiliated entities Sean Parker and certain affiliated entities Cara & Robert Scudder certain entities affiliated with Technology Crossover Ventures Valiant Capital Opportunities, LLC and VHPI2,LLC. Under a second type of voting agreement (which is filed as an exhibit to the registration statement of which this prospectusisapartasaType2HolderVotingAgreement),Mr.Zuckerberghastheauthority(andirrevocableproxy)to votetheseinvestorssharesathisdiscretiononallmatterstobevoteduponbystockholders,exceptforissuancesofcapital stock by us in excess of 20% of our then outstanding stock and matters which would disproportionately, materially and adverselyaffectsuchstockholder.Thistypeofvotingagreementalsoprovidesthattheinvestorshallnot:(1)acquireany ownership of any of our assets or business, (2) make any solicitation of proxies with respect to the voting of any of our securities, (3) form any group within the meaning of Section 13(d) of the Exchange Act, (4) nominate any person as directorwhoisnotnominatedbythethenincumbentdirectors,proposeanymattertobevoteduponbyourstockholdersor initiateorvoteinfavoroforcallforaspecialmeetingofthestockholders,or(5)publiclyannounceanintentiontodoanyof theabove.Followingthecompletionofourinitialpublicoffering,atransfereeofthesharescurrentlysubjecttothistypeof voting agreement shall no longer be subject to the terms of the voting agreement if we have a twoclass capital stock structureandapartytotheagreementistransferringClassBcommonstockthat,uponcompletionofthetransfer,becomes Class A common stock or is transferring Class A common stock. DST Global Limited and certain affiliated entities and Mail.ruGroupLimitedholdsharesofourcapitalstockthataresubjecttothistypeofvotingagreement. Thethirdtypeofvotingagreement(whichisfiledasanexhibittotheregistrationstatementofwhichthisprospectusis apartasaType3HolderVotingAgreement)containsthesamesubstantiveprovisionsasthesecondtypeofagreement. Forsomeofthepartiestothistypeofvotingagreement,theprovisionsoftheagreementdonotapplytosharesheldbythe investorspriortotheirsecondarypurchases.Thefollowingentitiesholdsharesofourcapitalstockthataresubjecttothis type of voting agreement: certain entities affiliated with Accel Partners and James W. Breyer, a member of our board of directorscertainentitiesaffiliatedwithElevationPartnersFelarmonGroupLimitedcertainentitiesaffiliatedwithGreylock Partners Li Ka Shing (Canada) Foundation certain entities affiliated with Meritech Capital Partners certain entities affiliated with Anand Rajaraman Tiger Global FB Holdings, LLC and certain entities affiliated with Venkatesh Harinarayan. Under a fourth type of voting agreement (which is filed as an exhibit to the registration statement of which this prospectusisapartasaType4HolderVotingAgreement),Mr.Zuckerberghastheauthority(andirrevocableproxy)to votetheseinvestorssharesathisdiscretiononallmatterstobevoteduponbystockholders,exceptforissuancesofcapital stock by us in excess of 20% of our then outstanding stock and matters which would disproportionately, materially and adverselyaffectsuchstockholder.Thistypeofvotingagreementdoesnotcontaintherestrictiveprovisionscontainedinthe second and third types of voting agreements with respect to acquiring ownership of our assets or business, making a solicitationofproxieswithrespecttovotingofanyofoursecurities,formingagroupwithinthemeaningofSection13(d) of the Exchange Act, or nominating any person as a director who is not nominated by the then incumbent directors or proposing 145
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Table of Contents anymatterstobevoteduponbyourstockholdersorinitiatingorvotinginfavoroforcallingforaspecialmeetingofthe stockholders.Thefollowingindividualsandentitiesholdsharesofourcapitalstockthataresubjecttothistypeofvoting agreement:GlynnPartners,L.P.,LiKaShing(Canada)Foundation,MontecitoVenturesVI,LLC,SiliconValleyCommunity Foundation,WilliamShea,andValiantCapitalOpportunities,LLC. UntilMr.Zuckerbergsdeath,232,542,558sharesofourClassBcommonstockwillremainsubjecttotheprovisionsof a voting agreement regardless of any sale, transfer, assignment, pledge, or other disposition of the shares, provided, that 6,773,633 of these shares will no longer be subject to the provisions of a voting agreement if an investor sells, transfers, assigns,pledges,orotherwisedisposesoforencumbersthesharesafterthedatethatissixmonthsfollowingourinitialpublic offering.Exceptforthe232,542,558sharesdescribedintheprecedingsentence,anysharessubjecttoavotingagreement will no longer be subject to the provisions of the voting agreement if an investor sells, transfers, assigns, pledges, or otherwise disposes of or encumbers the shares subject to the voting agreements after the completion of our initial public offering.Inaddition,votingagreementscovering42,395,203sharesofourClassAcommonstockand219,580,565sharesof ourClassBcommonstockwillterminateifMr.Zuckerbergisnolongeradirector,nolongerdevotingsubstantiallyallofhis businesseffortstoourcompany,andheholdslessthan210,758,960sharesofourcapitalstock. WedonotbelievethatthepartiestothesevotingagreementsconstituteagroupunderSection13oftheExchange Act,asMr.Zuckerbergexercisesvotingcontroloverthesharesheldbythesestockholders. RegistrationRights Afterourinitialpublicoffering,holdersofuptoapproximatelysharesofourcommonstockoutstandingwillbe entitledtocertainrightswithrespecttoregistrationofsuchsharesundertheSecuritiesAct.Thesesharesarereferredtoas registrablesecurities.TheholdersoftheseregistrablesecuritiespossessregistrationrightspursuanttothetermsofourSixth AmendedandRestatedInvestorsRightsAgreementdatedasofDecember27,2010(IRA)andaredescribedinadditional detail below. We, along with entities affiliated with Mr. Andreessen, Mr. Thiel, Mr. Breyer and Accel Partners, and DST GlobalLimited,aswellascertainotherparties,arepartiestotheIRA.WeoriginallyenteredintotheIRAinconnectionwith ourSeriesAfinancingin2005anditwasamendedineachofourfuturepreferredstockfinancingrounds.TheIRAwasmost recentlyamendedinDecember2010. DemandRegistrationRights UnderourIRA,uponthewrittenrequestoftheholdersofamajorityoftheregistrablesecuritiesthenoutstandingthat we file a registration statement under the Securities Act with an anticipated aggregate price to the public of at least $10 million,wewillbeobligatedtouseourcommerciallyreasonableeffortstoregisterthesaleofallregistrablesecuritiesthat holders may request in writing to be registered within 20 days of the mailing of a notice by us to all holders of such registration.Thedemandregistrationrightsmaynotbeexerciseduntilsixmonthsafterourinitialpublicoffering.Weare requiredtoeffectnomorethanthreeregistrationstatementswhicharedeclaredororderedeffective.Wemaypostponethe filingofaregistrationstatementforupto120daysonceina12monthperiodifinthegoodfaithjudgmentofourboardof directorssuchregistrationwouldbedetrimentaltous,andwearenotrequiredtoeffectthefilingofaregistrationstatement duringtheperiodbeginning60dayspriortoourgoodfaithestimateofthedateofthefilingof,andendingonadate90days followingtheeffectivedateof,aregistrationinitiatedbyus(unlesssuchofferingisourinitialpublicoffering,inwhichcase suchendingdateis180daysfollowingsuchregistration). PiggybackRegistrationRights Ifweregisteranyofoursecuritiesforpublicsale,wewillhavetouseallcommerciallyreasonableeffortstoregisterall registrablesecuritiesthattheholdersofsuchsecuritiesrequestinwritingberegisteredwithin20daysofmailingofnoticeby ustoallholdersoftheproposedregistration.However,thisrightdoesnotapplytoa 146
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Table of Contents registration relating to any of our stock plans, the offer and sale of debt securities, a corporate reorganization or other transactionunderRule145oftheSecuritiesAct,oraregistrationonanyregistrationformthatdoesnotincludesubstantially the same information as would be required to be included in a registration statement covering the sale of the registrable securities.Themanagingunderwriterofanyunderwrittenofferingwillhavetherighttolimit,duetomarketingreasons,the numberofsharesregisteredbytheseholdersto30%ofthetotalsharescoveredbytheregistrationstatement,unlesssuch offeringisourinitialpublicoffering,inwhichcase,theseholdersmaybeexcludediftheunderwritersdeterminethatthesale oftheirsharesmayjeopardizethesuccessoftheoffering. FormS3RegistrationRights Theholdersofatleast30%oftheregistrablesecuritiescanrequestthatweregisteralloraportionoftheirshareson FormS3ifweareeligibletofilearegistrationstatementonFormS3andtheaggregatepricetothepublicoftheshares offeredisatleast$2million.WearerequiredtofilenomorethantworegistrationstatementsonFormS3uponexerciseof theserightsper12monthperiod.Wemaypostponethefilingofaregistrationstatementforupto120daysonceina12 monthperiodifinthegoodfaithjudgmentofourboardofdirectorssuchregistrationwouldbedetrimentaltous. RegistrationExpenses Wewillpayallexpensesincurredinconnectionwitheachoftheregistrationsdescribedabove,exceptforunderwriting discountsandcommissions.However,wewillnotpayforanyexpensesofanydemandorFormS3registrationiftherequest issubsequentlywithdrawnattherequestofamajorityoftheholdersoftheregistrablesecuritiestoberegistered,subjectto limitedexceptions. ExpirationofRegistrationRights Theregistrationrightsdescribedabovewillsurviveourinitialpublicofferingandwillterminateastoanystockholder atsuchtimeasallofsuchstockholderssecurities(togetherwithanyaffiliateofthestockholderwithwhomsuchstockholder mustaggregateitssales)couldbesoldwithoutcompliancewiththeregistrationrequirementsoftheSecuritiesActpursuant toRule144orfollowingadeemedliquidationeventunderourcurrentrestatedcertificateofincorporation,butinanyevent nolaterthanthefiveyearanniversaryofourinitialpublicoffering. AntiTakeoverProvisions SolongastheoutstandingsharesofourClassBcommonstockrepresentamajorityofthecombinedvotingpowerof commonstock,MarkZuckerbergwilleffectivelycontrolallmatterssubmittedtoourstockholdersforavote,aswellasthe overallmanagementanddirectionofourcompany,whichwillhavetheeffectofdelaying,deferringordiscouraginganother personfromacquiringcontrolofourcompany. AftersuchtimeasthesharesofourClassBcommonstocknolongerrepresentamajorityofthecombinedvotingpower ofourcommonstock,theprovisionsofDelawarelaw,ourrestatedcertificateofincorporationandourrestatedbylawsmay havetheeffectofdelaying,deferringordiscouraginganotherpersonfromacquiringcontrolofourcompany. DelawareLaw Section203oftheDelawareGeneralCorporationLawpreventssomeDelawarecorporationsfromengaging,undersome circumstances,inabusinesscombination,whichincludesamergerorsaleofatleast10%ofthecorporationsassetswithany interestedstockholder,meaningastockholderwho,togetherwithaffiliates 147
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Table of Contents andassociates,ownsor,withinthreeyearspriortothedeterminationofinterestedstockholderstatus,didown15%ormore ofthecorporationsoutstandingvotingstock,unless: thetransactionisapprovedbytheboardofdirectorspriortothetimethattheinterestedstockholderbecamean interestedstockholder uponconsummationofthetransactionwhichresultedinthestockholdersbecominganinterestedstockholder,the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transactioncommenced,excludingstockownedbydirectorswhoarealsoofficersofthecorporationor subsequent to such time that the stockholder became an interested stockholder the business combination is approvedbytheboardofdirectorsandauthorizedatanannualorspecialmeetingofstockholdersbyatleasttwo thirdsoftheoutstandingvotingstockwhichisnotownedbytheinterestedstockholder.
A Delaware corporation may opt out of these provisions with an express provision in its original certificate of incorporationoranexpressprovisioninitscertificateofincorporationorbylawsresultingfromastockholdersamendment approvedbyatleastamajorityoftheoutstandingvotingshares.Wehaveoptedoutoftheseprovisions. RestatedCertificateofIncorporationandBylawProvisions Ourrestatedcertificateofincorporationandourrestatedbylawswillincludeanumberofprovisionsthatmayhavethe effectofdeterringhostiletakeoversordelayingorpreventingchangesincontrolofourcompany,evenaftersuchtimeasthe sharesofourClassBcommonstocknolongerrepresentamajorityofthecombinedvotingpowerofourcommonstock, includingthefollowing: SeparateClassBVoteforCertainTransactions.UntilthefirstdateonwhichtheoutstandingsharesofourClassB commonstockrepresentlessthan35%ofthecombinedvotingpowerofourcommonstock,anytransactionthat wouldresultinachangeincontrolofourcompanywillrequiretheapprovalofamajorityofouroutstandingClass B common stock voting as a separate class. This provision could delay or prevent the approval of a change in controlthatmightotherwisebeapprovedbyamajorityofoutstandingsharesofourClassAandClassBcommon stockvotingtogetheronacombinedbasis. Dual Class Stock. As described above in Common StockVoting Rights, our restated certificate of incorporation provides for a dual class common stock structure, which provides Mark Zuckerberg, our founder, Chairman,andCEO,withtheabilitytocontroltheoutcomeofmattersrequiringstockholderapproval,evenifhe owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our companyoritsassets. SupermajorityApprovals.Ourrestatedcertificateofincorporationandrestatedbylawsdonotprovidethatcertain amendmentstoourrestatedcertificateofincorporationorrestatedbylawsbystockholderswillrequiretheapproval oftwothirdsofthecombinedvoteofourthenoutstandingsharesofClassAandClassBcommonstock.However, whentheoutstandingsharesofourClassBcommonstockrepresentlessthanamajorityofthecombinedvoting powerofourcommonstock,certainamendmentstoourrestatedcertificateofincorporationorrestatedbylawsby stockholderswillrequiretheapprovaloftwothirdsofthecombinedvoteofourthenoutstandingsharesofClassA and Class B common stock. This will have the effect of making it more difficult to amend our certificate of incorporationorrestatedbylawstoremoveormodifycertainprovisions. Board of Directors Vacancies. Our restated certificate of incorporation and restated bylaws provide that stockholdersmayfillvacantdirectorships.WhentheoutstandingsharesofourClassBcommonstockrepresent lessthanamajorityofthecombinedvotingpowerofourcommonstock,ourrestatedcertificateofincorporation andrestatedbylawsauthorizeonlyourboardofdirectorstofillvacant 148
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Table of Contents directorships. In addition, the number of directors constituting our board of directors is set only by resolution adoptedbyamajorityvoteofourentireboardofdirectors.Theseprovisionsrestrictingthefillingofvacancieswill prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directorsbyfillingtheresultingvacancieswithitsownnominees. ClassifiedBoard.Ourboardofdirectorswillnotinitiallybeclassified.Ourrestatedcertificateofincorporationand restated bylaws provide that when the outstanding shares of our Class B common stock represent less than a majorityofthecombinedvotingpowerofourcommonstock,ourboardofdirectorswillbeclassifiedintothree classesofdirectorseachofwhichwillholdofficeforathreeyearterm.Inaddition,thereafter,directorsmayonlybe removedfromtheboardofdirectorsforcauseandonlybytheaffirmativevoteoftheholdersofatleastamajority ofthevotingpowerofthethenoutstandingsharesofourClassAandClassBcommonstock.Theexistenceofa classifiedboardcoulddelayasuccessfultenderofferorfromobtainingmajoritycontrolofourboardofdirectors, andtheprospectofthatdelaymightdeterapotentialofferor. Stockholder Action Special Meeting of Stockholders. Our restated certificate of incorporation provides that stockholderswillbeabletotakeactionbywrittenconsent.WhentheoutstandingsharesofourClassBcommon stockrepresentlessthanamajorityofthecombinedvotingpowerofourcommonstock,ourstockholderswillno longerbeabletotakeactionbywrittenconsent,andwillonlybeabletotakeactionatannualorspecialmeetings ofourstockholders.Stockholderswillnotbepermittedtocumulatetheirvotesfortheelectionofdirectors.Our restatedbylawsfurtherprovidethatspecialmeetingsofourstockholdersmaybecalledonlybyamajorityofour boardofdirectors,thechairmanofourboardofdirectors,ourchiefexecutiveofficerorourpresident. AdvanceNoticeRequirementsforStockholderProposalsandDirectorNominations.Ourrestatedbylawsprovide advancenoticeproceduresforstockholdersseekingtobringbusinessbeforeourannualmeetingofstockholders,or tonominatecandidatesforelectionasdirectorsatanymeetingofstockholders.Ourrestatedbylawsalsospecify certainrequirementsregardingtheformandcontentofastockholdersnotice.Theseprovisionsmayprecludeour stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directorsatourmeetingsofstockholders. IssuanceofUndesignatedPreferredStock.Ourboardofdirectorshastheauthority,withoutfurtheractionbythe stockholders, to issue up to 100,000,000 shares of undesignated preferred stock with rights and preferences, includingvotingrights,designatedfromtimetotimebytheboardofdirectors.Theexistenceofauthorizedbut unissuedsharesofpreferredstockenablesourboardofdirectorstorendermoredifficultortodiscourageanattempt toobtaincontrolofusbymeansofamerger,tenderoffer,proxycontestorotherwise.
ChoiceofForum OurrestatedcertificateofincorporationwillprovidethattheCourtofChanceryoftheStateofDelawarewillbethe exclusiveforumforanyderivativeactionorproceedingbroughtonourbehalfanyactionassertingabreachoffiduciary duty any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificateofincorporationorourrestatedbylawsanyactiontointerpret,apply,enforce,ordeterminethevalidityofour restated certificate of incorporation or bylaws or any action asserting a claim against us that is governed by the internal affairsdoctrine.Theenforceabilityofsimilarchoiceofforumprovisionsinothercompaniescertificatesofincorporationhas beenchallengedinlegalproceedings,anditispossiblethatacourtcouldfindthesetypesofprovisionstobeinapplicableor unenforceable. Listing WehaveappliedtolistourcommonstockontheNASDAQGlobalSelectMarketunderthesymbolFB. TransferAgentandRegistrar ThetransferagentandregistrarforourcommonstockisComputershareTrustCompany,N.A. 149
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Table of Contents SHARESELIGIBLEFORFUTURESALE Beforeourinitialpublicoffering,therehasnotbeenapublicmarketforsharesofourClassAcommonstock.Future sales of substantial amounts of shares of our common stock, including shares issued upon the settlement of RSUs and exercise of outstanding options, in the public market after our initial public offering, or the possibility of these sales occurring,couldcausetheprevailingmarketpriceforourcommonstocktofallorimpairourabilitytoraiseequitycapitalin thefuture. Afterourinitialpublicoffering,wewillhaveoutstandingsharesofourClassAcommonstockandshares ofourClassBcommonstock,basedonthenumberofsharesoutstandingasofMarch31,2012.Thisincludesshares thatweandthesellingstockholdersaresellinginourinitialpublicoffering,whichsharesmayberesoldinthepublicmarket immediatelyfollowingourinitialpublicoffering,andassumesnoadditionalexerciseofoutstandingoptions(otherthanthe exerciseoftheoptionheldbyMr.Zuckerbergdescribedelsewhereinthisprospectus).Inaddition,weexpecttoissue shares of our Class B common stock upon the net settlement of restricted stock units (RSUs) approximately six months following our initial public offering. Shares of our Class B common stock are convertible into an equivalent number of sharesofourClassAcommonstockandgenerallyconvertintosharesofourClassAcommonstockupontransfer. Thesharesofcommonstockthatwerenotofferedandsoldinourinitialpublicofferingaswellasshares underlyingoutstandingRSUswillbeuponissuance,restrictedsecurities,asthattermisdefinedinRule144underthe SecuritiesAct.TheserestrictedsecuritiesareeligibleforpublicsaleonlyiftheyareregisteredundertheSecuritiesActorif theyqualifyforanexemptionfromregistrationunderRule144orRule701undertheSecuritiesAct,whicharesummarized below. Asaresultofthelockupagreementsandmarketstandoffprovisionsdescribedbelowandsubjecttotheprovisionsof Rules 144 and 701 under the Securities Act, these restricted securities will be available for sale in the public market as follows: onthedateofthisprospectus,noneoftheserestrictedsecuritieswillbeavailableforsaleinthepublicmarket 91daysafterthedateofthisprospectus,sharesheldbythesellingstockholdersotherthanMr.Zuckerberg approximatelysixmonthsafterthedateofthisprospectus,approximatelysharesunderlyingnetsettled RSUs 181daysafterthedateofthisprospectus,shares 211daysafterthedateofthisprospectus,sharesheldbythesellingstockholders beginningoneyearafterthedateofthisprospectus,sharesheldbyMail.ruGroupLimitedandDSTGlobal Limitedandtheirrespectiveaffiliatesand beginning18monthsafterthedateofthisprospectus,sharesheldbyMail.ruGroupLimitedandDST GlobalLimitedandtheirrespectiveaffiliates.
Ofthe116,756,442sharesofourClassBcommonstockthatweresubjecttostockoptionsoutstanding(andnotheldby Mr.Zuckerberg)asofMarch31,2012,optionstopurchase104,184,511sharesofClassBcommonstockwerevestedasof March31,2012andtheClassBcommonstockunderlyingsuchoptionswillbeeligibleforsaleapproximatelysixmonths afterthedateofthisprospectus.WeexpectanadditionalsharesofClassBcommonstocktobedelivereduponthe netsettlementofRSUsbetweenthedatethatisapproximatelysixmonthsafterthedateofthisprospectusandDecember31, 2012,whichshareswouldbeeligibleforsaleinthepublicmarketimmediatelyfollowingsettlement. 150
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Table of Contents Rule144 Ingeneral,underRule144ascurrentlyineffect,oncewehavebeensubjecttopubliccompanyreportingrequirements foratleast90days,apersonwhoisnotdeemedtohavebeenoneofouraffiliatesforpurposesoftheSecuritiesActatany time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the publicinformationrequirementsofRule144.Ifsuchapersonhasbeneficiallyownedthesharesproposedtobesoldforat leastoneyear,includingtheholdingperiodofanypriorownerotherthanouraffiliates,thenthatpersonisentitledtosell thoseshareswithoutcomplyingwithanyoftherequirementsofRule144. Ingeneral,underRule144,ascurrentlyineffect,ouraffiliatesorpersonssellingsharesonbehalfofouraffiliatesare entitledtosellupontheexpirationofthelockupagreementsdescribedbelow,withinanythreemonthperiodbeginning 90daysafterthedateofthisprospectus,anumberofsharesthatdoesnotexceedthegreaterof: 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediatelyafterourinitialpublicoffering,or theaverageweeklytradingvolumeofthecommonstockduringthefourcalendarweeksprecedingthefilingofa noticeonForm144withrespecttosuchsale.
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain mannerofsaleprovisionsandnoticerequirementsandtotheavailabilityofcurrentpublicinformationaboutus. Rule701 Ingeneral,underRule701ascurrentlyineffect,anyofouremployees,consultantsoradvisorswhopurchaseshares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effectivedateofourinitialpublicofferingthatwascompletedinrelianceonRule701andcompliedwiththerequirements ofRule701will,subjecttothelockuprestrictionsdescribedbelow,beeligibletoresellsuchshares90daysafterthedateof this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, containedinRule144. LockUpAgreementsandMarketStandoffProvisions Ourofficers,directors,employees,andsubstantiallyallofourstockholdershaveagreedwiththeunderwritersorus,not todisposeofanyofourcommonstockorsecuritiesconvertibleintoorexchangeableforsharesofourcommonstockfor specifiedperiodsoftimeafterthedateofthisprospectus,exceptwiththepriorwrittenconsentofMorganStanley&Co.LLC orus,asapplicable.Underthetermsoftheirlockupagreementswiththeunderwriters,thesellingstockholders,otherthan Mr.Zuckerberg,areeligibletoselluptosharesofourcommonstockintheaggregateonthedatethatis91days afterthedateofthisprospectus,uptosharesofourcommonstockintheaggregateonthedatethatis181days afterthedateofthisprospectus,andtheremainingsharesofourcommonstockheldbythem211daysafterthedateofthis prospectus.Underthetermsoftheirlockupagreementwiththeunderwriters,ourdirectors,ourexecutiveofficers,andcertain stockholdersnotsellingsharesinthisofferingareeligibletosellsharesofourcommonstock181daysafterthedateofthis prospectus. All other holders of our common stock, RSUs and options have previously entered into market standoff agreementswithusnottosellorotherwisetransferanyoftheircommonstockorsecuritiesconvertibleintoorexchangeable forsharesofcommonstockforaperiodthatextendsthrough180daysafterthedateofthisprospectus.Inaddition,Mail.ru GroupLimitedandDSTGlobalLimitedandtheirrespectiveaffiliateshaveenteredintoanagreementwithustonotselltheir sharesforcertainperiodsoftimerangingfromsixto18monthsfollowingthedateofthisprospectus.SeeRelatedParty TransactionsConversionAgreementforadditionalinformationaboutthisagreement. 151
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Table of Contents Inaddition,wehaveagreedwithourunderwritersnottosellanysharesofourcommonstockorsecuritiesconvertible intoorexchangeableforsharesofourcommonstockforaperiodof180daysafterthedateofthisprospectus,subjectto certaincustomaryexceptions.MorganStanley&Co.LLCmay,intheirsolediscretion,atanytime,releasealloranyportion ofthesharesfromtheserestrictions. See Underwriting for a more complete description of the lockup agreements that we and our directors, executive officers,andthesellingstockholdershaveenteredintowiththeunderwriters. RegistrationRights Upontheclosingofourinitialpublicoffering,certainholdersofsharesofourClassAcommonstock(includingsuch shares of Class A common stock issuable upon conversion of our Class B common stock) will be entitled to rights with respecttotheregistrationofthesaleofthesesharesundertheSecuritiesAct.Registrationofthesaleofthesesharesunderthe SecuritiesActwouldresultinthesesharesbecomingfullytradablewithoutrestrictionundertheSecuritiesActimmediately upon the effectiveness of the registration, except for shares purchased by affiliates. See Description of Capital Stock RegistrationRightsforadditionalinformation. RegistrationStatement WeintendtofilearegistrationstatementonFormS8undertheSecuritiesActcoveringallofthesharesofcommon stocksubjecttoRSUsandoptionsoutstanding,aswellasreservedforfutureissuance,underourstockplans.Weexpectto filethisregistrationstatementassoonaspracticableafterourinitialpublicoffering.However,noneofthesharesregistered onFormS8willbeeligibleforresaleuntiltheexpirationofthelockupagreementstowhichtheyaresubject. 152
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Table of Contents MATERIALU.S.FEDERALTAXCONSIDERATIONS FORNONU.S.HOLDERSOFCLASSACOMMONSTOCK This section summarizes the material U.S. federal income and estate tax considerations relating to the acquisition, ownership and disposition of our common stock by nonU.S. holders (defined below) pursuant to this offering. This summarydoesnotprovideacompleteanalysisofallpotentialU.S.federalincometaxconsiderationsrelatingthereto.The information provided below is based upon provisions of the Code, Treasury regulations promulgated thereunder, administrative rulings, and judicial decisions currently in effect. These authorities may change at any time, possibly retroactively,ortheInternalRevenueService(IRS),mightinterprettheexistingauthoritiesdifferently.Ineithercase,thetax considerationsofowningordisposingofourcommonstockcoulddifferfromthosedescribedbelow. Forpurposesofthissummary,anonU.S.holderisanyholderofourClassAcommonstock,otherthanapartnership, thatisnot: anindividualwhoisacitizenorresidentoftheUnitedStates acorporation,orotherentitytaxableasacorporation,createdororganizedunderthelawsoftheUnitedStates,any statethereinortheDistrictofColumbia atrustifit(1)issubjecttotheprimarysupervisionofaU.S.courtandoneofmoreU.S.personshaveauthorityto control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulationstobetreatedasaU.S.personor anestatewhoseincomeissubjecttoU.S.incometaxregardlessofsource.
Ifyouareanindividual,youmay,inmanycases,bedeemedtobearesidentalien,asopposedtoanonresidentalien,by virtueofbeingpresentintheUnitedStatesforatleast31daysinthecalendaryearandforanaggregateofatleast183days duringathreeyearperiodendinginthecurrentcalendaryear.Forthesepurposes,allthedayspresentinthecurrentyear, onethirdofthedayspresentintheimmediatelyprecedingyear,andonesixthofthedayspresentinthesecondpreceding yeararecounted.ResidentaliensaresubjecttoU.S.federalincometaxasiftheywereU.S.citizens.Suchanindividualis urged to consult his or her own tax advisor regarding the U.S. federal income tax consequences of the ownership or dispositionofourcommonstock.Ifapartnershiporotherpassthroughentityisabeneficialownerofourcommonstock,the taxtreatmentofapartnerinthepartnershiporanowneroftheentitywilldependuponthestatusofthepartnerorother ownerandtheactivitiesofthepartnershiporotherentity.Anypartnerinapartnershiporownerofapassthroughentity holdingsharesofourcommonstockshouldconsultitsowntaxadvisor. ThisdiscussionassumesthatanonU.S.holderwillholdourcommonstockasacapitalasset(generally,propertyheld for investment). The summary generally does not address tax considerations that may be relevant to particular investors because of their specific circumstances, or because they are subject to special rules, including, without limitation, if the investor is a former citizen or longterm resident of the United States, controlled foreign corporation, passive foreign investmentcompany,corporationthataccumulatesearningstoavoidU.S.federalincometax,realestateinvestmenttrust, regulated investment company, dealer in securities or currencies, financial institution, taxexempt entity, insurance company,personholdingourcommonstockaspartofahedging,integrated,conversionorconstructivesaletransactionora straddle, trader in securities that elects to use a marktomarket method of accounting, person liable for the alternative minimumtax,personwhoacquiredourcommonstockascompensationforservices,orpartnerinapartnershiporbeneficial owner of a passthrough entity that holds our common stock. Finally, the summary does not describe the effects of any applicableforeign,stateorlocallaws,or,excepttotheextentdiscussedbelow,theeffectsofanyapplicablegiftorestatetax laws. 153
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Table of Contents INVESTORS CONSIDERING THE PURCHASE OF OUR CLASS A COMMON STOCK SHOULD CONSULT THEIROWNTAXADVISORSREGARDINGTHEAPPLICATIONOFTHEU.S.FEDERALINCOMEANDESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCALLAWS,ANDTAXTREATIES. Dividends WedonotexpecttodeclareorpayanydividendsonourClassAcommonstockintheforeseeablefuture.Ifwedopay dividends on shares of our Class A common stock, however, such distributions will constitute dividends for U.S. federal incometaxpurposestotheextentpaidfromourcurrentoraccumulatedearningsandprofits,asdeterminedunderU.S.federal incometaxprinciples.Distributionsinexcessofourcurrentandaccumulatedearningsandprofitswillconstituteareturnof capital that is applied against and reduces, but not below zero, a nonU.S. holders adjusted tax basis in shares of our commonstock.AnyremainingexcesswillbetreatedasgainrealizedonthesaleorotherdispositionofourClassAcommon stock.SeeSaleofClassACommonStock. AnydividendpaidtoanonU.S.holderonourClassAcommonstockwillgenerallybesubjecttoU.S.withholdingtax at a 30% rate. The withholding tax might not apply, however, or might apply at a reduced rate, under the terms of an applicableincometaxtreatybetweentheUnitedStatesandthenonU.S.holderscountryofresidence.Youshouldconsult yourtaxadvisorsregardingyourentitlementtobenefitsunderarelevantincometaxtreaty.Generally,inorderforusorour payingagenttowithholdtaxatalowertreatyrate,anonU.S.holdermustcertifyitsentitlementtotreatybenefits.Anon U.S. holder generally can meet this certification requirement by providing a Form W8BEN (or any successor form) or appropriatesubstituteformtousorourpayingagent.IfthenonU.S.holderholdsthestockthroughafinancialinstitutionor otheragentactingontheholdersbehalf,theholderwillberequiredtoprovideappropriatedocumentationtotheagent.The holders agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. For payments made to a partnership or other passthrough entity, the certification requirements generally applytothepartnersorotherownersratherthantothepartnershiporotherentity,andthepartnershiporotherentitymust providethepartnersorotherownersdocumentationtousorourpayingagent.IfyouareeligibleforareducedrateofU.S. federalwithholdingtaxunderanincometaxtreaty,youmayobtainarefundorcreditofanyexcessamountswithheldby filinganappropriateclaimforarefundwiththeIRSinatimelymanner. DividendsreceivedbyanonU.S.holderthatareeffectivelyconnectedwithaU.S.tradeorbusinessconductedbythe nonU.S. holder, and if required by an applicable income tax treaty between the United States and the nonU.S. holders countryofresidence,areattributabletoapermanentestablishmentmaintainedbythenonU.S.holderintheUnitedStates, arenotsubjecttosuchwithholdingtax.Toobtainthisexemption,anonU.S.holdermustprovideuswithanIRSFormW 8ECIproperlycertifyingsuchexemption.Sucheffectivelyconnecteddividends,althoughnotsubjecttowithholdingtax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition to the graduatedtaxdescribedabove,dividendsreceivedbycorporatenonU.S.holdersthatareeffectivelyconnectedwithaU.S. tradeorbusinessofthecorporatenonU.S.holdermayalsobesubjecttoabranchprofitstaxatarateof30%orsuchlower rateasmaybespecifiedbyanapplicabletaxtreaty. SaleofClassACommonStock NonU.S.holderswillgenerallynotbesubjecttoU.S.federalincometaxonanygainsrealizedonthesale,exchangeor otherdispositionofourClassAcommonstockunless: thegain(1)iseffectivelyconnectedwiththeconductbythenonU.S.holderofaU.S.tradeorbusinessand(2)if required by an applicable income tax treaty between the United States and the nonU.S. holders country of residence,isattributabletoapermanentestablishment(or,incertaincasesinvolvingindividualholders,afixed base) maintained by the nonU.S. holder in the United States (in which case the special rules described below apply) 154
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Table of Contents thenonU.S.holderisanindividualwhoispresentintheUnitedStatesfor183daysormoreinthetaxableyearof thesale,exchangeorotherdispositionofourcommonstock,andcertainotherrequirementsaremet(inwhichcase thegainwouldbesubjecttoaflat30%tax,orsuchreducedrateasmaybespecifiedbyanapplicableincometax treaty,whichmaybeoffsetbyU.S.sourcecapitallosses,eventhoughtheindividualisnotconsideredaresidentof theUnitedStates)or therulesoftheForeignInvestmentinRealPropertyTaxAct(FIRPTA)treatthegainaseffectivelyconnectedwith aU.S.tradeorbusiness.
TheFIRPTArulesmayapplytoasale,exchangeorotherdispositionofourcommonstockifweare,orwerewithinthe shorter of the fiveyear period preceding the disposition and the nonU.S. holders holding period, a U.S. real property holdingcorporation,orUSRPHC.Ingeneral,wewouldbeaUSRPHCifinterestsinU.S.realestatecomprisedatleasthalfof ourbusinessassets.WedonotbelievethatweareaUSRPHCandwedonotanticipatebecomingoneinthefuture.Evenif webecomeaUSRPHC,aslongasourcommonstockisregularlytradedonanestablishedsecuritiesmarket,suchcommon stock will be treated as U.S. real property interests only if beneficially owned by a nonU.S. holder that actually or constructivelyownedmorethan5%ofouroutstandingcommonstockatsometimewithinthefiveyearperiodprecedingthe disposition. Ifanygainfromthesale,exchangeorotherdispositionofourClassAcommonstock,(1)iseffectivelyconnectedwitha U.S.tradeorbusinessconductedbyanonU.S.holderand(2)ifrequiredbyanapplicableincometaxtreatybetweenthe UnitedStatesandthenonU.S.holderscountryofresidence,isattributabletoapermanentestablishment(or,incertaincases involvingindividuals,afixedbase)maintainedbysuchnonU.S.holderintheUnitedStates,thenthegaingenerallywillbe subject to U.S. federal income tax at the same graduated rates applicable to U.S. persons, net of certain deductions and credits.IfthenonU.S.holderisacorporation,undercertaincircumstances,thatportionofitsearningsandprofitsthatis effectively connected with its U.S. trade or business, subject to certain adjustments, generally would be subject also to a branch profits tax. The branch profits tax rate is generally 30%, although an applicable income tax treaty between the UnitedStatesandthenonU.S.holderscountryofresidencemightprovideforalowerrate. U.S.FederalEstateTax TheestatesofnonresidentalienindividualsgenerallyaresubjecttoU.S.federalestatetaxonpropertywithaU.S.situs. BecauseweareaU.S.corporation,ourClassAcommonstockwillbeU.S.situspropertyandthereforewillbeincludedinthe taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedentscountryofresidenceprovidesotherwise. BackupWithholdingandInformationReporting TheCodeandtheTreasuryregulationsrequirethosewhomakespecifiedpaymentstoreportthepaymentstotheIRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returnsenabletheIRStodeterminewhethertherecipientproperlyincludedthepaymentsinincome.Thisreportingregimeis reinforced by backup withholding rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identificationnumbertothepayor,furnishinganincorrectidentificationnumber,orfailingtoreportinterestordividendson hisreturns.Thebackupwithholdingtaxrateiscurrently28%.Thebackupwithholdingrulesdonotapplytopaymentsto corporations,whetherdomesticorforeign. Payments to nonU.S. holders of dividends on Class A common stock generally will not be subject to backup withholding,solongasthenonU.S.holdercertifiesitsnonresidentstatus(andweorourpayingagentdonothaveactual knowledge or reason to know the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied) or otherwise establishes an exemption. The certification procedures to claim treaty benefits described in Dividendswillsatisfythecertificationrequirementsnecessarytoavoidthe 155
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Table of Contents backupwithholdingtaxaswell.WemustreportannuallytotheIRSanydividendspaidtoeachnonU.S.holderandthetax withheld, if any, with respect to these dividends. Copies of these reports may be made available to tax authorities in the countrywherethenonU.S.holderresides. UndertheTreasuryregulations,thepaymentofproceedsfromthedispositionofsharesofourClassAcommonstockby anonU.S.holdermadetoorthroughaU.S.officeofabrokergenerallywillbesubjecttoinformationreportingandbackup withholding unless the beneficial owner certifies, under penalties of perjury, among other things, its status as a non U.S. holder (and the broker does not have actual knowledge or reason to know the holder is a U.S. person) or otherwise establishesanexemption.ThepaymentofproceedsfromthedispositionofsharesofourClassAcommonstockbyanon U.S. holder made to or through a nonU.S. office of a broker generally will not be subject to backup withholding and informationreporting,exceptasnotedbelow.Informationreporting,butnotbackupwithholding,willapplytoapaymentof proceeds,evenifthatpaymentismadeoutsideoftheUnitedStates,ifyousellourcommonstockthroughanonU.S.office ofabrokerthatis: aU.S.person(includingaforeignbranchorofficeofsuchperson) acontrolledforeigncorporationforU.S.federalincometaxpurposes aforeignperson50%ormoreofwhosegrossincomefromcertainperiodsiseffectivelyconnectedwithaU.S.trade orbusinessor aforeignpartnershipifatanytimeduringitstaxyear(a)oneormoreofitspartnersareU.S.personswho,inthe aggregate,holdmorethan50%oftheincomeorcapitalinterestsofthepartnershipor(b)theforeignpartnershipis engagedinaU.S.tradeorbusiness
unlessthebrokerhasdocumentaryevidencethatthebeneficialownerisanonU.S.holderandcertainotherconditionsare satisfied,orthebeneficialownerotherwiseestablishesanexemption(andthebrokerhasnoactualknowledgeorreasonto knowtothecontrary). Backupwithholdingisnotanadditionaltax.AnyamountswithheldfromapaymenttoaholderofClassAcommon stockunderthebackupwithholdingrulescanbecreditedagainstanyU.S.federalincometaxliabilityoftheholderandmay entitletheholdertoarefund,providedthattherequiredinformationisfurnishedtotheIRSinatimelymanner. Recentlegislationandadministrativeguidancegenerallyimposeswithholdingatarateof30%onpaymentstocertain foreignentitiesofdividendsonandthegrossproceedsofdispositionsofU.S.commonstock,unlessvariousU.S.information reportingandduediligencerequirements(generallyrelatingtoownershipbyU.S.personsofinterestsinoraccountswith those entities) have been satisfied. These withholding requirements are expected to be phased in for dividend payments madeonorafterJanuary1,2014,andforpaymentsofgrossproceedsofdispositionsofU.S.commonstockmadeonorafter January1,2015.NonU.S.holdersshouldconsulttheirtaxadvisorsregardingthepossibleimplicationsofthislegislationon theirinvestmentinourcommonstock. THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATIONONLY.ITISNOTTAXADVICE.EACHPROSPECTIVEINVESTORSHOULDCONSULTITSOWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR CLASS A COMMON STOCK, INCLUDINGTHECONSEQUENCESOFANYPROPOSEDCHANGEINAPPLICABLELAWS. 156
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Table of Contents UNDERWRITING Underthetermsandsubjecttotheconditionscontainedinanunderwritingagreementdatedthedateofthisprospectus, theunderwritersnamedbelow,forwhichMorganStanley&Co.LLCisactingasrepresentative,haveseverallyagreedto purchase,andweandthesellingstockholdershaveagreedtoselltothem,severally,thenumberofsharesindicatedbelow:

Name Numberof Shares
MorganStanley&Co.LLC J.P.MorganSecuritiesLLC Goldman,Sachs&Co. MerrillLynch,Pierce,Fenner&Smith Incorporated BarclaysCapitalInc. Allen&CompanyLLC CitigroupGlobalMarketsInc. CreditSuisseSecurities(USA)LLC DeutscheBankSecuritiesInc. RBCCapitalMarkets,LLC WellsFargoSecurities,LLC BlaylockRobertVanLLC BMOCapitalMarketsCorp. C.L.King&Associates,Inc. CabreraCapitalMarkets,LLC CastleOakSecurities,L.P. CowenandCompany,LLC. LazardCapitalMarketsLLC Lebenthal&Co.,LLC LoopCapitalMarketsLLC M.R.Beal&Company MacquarieCapital(USA)Inc. MurielSiebert&Co.,Inc. Oppenheimer&Co.Inc. PacificCrestSecuritiesLLC PiperJaffray&Co. RaymondJames&Associates,Inc. SamuelA.Ramirez&Company,Inc. Stifel,Nicolaus&Company,Incorporated TheWilliamsCapitalGroup,L.P. WilliamBlair&Company,L.L.C. Total: The underwriters and the representative are collectively referred to as the underwriters and the representative, respectively.TheunderwritersareofferingthesharesofClassAcommonstocksubjecttotheiracceptanceofthesharesfrom usandsubjecttopriorsale.Theunderwritingagreementprovidesthattheobligationsoftheseveralunderwriterstopayfor andacceptdeliveryofthesharesofClassAcommonstockofferedbythisprospectusaresubjecttotheapprovalofcertain legalmattersbytheircounselandtocertainotherconditions.Theunderwritersareobligatedtotakeandpayforallofthe sharesofClassAcommonstockofferedbythisprospectusifanysuchsharesaretaken.However,theunderwritersarenot requiredtotakeorpayforthesharescoveredbytheunderwritersoverallotmentoptiondescribedbelow.Ifanunderwriter defaults,the 157
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Table of Contents underwritingagreementprovidesthatthepurchasecommitmentsofthenondefaultingunderwritersmaybeincreased. TheunderwritersinitiallyproposetoofferpartofthesharesofClassAcommonstockdirectlytothepublicattheinitial public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concessionnotinexcessof$ashareunderthepublicofferingprice.AftertheinitialofferingofthesharesofClassA commonstock,theofferingpriceandothersellingtermsmayfromtimetotimebevariedbytherepresentative. Weandthesellingstockholdershavegrantedtotheunderwritersanoption,exercisablefor30daysfromthedateofthis prospectus,topurchaseuptoadditionalsharesofcommonstockatthepublicofferingpricelistedonthecoverpage ofthisprospectus,lessunderwritingdiscountsandcommissions.Theunderwritersmayexercisethisoptionsolelyforthe purposeofcoveringoverallotments,ifany,madeinconnectionwiththeofferingofthesharesofClassAcommonstock offeredbythisprospectus.Totheextenttheoptionisexercised,eachunderwriterwillbecomeobligated,subjecttocertain conditions,topurchaseaboutthesamepercentageoftheadditionalsharesofClassAcommonstockasthenumberlisted nexttotheunderwritersnameintheprecedingtablebearstothetotalnumberofsharesofClassAcommonstocklistednext tothenamesofallunderwritersintheprecedingtable. Thefollowingtableshowsthepershareandtotalpublicofferingprice,underwritingdiscountsandcommissions,and proceedsbeforeexpensestousandthesellingstockholders.Theseamountsareshownassumingbothnoexerciseandfull exerciseoftheunderwritersoptiontopurchaseuptoanadditionalsharesofcommonstock.
PerShare NoExercise Total FullExercise
Publicofferingprice Underwritingdiscountsandcommissionstobepaidby: Us Thesellingstockholders Proceeds,beforeexpenses,tous Proceeds,beforeexpenses,tothesellingstockholders
$ $ $ $ $
$ $ $ $ $
$ $ $ $ $
Theunderwritershaveagreedtoreimburseusforcertainexpensesinconnectionwithourinitialpublicoffering.The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $million,whichincludeslegal,accounting,andprintingcostsandvariousotherfeesassociatedwiththeregistration andlistingofourClassAcommonstock. Theunderwritershaveinformedusthattheydonotintendsalestodiscretionaryaccountstoexceed5%ofthetotal numberofsharesofClassAcommonstockofferedbythem. WehaveappliedtohaveourClassAcommonstockquotedontheNASDAQGlobalSelectMarketunderthetrading symbolFB. We,allofourdirectorsandexecutiveofficers,andthesellingstockholdershaveagreedthat,withoutthepriorwritten consentofMorganStanley&Co.LLConbehalfoftheunderwriters,weandtheywillnot,duringspecifiedperiodsoftime afterthedateofthisprospectus: offer,pledge,sell,contracttosell,sellanyoptionorcontracttopurchase,purchaseanyoptionorcontracttosell, grantanyoption,rightorwarranttopurchaselendorotherwisetransferordisposeof,directlyorindirectly,any sharesofcommonstockorothersecuritiesconvertibleintoorexercisableorexchangeableforcommonstock 158
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Table of Contents enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequencesofownershipofthecommonstockor makeademandfor,orinourcasefile,aregistrationstatementwiththeSECrelatingtotheofferingofanysharesof commonstockoranysecuritiesconvertibleintoorexercisableorexchangeableforcommonstock.
Therestrictionsdescribedintheimmediatelyprecedingparagrapharesubjecttocustomaryexceptions. In order to facilitate our initial public offering of the Class A common stock, the underwriters may engage in transactionsthatstabilize,maintainorotherwiseaffectthepriceoftheClassAcommonstock.Specifically,theunderwriters maysellmoresharesthantheyareobligatedtopurchaseundertheunderwritingagreement,creatingashortposition.Ashort saleiscoverediftheshortpositionisnogreaterthanthenumberofsharesavailableforpurchasebytheunderwritersunder theoverallotmentoption.Theunderwriterscancloseoutacoveredshortsalebyexercisingtheoverallotmentoptionor purchasingsharesintheopenmarket.Indeterminingthesourceofsharestocloseoutacoveredshortsale,theunderwriters willconsider,amongotherthings,theopenmarketpriceofsharescomparedtothepriceavailableundertheoverallotment option.Theunderwritersmayalsosellsharesinexcessoftheoverallotmentoption,creatinganakedshortposition.The underwritersmustcloseoutanynakedshortpositionbypurchasingsharesintheopenmarket.Anakedshortpositionis morelikelytobecreatediftheunderwritersareconcernedthattheremaybedownwardpressureonthepriceofthecommon stockintheopenmarketafterpricingthatcouldadverselyaffectinvestorswhopurchaseinourinitialpublicoffering.Asan additional means of facilitating our initial public offering, the underwriters may bid for, and purchase, shares of Class A common stock in the open market. The underwriting syndicate also may reclaim selling concessions allowed to an underwriteroradealerfordistributingtheClassAcommonstockintheoffering,ifthesyndicaterepurchasespreviously distributedClassAcommonstocktocoversyndicateshortpositionsortostabilizethepriceofthecommonstock.These activitiesmayraiseormaintainthemarketpriceoftheClassAcommonstockaboveindependentmarketlevelsorpreventor retardadeclineinthemarketpriceofthecommonstock.Theunderwritersarenotrequiredtoengageintheseactivitiesand mayendanyoftheseactivitiesatanytime. We, the selling stockholders, and the underwriters have agreed to indemnify each other against certain liabilities, includingliabilitiesundertheSecuritiesAct. Aprospectusinelectronicformatmaybemadeavailableonwebsitesmaintainedbyoneormoreunderwriters,orselling group members, if any, participating in our initial public offering. The representative may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocatedbytherepresentativetounderwritersthatmaymakeInternetdistributionsonthesamebasisasotherallocations. Theunderwritersandtheirrespectiveaffiliatesarefullservicefinancialinstitutionsengagedinvariousactivities,which mayincludesecuritiestrading,commercialandinvestmentbanking,financialadvisory,investmentmanagement,principal investment,hedging,financingandbrokerageactivities.Certainoftheunderwritersandtheirrespectiveaffiliateshave,from timetotime,performed,andmayinthefutureperform,variousfinancialadvisoryandinvestmentbankingservicesforus,for whichtheyreceivedorwillreceivecustomaryfeesandexpenses. From October 2010 through March 2012, 18 mutual funds and two other discretionary client accounts managed by Morgan Stanley Investment Management Inc., an affiliate of Morgan Stanley & Co. LLC, purchased an aggregate of 6,585,563 shares of our Class B common stock from certain existing stockholders for an aggregate purchase price of approximately$139million.Inaddition,ErskineB.Bowles,amemberofourboardofdirectors,alsoservesasamemberof theboardofdirectorsofMorganStanley. InFebruary2011,weenteredintoacreditagreementwithfivelenders,includingaffiliatesofMorganStanley&Co. LLC,J.P.MorganSecuritiesLLC,Goldman,Sachs&Co.,MerrillLynch,Pierce,Fenner&Smith 159
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Table of Contents Incorporated,andBarclaysCapitalInc.,toborrowupto$1,500millioninrevolvingloans.InSeptember2011,thecredit agreementwasamendedtoincreasetheborrowingcapacityto$2,500million.InFebruary2012,weterminatedthecredit facility provided for by this agreement and we entered into a new agreement for an unsecured fiveyear revolving credit facility with these lenders, as well as affiliates of Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, DeutscheBankSecuritiesInc.,RBCCapitalMarkets,LLC,andWellsFargoSecurities,LLC,thatallowsustoborrowupto $5,000 million for general corporate purposes. Concurrent with our entering into the new revolving credit facility, we enteredintoabridgecreditfacilitywiththelendersthatarepartiestoournewrevolvingcreditfacility.Thisbridgecredit facilityallowsustoborrowupto$3,000milliontofundtaxwithholdingandremittanceobligationsrelatedtothesettlement ofRSUsinconnectionwithourinitialpublicoffering.Foradditionalinformationonourcreditfacilities,seeManagements DiscussionandAnalysisofFinancialConditionandResultsofOperationsLiquidityandCapitalResources. In December 2010 and January 2011, affiliates of Goldman, Sachs & Co., one of the underwriters, purchased an aggregateof69,544,363sharesofourClassAcommonstockforanaggregatepurchasepriceof$1,450million.Aspartof the transaction, the affiliates entered into the Sixth Amended and Restated Investors Rights Agreement. Pursuant to the purchaseagreement,oneoftheaffiliateshadanoptiontosell3,597,122sharesofClassAcommonstocktoDSTGlobal Limitedatthesameprice,andonthesameterms,setforthinthepurchaseagreement.Theaffiliateexerciseditsoptionin January2011. Intheordinarycourseoftheirvariousbusinessactivities,theunderwritersandtheirrespectiveaffiliatesmaymakeor holdabroadarrayofinvestmentsandactivelytradedebtandequitysecurities(orrelatedderivativesecurities)andfinancial instruments(includingbankloans)fortheirownaccountandfortheaccountsoftheircustomersandmayatanytimehold long and short positions in such securities and instruments. Such investment and securities activities may involve our securitiesandinstruments.Theunderwritersandtheirrespectiveaffiliatesmayalsomakeinvestmentrecommendationsor publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommendtoclientsthattheyacquire,longorshortpositionsinsuchsecuritiesandinstruments. LazardFrres&Co.LLCreferredthistransactiontoLazardCapitalMarketsLLCandwillreceiveareferralfeefrom LazardCapitalMarketsLLCinconnectiontherewith. PricingoftheOffering Priortoourinitialpublicoffering,therehasbeennopublicmarketforourClassAcommonstock.Theinitialpublic offering price will be determined by negotiations among us, the selling stockholders, and the representative of the underwriters. Among the factors considered in determining the initial public offering price were our future prospects and thoseofourindustryingeneral,oursales,earningsandcertainotherfinancialandoperatinginformationinrecentperiods, andthepriceearningsratios,pricesalesratios,marketpricesofsecurities,andcertainfinancialandoperatinginformationof companiesengagedinactivitiessimilartoours.Theestimatedinitialpublicofferingpricerangesetforthonthecoverpage of this preliminary prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriterscanassureinvestorsthatanactivetradingmarketfortheshareswilldevelop,orthataftertheofferingtheshares willtradeinthepublicmarketatorabovetheinitialpublicofferingprice. SellingRestrictions EuropeanEconomicArea InrelationtoeachMemberStateoftheEuropeanEconomicAreawhichhasimplementedtheProspectusDirective,with effect from and including the date on which the Prospectus Directive is implemented in that Member State, an offer of securitiesmaynotbemadetothepublicinthatMemberState,otherthan: (a)toanylegalentitythatisaqualifiedinvestorasdefinedintheProspectusDirective 160
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Table of Contents (b) to fewer than 100 or, if that Member State has implemented the relevant provision of the 2010 PD Amending Directive,150naturalorlegalpersons(otherthanqualifiedinvestorsasdefinedintheProspectusDirective)subjectto obtainingthepriorconsentoftherepresentativeor (c)inanyothercircumstancesthatdonotrequirethepublicationofaprospectuspursuanttoArticle3oftheProspectus Directive providedthatnosuchofferofsecuritiesshallrequireusoranyunderwritertopublishaprospectuspursuanttoArticle3of theProspectusDirective. Forthepurposesoftheabove,theexpressionanofferofsecuritiestothepublicinrelationtoanysecuritiesinany MemberStatemeansthecommunicationinanyformandbyanymeansofsufficientinformationonthetermsoftheofferand thesecuritiestobeofferedsoastoenableaninvestortodecidetopurchaseorsubscribeforthesecurities,asthesamemaybe variedinthatMemberStatebyanymeasureimplementingtheProspectusDirectiveinthatMemberState(andamendments thereto,includingthe2010PDAmendingDirective,totheextentimplementedinthatMemberState),andtheexpression ProspectusDirectivemeansDirective2003/71/ECandincludesanyrelevantimplementingmeasureinthatMemberState, andtheexpression2010PDAmendingDirectivemeansDirective2010/73/EU. UnitedKingdom Thisprospectusandanyothermaterialinrelationtothesharesdescribedhereinisonlybeingdistributedto,andisonly directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospective Directive (qualified investors) that also (i) have professional experience in matters relating to investments fallingwithinArticle19(5)oftheFinancialServicesandMarketsAct2000(FinancialPromotion)Order2005,asamended, or the Order, (ii) who fall within Article 49(2)(a) to (d) of the Order or (iii) to whom it may otherwise lawfully be communicated(allsuchpersonstogetherbeingreferredtoasrelevantpersons).Thesharesareonlyavailableto,andany invitation,offeroragreementtopurchaseorotherwiseacquiresuchshareswillbeengagedinonlywith,relevantpersons. Thisprospectusanditscontentsareconfidentialandshouldnotbedistributed,publishedorreproduced(inwholeorinpart) or disclosed by recipients to any other person in the United Kingdom. Any person in the United Kingdom that is not a relevantpersonshouldnotactorrelyonthisprospectusoranyofitscontents. HongKong Thesharesmaynotbeofferedorsoldbymeansofanydocumentotherthan(i)incircumstanceswhichdonotconstitute anoffertothepublicwithinthemeaningoftheCompaniesOrdinance(Cap.32,LawsofHongKong),or(ii)toprofessional investorswithinthemeaningoftheSecuritiesandFuturesOrdinance(Cap.571,LawsofHongKong)andanyrulesmade thereunder,or(iii)inothercircumstanceswhichdonotresultinthedocumentbeingaprospectuswithinthemeaningof theCompaniesOrdinance(Cap.32,LawsofHongKong),andnoadvertisement,invitationordocumentrelatingtotheshares maybeissuedormaybeinthepossessionofanypersonforthepurposeofissue(ineachcasewhetherinHongKongor elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (exceptifpermittedtodosounderthelawsofHongKong)otherthanwithrespecttoshareswhichareorareintendedtobe disposedofonlytopersonsoutsideHongKongoronlytoprofessionalinvestorswithinthemeaningoftheSecuritiesand FuturesOrdinance(Cap.571LawsofHongKong)andanyrulesmadethereunder. Singapore ThisprospectushasnotbeenregisteredasaprospectuswiththeMonetaryAuthorityofSingapore.Accordingly,this prospectusandanyotherdocumentormaterialinconnectionwiththeofferorsale,orinvitationforsubscriptionorpurchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutionalinvestorunderSection274oftheSecuritiesandFuturesAct,Chapter289ofSingapore(SFA),(ii)toarelevant person,oranypersonpursuantto 161
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Table of Contents Section275(1A),andinaccordancewiththeconditions,specifiedinSection275oftheSFAor(iii)otherwisepursuantto, andinaccordancewiththeconditionsof,anyotherapplicableprovisionoftheSFA. WherethesharesaresubscribedorpurchasedunderSection275byarelevantpersonwhichis:(a)acorporation(which isnotanaccreditedinvestor)thesolebusinessofwhichistoholdinvestmentsandtheentiresharecapitalofwhichisowned by one or more individuals, each of whom is an accredited investor or (b) a trust (where the trustee is not an accredited investor)whosesolepurposeistoholdinvestmentsandeachbeneficiaryisanaccreditedinvestor,shares,debenturesand unitsofsharesanddebenturesofthatcorporationorthebeneficiariesrightsandinterestinthattrustshallnotbetransferable forsixmonthsafterthatcorporationorthattrusthasacquiredthesharesunderSection275except:(1)toaninstitutional investorunderSection274oftheSFAortoarelevantperson,oranypersonpursuanttoSection275(1A),andinaccordance with the conditions, specified in Section 275 of the SFA (2) where no consideration is given for the transfer or (3) by operationoflaw. Japan ThesecuritieshavenotbeenandwillnotberegisteredundertheFinancialInstrumentsandExchangeLawofJapan(the FinancialInstrumentsandExchangeLaw)andmaynotbeofferedorsold,directlyorindirectly,inJapanorto,orforthe benefitof,anyresidentofJapan(whichtermasusedhereinmeansanypersonresidentinJapan,includinganycorporationor otherentityorganizedunderthelawsofJapan),ortoothersforreofferingorresale,directlyorindirectly,inJapanortoa residentofJapan,exceptpursuanttoanexemptionfromtheregistrationrequirementsof,andotherwiseincompliancewith, theFinancialInstrumentsandExchangeLawandanyotherapplicablelaws,regulationsandministerialguidelinesofJapan. NoticetoProspectiveInvestorsinSwitzerland ThesharesmaynotbepubliclyofferedinSwitzerlandandwillnotbelistedontheSIXSwissExchange(SIX)oronany otherstockexchangeorregulatedtradingfacilityinSwitzerland.Thisdocumenthasbeenpreparedwithoutregardtothe disclosurestandardsforissuanceprospectusesunderart.652aorart.1156oftheSwissCodeofObligationsorthedisclosure standardsforlistingprospectusesunderart.27ff.oftheSIXListingRulesorthelistingrulesofanyotherstockexchangeor regulatedtradingfacilityinSwitzerland.Neitherthisdocumentnoranyotherofferingormarketingmaterialrelatingtothe sharesortheofferingmaybepubliclydistributedorotherwisemadepubliclyavailableinSwitzerland. Neitherthisdocumentnoranyotherofferingormarketingmaterialrelatingtotheoffering,theCompany,ortheshares havebeenorwillbefiledwithorapprovedbyanySwissregulatoryauthority.Inparticular,thisdocumentwillnotbefiled with,andtheofferofshareswillnotbesupervisedby,theSwissFinancialMarketSupervisoryAuthorityFINMA(FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes(CISA).TheinvestorprotectionaffordedtoacquirersofinterestsincollectiveinvestmentschemesundertheCISA doesnotextendtoacquirersoftheshares. NoticetoProspectiveInvestorsintheDubaiInternationalFinancialCentre This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial ServicesAuthority(DFSA).ThisprospectusisintendedfordistributiononlytopersonsofatypespecifiedintheOffered SecuritiesRulesoftheDFSA.Itmustnotbedeliveredto,orreliedonby,anyotherperson.TheDFSAhasnoresponsibility forreviewingorverifyinganydocumentsinconnectionwithExemptOffers.TheDFSAhasnotapprovedthisprospectusnor takenstepstoverifytheinformationsetforthhereinandhasnoresponsibilityfortheprospectus.Thesharestowhichthis prospectusrelatesmaybeilliquidand/orsubjecttorestrictionsontheirresale.Prospectivepurchasersofthesharesoffered shouldconducttheirownduediligenceontheshares.Ifyoudonotunderstandthecontentsofthisprospectusyoushould consultanauthorizedfinancialadvisor. 162
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Table of Contents LEGALMATTERS ThevalidityofthesharesofClassAcommonstockofferedherebywillbepasseduponforusbyFenwick&WestLLP, MountainView,California.SimpsonThacher&BartlettLLP,PaloAlto,Californiaisactingascounseltotheunderwriters. EXPERTS Ernst&YoungLLP,independentregisteredpublicaccountingfirm,hasauditedourconsolidatedfinancialstatements atDecember31,2010and2011,andforeachofthethreeyearsintheperiodendedDecember31,2011,assetforthintheir report.Wehaveincludedourfinancialstatementsintheprospectusandelsewhereintheregistrationstatementinrelianceon Ernst&YoungLLPsreport,givenontheirauthorityasexpertsinaccountingandauditing. WHEREYOUCANFINDADDITIONALINFORMATION WehavefiledwiththeSECaregistrationstatementonFormS1undertheSecuritiesActwithrespecttothesharesof Class A common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not containalloftheinformationsetforthintheregistrationstatementortheexhibitsfiledtherewith.Forfurtherinformation about us and the common stock offered hereby, reference is made to the registration statement and the exhibits filed therewith.Statementscontainedinthisprospectusregardingthecontentsofanycontractoranyotherdocumentthatisfiled asanexhibittotheregistrationstatementarenotnecessarilycomplete,andineachinstancewereferyoutothecopyofsuch contractorotherdocumentfiledasanexhibittotheregistrationstatement.Wecurrentlydonotfileperiodicreportswiththe SEC. Upon closing of our initial public offering, we will be required to file periodic reports, proxy statements and other informationwiththeSECpursuanttotheExchangeAct.Acopyoftheregistrationstatementandtheexhibitsfiledtherewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington,DC20549,andcopiesofalloranypartoftheregistrationstatementmaybeobtainedfromthatoffice.Please calltheSECat1800SEC0330forfurtherinformationaboutthepublicreferenceroom.TheSECalsomaintainsawebsite thatcontainsreports,proxyandinformationstatementsandotherinformationregardingregistrantsthatfileelectronically withtheSEC.Theaddressofthewebsiteiswww.sec.gov. 163
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Table of Contents FACEBOOK,INC. INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS ReportofErnst&YoungLLP,IndependentRegisteredPublicAccountingFirm ConsolidatedFinancialStatements: ConsolidatedBalanceSheets ConsolidatedStatementsofIncome ConsolidatedStatementsofComprehensiveIncome ConsolidatedStatementsofStockholdersEquity ConsolidatedStatementsofCashFlows NotestoConsolidatedFinancialStatements F1 F3 F4 F5 F6 F8 F9 F2
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Table of Contents ReportofErnst&YoungLLP,IndependentRegisteredPublicAccountingFirm TheBoardofDirectorsandStockholders Facebook,Inc. WehaveauditedtheaccompanyingconsolidatedbalancesheetsofFacebook,Inc.asofDecember31,2010and2011, andtherelatedconsolidatedstatementsofincome,comprehensiveincome,stockholdersequity,andcashflowsforeachof thethreeyearsintheperiodendedDecember31,2011.ThesefinancialstatementsaretheresponsibilityoftheCompanys management.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits. WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we expressnosuchopinion.Anauditalsoincludesexaminingonatestbasis,evidencesupportingtheamountsanddisclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financialpositionofFacebook,Inc.atDecember31,2010and2011,andtheconsolidatedresultsofitsoperationsandits cashflowsforeachofthethreeyearsintheperiodendedDecember31,2011,inconformitywithU.S.generallyaccepted accountingprinciples. /s/Ernst&YoungLLP SanFrancisco,California February1,2012, except for the retrospective adoption of amendments to the accounting standard relating to the reporting and display of comprehensiveincomeasdescribedinNote1,astowhichthedateis April23,2012 F2
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Table of Contents FACEBOOK,INC. CONSOLIDATEDBALANCESHEETS (Inmillions,exceptfornumberofsharesandparvalue)

December31, 2010 Assets Currentassets: Cashandcashequivalents Marketablesecurities Accountsreceivable,netofallowancesfordoubtfulaccountsof$11,$17and$16asofDecember31, 2010and2011andMarch31,2012,respectively Prepaidexpensesandothercurrentassets Totalcurrentassets Propertyandequipment,net Goodwillandintangibleassets,net Otherassets Totalassets Liabilitiesandstockholdersequity Currentliabilities: Accountspayable Platformpartnerspayable Accruedexpensesandothercurrentliabilities Deferredrevenueanddeposits Currentportionofcapitalleaseobligations Totalcurrentliabilities Capitalleaseobligations,lesscurrentportion Longtermdebt Otherliabilities Totalliabilities Commitmentsandcontingencies Stockholdersequity: Convertiblepreferredstock,$0.000006parvalue,issuableinseries:569millionsharesauthorized, 541millionsharesissuedandoutstandingatDecember31,2010and543millionsharesissued andoutstandingatDecember31,2011andMarch31,2012(unaudited)(aggregateliquidation preferenceof$615millionasofDecember31,2011andMarch31,2012(unaudited))noshares authorized,issuedandoutstanding,proforma(unaudited) Commonstock,$0.000006parvalue:4,141millionClassAsharesauthorized,60millionshares issuedandoutstandingatDecember31,2010,117millionsharesissuedandoutstanding, including1millionoutstandingsharessubjecttorepurchaseatDecember31,2011and 118millionsharesissuedandoutstanding,including1millionoutstandingsharessubjectto repurchaseatMarch31,2012(unaudited)andproforma(unaudited)4,141millionClassB sharesauthorized,1,112million,1,213million,1,235millionand1,781millionsharesissued andoutstanding,including5million,2million,2millionand2millionoutstandingshares subjecttorepurchase,atDecember31,2010,2011,March31,2012(unaudited)andproforma (unaudited),respectively Additionalpaidincapital Accumulatedothercomprehensiveloss Retainedearnings Totalstockholdersequity Totalliabilitiesandstockholdersequity 2011 March ProForma 31, March31, 2012 2012 (unaudited)
$1,785 373 88 2,246 574 96 74
$1,512 2,396 547 149 4,604 1,475 162 90 $6,331
$ 1,282 2,628 482 302 4,694 1,855 189 121 $ 6,859
$ $
1,282 2,628 482 627 5,019 1,855 189 121 7,184
$2,990
$ 29 75 137 42 106 389 117 250 72 828
63 171 296 90 279 899 398 135
$ 129 178 337 93 302 1,039 404 144
129 178 337 93 302 1,039 404 144 1,587
1,432
1,587
615
615
615
947 (6) 606 2,162 $2,990
2,684 (6) 1,606 4,899 $6,331
2,853 (7) 1,811 5,272 $ 6,859
4,433 (7) 1,171 5,597 7,184
SeeNotestoConsolidatedFinancialStatements. F3
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Table of Contents FACEBOOK,INC. CONSOLIDATEDSTATEMENTSOFINCOME (Inmillions,exceptpershareamounts)

YearEndedDecember31, 2009 2010 2011 ThreeMonths EndedMarch31, 2011 2012 (unaudited)
Revenue Costsandexpenses: Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalcostsandexpenses Incomefromoperations Interestandotherincome(expense),net: Interestexpense Otherincome(expense),net Incomebeforeprovisionforincometaxes Provisionforincometaxes Netincome Netincomeattributabletoparticipatingsecurities NetincomeattributabletoClassAandClassBcommon stockholders EarningspershareattributabletoClassAandClassBcommon stockholders: Basic Diluted ProformaearningspershareattributabletoClassAandClassB commonstockholders(unaudited): Basic Diluted Sharebasedcompensationexpenseincludedincostsandexpenses: Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebasedcompensationexpense
$777 $ 223 115 87 90 515 262 (10) 2 254 25 229 107
$1,974 493 184 144 121 942 1,032 (22) (2) 1,008 402 $ 606 234 $ 372
$3,711 860 427 388 280 1,955 1,756 (42) (19) 1,695 695 $1,000 332 $ 668
$ 731 167 68 57 51 343 388 (7) 17 398 165 $ 233 80 $ 153
$1,058 277 159 153 88 677 381
(13) 14 382 177 $ 205 68 $ 137
$ 122
$ 0.12 $ 0.10
$ 0.34 $ 0.28
$ 0.52 $ 0.46
$0.12 $0.11
$ 0.10 $ 0.09
$ 0.49 $ 0.43 $ $ 2 6 19 27 $ $ 2 9 9 20 $ 9 43 114 51 $ 217 $ 4 3 $ 7
$ 0.10 $ 0.09 $ 4 23 60 16 $ 103
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Table of Contents FACEBOOK,INC. CONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME (Inmillions)

YearEndedDecember31, 2009 2010 2011 ThreeMonths EndedMarch31, 2011 2012 (unaudited)
Netincome Othercomprehensiveincome(loss): Foreigncurrencytranslationadjustments Comprehensiveincome
$ 229 $229
$ 606 (6) $600
$1,000 $1,000
$ 233 1 $234
$ 205 (1) $204
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Table of Contents FACEBOOK,INC. CONSOLIDATEDSTATEMENTSOFSTOCKHOLDERSEQUITY (Inmillions)

ClassAand Accumulated Retained Convertible ClassB Additional Other Earnings Total PreferredStock CommonStock PaidIn Comprehensive (Accumulated Stockholders Shares Amount Shares ParValue Capital Loss Deficit) Equity 499 $ 415 1,007 $ $ 147 $ $ (229) $ 333 44 543 $ (2) 541 $ 200 57 2 4 $ $ 9 9 20 16 2 50 253 $ 500 6 60 3 17 1 107 947 $ $ (6) (6) $ 229 $ 606 606 $ 200 9 9 20 16 2 50 229 868 500 6 60 3 17 1 107 (6) 606 2,162 998 28 3 58 217 433 1,000 4,899
BalancesatDecember31,2008 IssuanceofSeriesEconvertiblepreferred stock,netofissuancecosts Issuanceofcommonstockforcashupon exerciseofstockoptions Issuanceofcommonstockto nonemployeesforpastservices Issuanceofcommonstockrelatedto acquisition Sharebasedcompensation,relatedto employeesharebasedawards Sharebasedcompensation,relatedto nonemployeesharebasedawards Excesstaxbenefitfromsharebasedaward activity Netincome BalancesatDecember31,2009 Issuanceofcommonstock,netofissuance costs Issuanceofcommonstockforcashupon exerciseofstockoptions Issuanceofcommonstockrelatedto acquisitions ConversionofSeriesApreferredstockto commonstock Reclassificationofoptionliabilityto additionalpaidincapital Sharebasedcompensation,relatedto employeesharebasedawards Sharebasedcompensation,relatedto nonemployeesharebasedawards Excesstaxbenefitfromsharebasedaward activity,netofdeferredtaximpact Othercomprehensiveincome Netincome BalancesatDecember31,2010 Issuanceofcommonstock,netofissuance costs Issuanceofcommonstockforcashupon exerciseofstockoptions Issuanceofcommonstockto nonemployeesforpastservices Issuanceofcommonstockrelatedto acquisitions Exerciseofpreferredstockwarrants ConversionofSeriesBpreferredstockto commonstock ConversionofSeriesCpreferredstockto commonstock. Sharebasedcompensation,relatedto employeesharebasedawards Excesstaxbenefitfromsharebasedaward activity Netincome BalancesatDecember31,2011
615 1,070 $ 615 24 70 6 2 $
1,172
8 (2) (4) 543 $
48 102 2 2 4
998 28 3 58 217 433 2,684 $
(6) $
1,000 1,606 $
615 1,330 $
F6
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Table of Contents FACEBOOK,INC. CONSOLIDATEDSTATEMENTSOFSTOCKHOLDERSEQUITY(CONTINUED) (Inmillions)

ClassAand Accumulated Retained Convertible ClassB Additional Other Earnings Total PreferredStock CommonStock PaidIn Comprehensive (Accumulated Stockholders Shares Amount Shares ParValue Capital Loss Deficit) Equity 543 $ 615 1,330 $ $ 2,684 $ (6) $ 1,606 $ 4,899 543 $ 615 22 $ $ 5 1 6 103 54 2,853 $ (1) (7) $ 205 1,811 $ 5 1 6 103 54 (1) 205 5,272
BalancesatDecember31,2011 Issuanceofcommonstockforcashuponexercise ofstockoptions(unaudited) Issuanceofcommonstocktononemployees forpastservices(unaudited) Issuanceofcommonstockrelatedtoasset acquisition(unaudited) Share basedcompensation,relatedtoemployeeshare basedawards(unaudited) Excesstaxbenefitfromsharebased awardactivity(unaudited) Othercomprehensiveincome(unaudited) Netincome(unaudited) BalancesatMarch31,2012(unaudited)
1,352
SeeNotestoConsolidatedFinancialStatements.
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Table of Contents FACEBOOK,INC. CONSOLIDATEDSTATEMENTSOFCASHFLOWS (Inmillions)

ThreeMonths Ended March31, 2011 2012 (unaudited) $ 233 51 1 7 69 (69) 27 (26) (10) (3) 24 6 17 18 345 $ 205 110 1 103 54 (54) 65 (28) (32) (3) 7 2 3 8 441
YearEndedDecember31, 2009 2010 2011 Cashflowsfromoperatingactivities Netincome Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities: Depreciationandamortization Lossonwriteoffofassets Sharebasedcompensation Taxbenefitfromsharebasedawardactivity Excesstaxbenefitfromsharebasedawardactivity Changesinassetsandliabilities: Accountsreceivable Prepaidexpensesandothercurrentassets Otherassets Accountspayable Platformpartnerspayable Accruedexpensesandothercurrentliabilities Deferredrevenueanddeposits Otherliabilities Netcashprovidedbyoperatingactivities Cashflowsfrominvestingactivities Purchasesofpropertyandequipment Purchasesofmarketablesecurities Maturitiesofmarketablesecurities Salesofmarketablesecurities Investmentsinnonmarketableequitysecurities Acquisitionsofbusiness,netofcashacquired,andpurchasesofintangibleandotherassets Changeinrestrictedcashanddeposits Netcashusedininvestingactivities Cashflowsfromfinancingactivities Netproceedsfromissuanceofconvertiblepreferredstock Netproceedsfromissuanceofcommonstock Proceedsfromexerciseofstockoptions Proceedsfrom(repaymentsof)longtermdebt Proceedsfromsaleandleasebacktransactions Principalpaymentsoncapitalleaseobligations Excesstaxbenefitfromsharebasedawardactivity Netcashprovidedbyfinancingactivities Effectofexchangeratechangesoncashandcashequivalents Netincrease(decrease)incashandcashequivalents Cashandcashequivalentsatbeginningofperiod Cashandcashequivalentsatendofperiod Supplementalcashflowdata Cashpaidduringtheperiodfor: Interest Incometaxes Noncashinvestingandfinancingactivities: Propertyandequipmentadditionsincludedinaccountspayableandaccruedexpensesand otherliabilities Propertyandequipmentacquiredundercapitalleases Fairvalueofsharesissuedrelatedtoacquisitionsofbusinessandotherassets
$229 $ 78 1 27 50 (51) (112) (30) (59) (7) 27 1 1 155 (33) 3 (32) (62) 200 9 31 (48) 51 243 336 297 633
$ 606 139 3 20 115 (115) (209) (38) 17 12 75 20 37 16 698 (293) (22) (9) (324) 500 6 250 (90) 115 781
$ 1,000 323 4 217 433 (433)
(174) (31) (32) 6 96 38 49 53 1,549 (606) (3,025) 516 113 (3) (24) 6 (3,023) 998 28 (250) 170 (181) 433 1,198 3 (273) 1,785 $ 1,512
(153) (1) 1 (153) 998 9 (250) 1 (29) 69 798 1 991 1,785 $2,776
(453) (876) 567 69 (1) (25) (1) (720) 5 62 (71) 54 50
(3) 1,152 633 $1,785
(1) (230) 1,512 $1,282
$ $
9 42
23
$ $
28 197
$ 261
$ 103
$ 174
$ $ $
5 56 20
$ $
47 60
$ $ $
135 473 58
$ $
43 6
$ 110 $ $ 38 6
$ 217
$ 211
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Note1.SummaryofSignificantAccountingPolicies OrganizationandDescriptionofBusiness FacebookwasincorporatedinDelawareinJuly2004.Ourmissionistomaketheworldmoreopenandconnected.We build products that support our mission by providing utility to Facebook users, Platform developers, and advertisers. We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enablesuserstopurchasevirtualanddigitalgoodsfromourPlatformdevelopers. BasisofPresentation WepreparedtheconsolidatedfinancialstatementsinaccordancewithU.S.generallyacceptedaccountingprinciples (GAAP).TheconsolidatedfinancialstatementsincludetheaccountsofFacebook,Inc.anditswhollyownedsubsidiaries.All intercompanybalancesandtransactionshavebeeneliminated. UnauditedInterimConsolidatedFinancialInformation The accompanying interim consolidated balance sheet as of March 31, 2012, and the consolidated statements of income,comprehensiveincome,andcashflowsforthethreemonthsendedMarch31,2011and2012andtheconsolidated statement of stockholders equity for the three months ended March 31, 2012 and the related footnote disclosures are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with GAAP. In managementsopinion,theunauditedinterimconsolidatedfinancialstatementshavebeenpreparedonthesamebasisasthe auditedfinancialstatementsandincludealladjustments,whichincludeonlynormalrecurringadjustments,necessaryforthe fairpresentationofourstatementoffinancialpositionasofMarch31,2012andourconsolidatedresultsofoperationsand ourcashflowsforthethreemonthsendedMarch31,2011and2012.TheresultsforthethreemonthsendedMarch31,2012 arenotnecessarilyindicativeoftheresultsexpectedforthefullfiscalyear. UseofEstimates ConformitywithGAAPrequirestheuseofestimatesandjudgmentsthataffectthereportedamountsintheconsolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying valuesofourassetsandliabilities,whicharenotreadilyapparentfromothersources.Webaseourestimatesandjudgments onhistoricalinformationandonvariousotherassumptionsthatwebelievearereasonableunderthecircumstances.GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of sharebased awards, fair value of financialinstruments,fairvalueofacquiredintangibleassetsandgoodwill,usefullivesofintangibleassetsandpropertyand equipment,andincometaxes.Theseestimatesarebasedonmanagementsknowledgeaboutcurrenteventsandexpectations aboutactionswemayundertakeinthefuture.Actualresultscoulddiffermateriallyfromthoseestimates. CashandCashEquivalents,andMarketableSecurities Weholdinvestmentsinshorttermandlongtermmarketablesecurities,consistingofU.S.governmentandgovernment agencysecurities.Weclassifyourmarketablesecuritiesasavailableforsaleinvestmentsinourcurrentassetsbecausethey representinvestmentsofcashavailableforcurrentoperations.Ouravailableforsaleinvestmentsarecarriedatestimatedfair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income/(loss) in stockholdersequity.Unrealizedlossesarechargedagainst F9
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) otherincome(expense),netwhenadeclineinfairvalueisdeterminedtobeotherthantemporary.Wehavenotrecordedany suchimpairmentchargeinanyperiodpresented.Wedeterminerealizedgainsorlossesonsaleofmarketablesecuritiesona specificidentificationmethod,andrecordsuchgainsorlossesasotherincome(expense),net. We classify certain restricted cash balances within prepaid expenses and other current assets and other assets on the accompanyingconsolidatedbalancesheetsbaseduponthetermoftheremainingrestrictions. NonMarketableSecurities Weinvestincertaininvestmentfundsthatarenotpubliclytraded.Wecarrytheseinvestmentsatcostbecausewedonot havesignificantinfluenceovertheunderlyinginvestee.Weassessforanyotherthantemporaryimpairmentatleastonan annualbasis.Noimpairmentchargehasbeenrecordedtodateonournonmarketablesecurities. FairValueofFinancialInstruments Weapplyfairvalueaccountingforallfinancialassetsandliabilitiesandnonfinancialassetsandliabilitiesthatare recognizedordisclosedatfairvalueinthefinancialstatementsonarecurringbasis.Wedefinefairvalueasthepricethat wouldbereceivedfromsellinganassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsat the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recordedatfairvalue,weconsidertheprincipalormostadvantageousmarketinwhichwewouldtransactandthemarket based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy,whichprioritizestheinputsusedtomeasurefairvalueintothreelevelsandbasesthecategorizationwithinthe hierarchyuponthelowestlevelofinputthatisavailableandsignificanttothefairvaluemeasurement: Level1Quotedpricesinactivemarketsforidenticalassetsorliabilities. Level2Observableinputsotherthanquotedpricesinactivemarketsforidenticalassetsandliabilities,quotedprices foridenticalorsimilarassetsorliabilitiesininactivemarkets,orotherinputsthatareobservableorcanbecorroboratedby observablemarketdataforsubstantiallythefulltermoftheassetsorliabilities. Level3Inputsthataregenerallyunobservableandtypicallyreflectmanagementsestimateofassumptionsthatmarket participantswoulduseinpricingtheassetorliability. Ourvaluationtechniquesusedtomeasurethefairvalueofmoneymarketfundsandmarketabledebtsecuritieswere derivedfromquotedpricesinactivemarketsforidenticalassetsorliabilities. ForeignCurrency Generally the functional currency of our international subsidiaries is the local currency. We translate the financial statementsofthesesubsidiariestoU.S.dollarsusingmonthendratesofexchangeforassetsandliabilities,andaveragerates ofexchangeforrevenue,costs,andexpenses.Translationgainsandlossesarerecordedinaccumulatedothercomprehensive income (loss) as a component of stockholders equity. Net losses resulting from foreign exchange transactions were insignificantfortheyearendedDecember31,2009,andwere$1millionand$29million,respectively,fortheyearsended December31,2010and2011.Netgainsresulting F10
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) fromforeignexchangetransactionswere$16millionand$10million,respectively,forthethreemonthsendedMarch31, 2011and2012.Thesegainsandlosseswererecordedasotherincome(expense),net. PropertyandEquipment Property and equipment, which includes amounts recorded under capital leases, are stated at cost. Depreciation is computedusingthestraightlinemethodovertheestimatedusefullivesoftheassetsortheremainingleaseterm,inthecase ofacapitallease,whicheverisshorter. Theestimatedusefullivesofpropertyandequipmentaredescribedbelow:
PropertyandEquipment UsefulLife
Networkequipment Computersoftware,officeequipmentandother Buildings Leasedequipmentandleaseholdimprovements
Threetofouryears Twotofiveyears 15to20years Lesserofestimatedusefullifeorremainingleaseterm
Land and assets held within construction in progress are not depreciated. Construction in progress is related to the constructionordevelopmentofpropertyandequipmentthathavenotyetbeenplacedinservicefortheirintendeduse. Thecostofmaintenanceandrepairsisexpensedasincurred.Whenassetsareretiredorotherwisedisposedof,thecost andrelatedaccumulateddepreciationandamortizationareremovedfromtheirrespectiveaccounts,andanygainorlosson suchsaleordisposalisreflectedinincomefromoperations. LongLivedAssets,IncludingGoodwillandOtherAcquiredIntangibleAssets Weevaluatetherecoverabilityofpropertyandequipmentandamortizableintangibleassetsforpossibleimpairment whenevereventsorcircumstancesindicatethatthecarryingamountofsuchassetsmaynotberecoverable.Recoverabilityof these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expectedtogenerate.Ifsuchreviewindicatesthatthecarryingamountofpropertyandequipmentandintangibleassetsis notrecoverable,thecarryingamountofsuchassetsisreducedtofairvalue.Inaddition,wetestgoodwillforimpairmentat leastannuallyormorefrequentlyifeventsorchangesincircumstancesindicatethatthisassetmaybeimpaired.Thesetests arebasedonoursingleoperatingsegmentandreportingunitstructure.Noindicationsofimpairmentofgoodwillwerenoted duringtheyearspresented. Acquiredamortizableintangibleassets,whichareincludedingoodwillandintangibleassets,net,areamortizedona straightline basis over the estimated useful lives of the assets. The estimated remaining useful lives for intangible assets rangefromlessthanoneyearto16years. Inadditiontotherecoverabilityassessment,weroutinelyreviewtheremainingestimatedusefullivesofpropertyand equipmentandamortizableintangibleassets.Ifwereducetheestimatedusefullifeassumptionforanyasset,theremaining unamortizedbalancewouldbeamortizedordepreciatedovertherevisedestimatedusefullife. LeaseObligations We lease office space, data centers, and equipment under noncancelable capital and operating leases with various expirationdatesthrough2027.Certainoftheoperatingleaseagreementscontainrentholidays,rentescalationprovisions, and purchase options. Rent holidays and rent escalation provisions are considered in determining the straightline rent expensetoberecordedovertheleaseterm.Theleasetermbeginsonthedateof F11
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) initialpossessionoftheleasedpropertyforpurposesofrecognizingleaseexpenseonastraightlinebasisoverthetermofthe lease.Wedonotassumerenewalsinourdeterminationoftheleasetermunlesstherenewalsaredeemedtobereasonably assuredatleaseinception. UnauditedProFormaBalanceSheetInformation Upon the completion of our initial public offering, all outstanding convertible preferred stock will automatically convert into shares of our Class B common stock. The unaudited pro forma balance sheet information gives effect to the conversionoftheconvertiblepreferredstockasofMarch31,2012.Additionally,asdescribedindetailinSharebased Compensationbelow,wegrantrestrictedstockunits(RSUs)thatgenerallyvestuponthesatisfactionofaservicecondition, andwithrespecttoRSUsgrantedpriortoJanuary1,2011(Pre2011RSUs),sixmonthsafterthecompletionofourinitial publicoffering.Thevestingconditionthatwillbesatisfiedsixmonthsfollowingourinitialpublicofferingdoesnotaffect theexpenseattributionperiodfortheRSUsforwhichtheserviceconditionhasbeenmetasofthedateofourinitialpublic offering. Accordingly, the unaudited pro forma balance sheet information at March 31, 2012, gives effect to sharebased compensationexpenseofapproximately$965millionassociatedwithPre2011RSUs,forwhichtheserviceconditionwas met as of March 31, 2012, which we expect to record upon the completion of our initial public offering. This pro forma adjustmentrelatedtosharebasedcompensationexpenseofapproximately$965millionhasbeenreflectedasanincreaseto additionalpaidincapitalandtheassociatedtaxeffectof$325millionhasbeennettedagainstthischarge,resultinginanet reduction of $640 million to retained earnings. The income tax effects have been reflected as an increase to deferred tax assetsincludedinprepaidexpensesandothercurrentassets,toreflecttheanticipatedfuturetaxbenefitsuponsettlementof the RSUs, as adjusted for any RSUs that will not result in a tax benefit because they are related to foreign employees or foreign operations. Payroll tax expenses and other withholding obligations have not been included in the pro forma adjustment.WeestimatethatapproximatelysharesunderlyingPre2011RSUswillvestandsettleapproximately sixmonthsafterourinitialpublicoffering.Theseshareshavenotbeenincludedinourproformabalancesheetdisclosuresof sharesoutstanding.RSUholdersgenerallywillrecognizetaxableincomebaseduponthevalueofthesharesonthedatethey aresettledandwearerequiredtowithholdtaxesonsuchvalueatapplicableminimumstatutoryrates.Wecurrentlyexpect that the average of these withholding rates will be approximately 45%. We are unable to quantify the obligations as of March 31, 2012 and we will remain unable to quantify this amount until the settlement of the RSUs, as the withholding obligationwillbebasedonthevalueofthesharessixmonthsafterthedateofourinitialpublicoffering. SharebasedCompensation Weaccountforsharebasedemployeecompensationplansunderthefairvaluerecognitionandmeasurementprovisions ofGAAP.Thoseprovisionsrequireallsharebasedpaymentstoemployees,includinggrantsofstockoptionsandRSUs,tobe measured based on the grantdate fair value of the awards, with the resulting expense generally recognized in our consolidatedstatementsofincomeovertheperiodduringwhichtheemployeeisrequiredtoperformserviceinexchangefor theaward. We estimate the fair value of stock options granted using the BlackScholesMerton single option valuation model, whichrequiresinputssuchasexpectedterm,expectedvolatilityandriskfreeinterestrate.Further,theestimatedforfeiture rate of awards also affects the amount of aggregate compensation. These inputs are subjective and generally require significantanalysisandjudgmenttodevelop. Weestimatetheexpectedtermbaseduponthehistoricalbehaviorofouremployeesforemployeegrants.Weestimate expectedvolatilitybasedonastudyofpubliclytradedindustrypeercompanies.Theforfeiturerateisderivedprimarilyfrom ourhistoricaldata,andtheriskfreeinterestrateisbasedontheyieldavailableonU.S.Treasuryzerocouponissues.Our dividendyieldis0%,sincewehavenotpaid,anddonotexpecttopay,dividends. F12
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Thefairvaluesofemployeeoptionsgrantedduring2009and2010havebeenestimatedasofthedateofgrantusingthe followingweightedaverageassumptions.

Expectedtermfromgrantdate(inyears) Riskfreeinterestrate Expectedvolatility Dividendyield
5.04 2.01% 0.57
7.15 1.69% 0.46
Theweightedaveragefairvalueofemployeeoptionsgrantedduring2009and2010was$1.12and$5.26pershare, respectively.Therewerenooptionsgrantedin2011orinthethreemonthsendedMarch31,2012. WehavegrantedRSUstoouremployeesandmembersofourboardofdirectors.Pre2011RSUsgrantedunderour2005 StockPlanvestuponthesatisfactionofbothaserviceconditionandaliquiditycondition.Theserviceconditionforthe majorityoftheseawardsissatisfiedoverfouryears.Theliquidityconditionissatisfiedupontheoccurrenceofaqualifying event,definedasachangeofcontroltransactionorsixmonthsfollowingthecompletionofourinitialpublicoffering.Pre 2011RSUsforwhichtheserviceconditionhasbeensatisfiedarenotforfeitableshouldemploymentterminatepriortothe liquidityconditionbeingmet.AsofMarch31,2012,nosharebasedcompensationexpensehadbeenrecognizedforPre 2011RSUs,becausethequalifyingevents(describedabove)hadnotoccurred.Thevestingconditionthatwillbesatisfied sixmonthsfollowingourinitialpublicofferingdoesnotaffecttheexpenseattributionperiodfortheRSUsforwhichthe serviceconditionhasbeenmetasofthedateofourinitialpublicoffering.Thissixmonthperiodisnotasubstantiveservice conditionand,accordingly,upontheeffectivenessofourinitialpublicoffering,wewillrecognizeasignificantcumulative sharebasedcompensationexpensefortheportionoftheRSUsthathadmettheserviceconditionasofthatdate,following the accelerated attribution method (net of estimated forfeitures). The remaining unrecognized sharebased compensation expense related to the Pre2011 RSUs will be recorded over the remaining requisite service period, using the accelerated attribution method (net of estimated forfeitures). For the Pre2011 RSUs, if the initial public offering had occurred on March31,2012,wewouldhaverecognized$965millionofsharebasedcompensationexpenseonthatdate,andwouldhave approximately $235 million of additional future period expense to be recognized over a weightedaverage period of approximatelyoneyear. RSUsgrantedonorafterJanuary1,2011(Post2011RSUs)arenotsubjecttoaliquidityconditioninordertovest,and compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straightlinebasisovertheapplicableserviceperiod.ThemajorityofPost2011RSUsareearnedoveraserviceperiodoffour to five years. In 2011 and the three months ended March 31, 2012, we recognized $189 million and $97 million, respectively,ofsharebasedcompensationexpenserelatedtothePost2011RSUs,andasofMarch31,2012weanticipate $1,119 million of future period expense related to such RSUs to be recognized over a weightedaverage period of approximatelythreeyears.TherewasnocapitalizedsharebasedemployeecompensationexpenseasofDecember31,2010 andDecember31,2011. DuringtheyearsendedDecember31,2009,2010,and2011andthethreemonthsendedMarch31,2011and2012,we realized tax benefits from sharebased award activity of $50 million, $115 million, $433 million, $69 million, and $54million,respectively.Theseamountsreflecttheextentthatthetotalreductiontoourincometaxliabilityfromshare basedawardactivitywasgreaterthantheamountofthedeferredtaxassetsthatwehadpreviouslyrecordedinanticipationof these benefits. These amounts are the aggregate of the individual transactions in which the reduction to our income tax liability was greater than the deferred tax assets that we recorded, reduced by any individual transactions in which the reductiontoourincometaxliabilitywaslessthan F13
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) thedeferredtaxassetsthatwererecorded.Thesenetamountswererecordedasanadjustmenttostockholdersequityineach period, as an increase to cash flows from operating activities, and were not recognized in our consolidated statements of income. Inaddition,wereportedexcesstaxbenefitsthatdecreasedourcashflowsfromoperatingactivitiesandincreasedour cashflowsfromfinancingactivitiesfortheyearsendedDecember31,2009,2010,and2011andthethreemonthsended March 31, 2011 and 2012, by $51 million, $115 million, $433 million, $69 million and $54 million, respectively. The amountsoftheseexcesstaxbenefitsreflectthetotaloftheindividualtransactionsinwhichthereductiontoourincometax liability was greater than the deferred tax assets that were recorded, but were not reduced by any of the individual transactionsinwhichthereductiontoourincometaxliabilitywaslessthanthedeferredtaxassetsthatwererecorded. As of December 31, 2011, there was $2,463 million of unrecognized sharebased compensation expense, of which $2,396millionisrelatedtoRSUs,and$67millionisrelatedtorestrictedsharesandstockoptions.AsofMarch31,2012, therewas$2,381millionofunrecognizedsharebasedcompensationexpense,ofwhich$2,319millionisrelatedtoRSUs, and$62millionisrelatedtorestrictedsharesandstockoptions.Thisunrecognizedcompensationexpenseisexpectedtobe recognizedoveraweightedaverageperiodofapproximatelytwoyears. IncomeTaxes Werecognizeincometaxesundertheassetandliabilitymethod.Werecognizedeferredincometaxassetsandliabilities fortheexpectedfutureconsequencesoftemporarydifferencesbetweenthefinancialreportingandtaxbasesofassetsand liabilities.Thesedifferencesaremeasuredusingtheenactedstatutorytaxratesthatareexpectedtoapplytotaxableincome fortheyearsinwhichdifferencesareexpectedtoreverse.Werecognizetheeffectondeferredincometaxesofachangeintax ratesinincomeintheperiodthatincludestheenactmentdate. Werecordavaluationallowancetoreduceourdeferredtaxassetstothenetamountthatwebelieveismorelikelythan not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectationsandrisksassociatedwithestimatesoffuturetaxableincomeandongoingtaxplanningstrategiesinassessing theneedforavaluationallowance. Werecognizetaxbenefitsfromuncertaintaxpositionsonlyifwebelievethatitismorelikelythannotthatthetax positionwillbesustainedonexaminationbythetaxingauthoritiesbasedonthetechnicalmeritsoftheposition.Wemake adjustmentstothesereserveswhenfactsandcircumstanceschange,suchastheclosingofataxauditortherefinementofan estimate.Theprovisionforincometaxesincludestheeffectsofanyreservesthatareconsideredappropriate,aswellasthe relatednetinterestandpenalties. RevenueRecognition Wegeneratesubstantiallyallofourrevenuefromadvertisingandpaymentprocessingfees.Werecognizerevenueonce allofthefollowingcriteriahavebeenmet: persuasiveevidenceofanarrangementexists deliveryofFacebooksobligationstoourcustomerhasoccurred thepriceisfixedordeterminableand collectabilityoftherelatedreceivableisreasonablyassured. F14
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) RevenuefortheyearsendedDecember31,2009,2010,and2011andthethreemonthsendedMarch31,2011and2012 consistsofthefollowing(inmillions):

YearEnded December31, 2010 ThreeMonthsEnded March31, 2011 2012 (unaudited)
2009
2011
Revenue Advertising Paymentsandotherfees Totalrevenue Advertising
$ 764 13 $ 777
$ 1,868 106 $ 1,974
$ 3,154 557 $ 3,711
$ 637 94 $ 731
$ 872 186 $ 1,058
Advertisingrevenueisgeneratedfromthedisplayofadvertisementsonourwebsite.Thearrangementsareevidencedby either online acceptance of terms and conditions or contracts that stipulate the types of advertising to be delivered, the timing and the pricing. The typical term of an advertising arrangement is approximately 30 days with billing generally occurringafterthedeliveryoftheadvertisement. We recognize revenue from the display of impressionbased advertisements on our website in the contracted period whentheimpressionsaredelivered.Impressionsareconsidereddeliveredwhenanadvertisementappearsinpagesdelivered tousers. Wealsorecognizerevenuefromthedeliveryofclickbasedadvertisementsonourwebsite.Revenueassociatedwith theseadvertisementsisrecognizedintheperiodthatauserclicksonanadvertisement. PaymentsandOtherFees We enable Payments between our users and developers on the Facebook Platform. Our users can purchase virtual or digital goods on the Facebook Platform by using credit cards or other payment methods available on our website. The primarymethodforuserstotransactwiththedevelopersontheFacebookPlatformisviathepurchaseofourvirtualcurrency, whichenablesouruserstopurchasevirtualanddigitalgoodsingamesandapps.Upontheinitialsaleofourvirtualcurrency, werecordconsiderationreceivedfromauserasadeposit. Whenauserengagesinapaymenttransactionutilizingourvirtualcurrencyforthepurchaseofavirtualordigitalgood fromaPlatformdeveloper,wereducetheusersvirtualcurrencybalancebythepriceofthepurchase,whichisapricethatis solelydeterminedbythePlatformdeveloper.WeremittothePlatformdeveloperanamountthatisbasedonthetotalamount ofvirtualcurrencyredeemedlesstheprocessingfeethatwechargethePlatformdeveloperforthetransaction.Ourrevenueis thenetamountofthetransaction,representingourprocessingfeefortheserviceperformed.Werecordrevenueonanetbasis aswedonotconsiderourselvestobetheprincipalinthesaleofthevirtualordigitalgoodtotheuser. Otherfeeshavenotbeenmaterialinallperiodspresentedinourfinancialstatements. Allrevenueisrecognizednetofapplicablesalesandothertaxes,whereappropriate. CostofRevenue Ourcostofrevenueconsistsprimarilyofexpensesassociatedwiththedeliveryanddistributionofourproducts.These includeexpensesrelatedtotheoperationofourdatacenterssuchasfacilityandserver F15
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) equipmentdepreciation,facilityandserverequipmentrentexpense,energyandbandwidthcosts,supportandmaintenance costs,andsalaries,benefitsandsharebasedcompensationforcertainpersonnelonouroperationsteams.Costofrevenuealso includescreditcardandothertransactionfeesrelatedtoprocessingcustomertransactions. DeferredRevenueandDeposits Deferredrevenueconsistsofbillingsinadvanceofrevenuerecognition.Depositsrelatetounusedvirtualcurrencyheld byourusers.Oncethisvirtualcurrencyisutilizedbyauser,approximately70%ofthisamountwouldthenbepayabletothe Platformdeveloperandthebalancewouldberecognizedasrevenue. Deferredrevenueanddepositsconsistsofthefollowing(inmillions):
December31, 2010 2011 March31, 2012 (unaudited)
Deferredrevenue Deposits Totaldeferredrevenueanddeposits CreditRiskandConcentration
$ 35 7 $ 42
$ 75 15 $ 90
$ $
77 16 93
Financial instruments owned by the company that are potentially subject to concentrations of credit risk consist primarilyofcash,cashequivalents,restrictedcash,marketablesecurities,andaccountsreceivable.Cashequivalentsconsist ofshorttermmoneymarketfundsandU.S.governmentandagencysecurities,whicharedepositedwithreputablefinancial institutions.MarketablesecuritiesconsistofinvestmentsinU.S.governmentandgovernmentagencysecurities.Ourcash management and investment policy limits investment instruments to investmentgrade securities with the objective to preservecapitalandtomaintainliquidityuntilthefundscanbeusedinbusinessoperations.BankaccountsintheUnited StatesareinsuredbytheFederalDepositInsuranceCorporation(FDIC)upto$250,000.Ouroperatingaccountssignificantly exceedtheFDIClimits. Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industriesandcountries.Wegenerated67%,62%,and56%ofourrevenuefortheyearsendedDecember31,2009,2010, and2011,respectively,fromadvertisersandPlatformdevelopersbasedintheUnitedStates,withthemajorityofrevenue outsideoftheUnitedStatescomingfromcustomerslocatedinwesternEurope,Canada,andAustralia. We perform ongoing credit evaluations of our customers, and generally do not require collateral. An allowance for doubtfulaccountsisdeterminedusingthespecificidentificationmethodfordoubtfulaccountsandanagingofreceivables analysisbasedoninvoiceduedates.Uncollectiblereceivablesarewrittenoffagainsttheallowancefordoubtfulaccounts whenalleffortstocollectthemhavebeenexhausted,andrecoveriesarerecognizedasanincreasetotheallowancewhen theyarereceived.DuringtheyearsendedDecember31,2009,2010,and2011,ourbaddebtexpenseswere$1million,$9 million,and$8million,respectively.Intheeventthataccountsreceivablecollectioncyclesdeteriorate,ouroperatingresults andfinancialpositioncouldbeadverselyaffected. Revenuefromonecustomer,Zynga,represented12%,13%,and11%oftotalrevenuefortheyearendedDecember31, 2011andthethreemonthsendedMarch31,2011and2012,respectively.Additionally,Zyngas F16
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) appsgeneratepagesonwhichwedisplayadsandearnrevenuefromotheradvertisers.Nocustomerrepresented10%ormore oftotalrevenueduringtheyearsendedDecember31,2009or2010. AdvertisingExpense Weexpenseourcostsofadvertisingintheperiodinwhichtheyareincurred.Advertisingexpense,whichisincludedin marketingandsalesexpenses,totaled$5million,$8million,and$28millionfortheyearsendedDecember31,2009,2010, and2011,respectively. Segments Our chief operating decisionmaker is our Chief Executive Officer who reviews financial information presented on a consolidated basis. There are no segment managers who are held accountable by the chief operating decisionmaker, or anyone else, for operations, operating results, and planning for levels or components below the consolidated unit level. Accordingly,wehavedeterminedthatwehaveasinglereportingsegmentandoperatingunitstructure. RecentAccountingPronouncement InMay2011,theFinancialAccountingStandardsBoardissuedguidancethatchangedtherequirementforpresenting ComprehensiveIncomeintheconsolidatedfinancialstatements.Theupdaterequiresanentitytopresentthecomponents of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December15,2011andshouldbeappliedretrospectively.WeadoptedthisnewguidanceonJanuary1,2012. Note2.EarningsperShare Wecomputeearningspershare(EPS)ofClassAandClassBcommonstockusingthetwoclassmethodrequiredfor participatingsecurities.Ourparticipatingsecuritiesincludeallseriesofourconvertiblepreferredstockandrestrictedstock awards.Undistributedearningsallocatedtotheseparticipatingsecuritiesaresubtractedfromnetincomeindeterminingnet income attributable to common stockholders. Basic EPS is computed by dividing net income attributable to common stockholdersbytheweightedaveragenumberofsharesofourClassAandClassBcommonstockoutstanding,adjustedfor outstandingsharesthataresubjecttorepurchase. ForthecalculationofdilutedEPS,netincomeattributabletocommonstockholdersforbasicEPSisadjustedbythe effect of dilutive securities, including awards under our equity compensation plans. In addition, the computation of the dilutedEPSofClassAcommonstockassumestheconversionfromClassBcommonstock,whilethedilutedEPSofClassB common stock does not assume the conversion of those shares. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income attributable to common stockholders by the weightedaverage number of fullydilutedcommonsharesoutstanding. DilutivesecuritiesinourdilutedEPScalculationdonotincludePre2011RSUs.VestingoftheseRSUsisdependent upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition is satisfied upon the occurrenceofaqualifyingevent,definedasachangeofcontroltransactionorsixmonthsfollowingthecompletionofour initialpublicoffering.AsofMarch31,2012,suchaqualifyingeventhadnotoccurredanduntilitoccurs,theholdersof theseRSUshavenorightsinourundistributedearnings.Therefore,theyareexcludedfromtheeffectofdilutivesecurities. Post2011RSUsarenotsubjecttoaliquidityconditionin F17
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) ordertovest,andarethusincludedinthecalculationofdilutedEPS.Weexcluded4millionand2millionsharesissuable uponexerciseofemployeestockoptionsfortheyearsendedDecember31,2009and2010,respectively,and3millionand 3millionPost2011RSUsfortheyearendedDecember31,2011andthethreemonthsendedMarch31,2011,respectively, because the impact would be antidilutive. No shares were excluded from the calculation for the three months ended March31,2012. BasicanddilutedEPSarethesameforeachclassofcommonstockbecausetheyareentitledtothesameliquidationand dividendrights. ThenumeratorsanddenominatorsofthebasicanddilutedEPScomputationsforourcommonstockarecalculatedas follows(inmillions,exceptpershareamounts):
2009 Class Class A B YearEndedDecember31, 2010 2011 Class Class Class A B A ClassB ThreeMonthsEndedMarch31, 2011 2012 ClassA ClassB ClassA ClassB (unaudited) (unaudited)
BasicEPS: Numerator: Netincome Less:Netincome attributableto participatingsecurities Netincome attributableto common stockholders
$ $ 229 $ 18 $ 588 $ 85 $ 915 $ 18 $ 215 $ 18 $ 187
107
227
28
304
74
62
$ $ 122 $ 11 $ 361 $ 57 $ 611 $ 12 $ 141 $ 12 $ 125
Denominator: Weightedaverageshares outstanding 1,026 Less:Sharessubjectto repurchase 6 Numberofshares usedforbasicEPS computation 1,020 BasicEPS
32 1,081 110 1,189 6 5
98 1,147 117 1,233 5 3
32 1,075 110 1,184
98 1,142 117 1,230
$ $ 0.12 $0.34 $ 0.34 $0.52 $ 0.52 $ 0.12 $ 0.12 $ 0.10 $ 0.10 F18
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited)

2009 Class A YearEndedDecember31, 2010 2011 Class Class Class Class B A B A ClassB ThreeMonthsEndedMarch31, 2011 2012 ClassA ClassB ClassA ClassB
DilutedEPS: Numerator: Netincomeattributableto commonstockholders Reallocationofnetincome attributableto participatingsecurities Reallocationofnetincome asaresultofconversion ofClassBtoClassA commonstock Reallocationofnetincome toClassBcommon stock Netincome attributableto common stockholdersfor dilutedEPS
(unaudited)
(unaudited)
$ 122 $
11 $ 361 $
57 $ 611 $
12 $ 141 $
12 $ 125
12
30
31
122
361
611
141
125
12
32
37
10
$ 134 $ 134 $ 402 $ 393 $ 699 $ 648 $ 162 $ 151 $ 142 $ 131
Denominator: Numberofsharesusedfor basicEPScomputation 1,020 32 1,075 110 1,184 98 1,142 117 1,230 ConversionofClassBto ClassAcommonstock 1,020 1,075 1,184 1,142 1,230 Weightedaverageeffectof dilutivesecurities: Employeestock options 334 334 295 295 204 204 240 240 169 169 RSUs 5 5 9 9 Sharessubjectto repurchase 5 5 4 4 3 3 4 4 2 2 Warrants 7 7 8 8 2 2 4 4 Numberof sharesused fordiluted EPS computation 1,366 1,366 1,414 1,382 1,508 1,398 1,488 1,390 1,526 1,410 DilutedEPS $ 0.10 $ 0.10 $ 0.28 $ 0.28 $ 0.46 $ 0.46 $ 0.11 $ 0.11 $ 0.09 $ 0.09 F19
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) ProFormaEPS(unaudited) ThefollowingunauditedcalculationofthenumeratorsanddenominatorsofbasicanddilutedEPSgiveseffecttothe automatic conversion of all outstanding shares of our convertible preferred stock (using the as ifconverted method) into Class B common stock as though the conversion had occurred as of the beginning of the period or the original date of issuance, if later. In addition, the pro forma share amounts give effect to Pre2011 RSUs that have satisfied the service conditionasofDecember31,2011andMarch31,2012.TheseRSUswillvestandsettleuponthesatisfactionofaqualifying event,aspreviouslydefined.SharebasedcompensationexpenseassociatedwiththesePre2011RSUsisexcludedfromthis proformapresentation.IfthequalifyingeventhadoccurredonMarch31,2012,wewouldhaverecorded$965millionof sharebasedcompensationexpenseonthatdaterelatedtotheseRSUs,netofassociatedtaxeffectof$325million,resulting inanetreductionof$640milliontonetincome.
YearEnded December31,2011 ClassA ClassB ThreeMonthsEnded March31,2012 ClassA ClassB
ProFormaBasicEPS: Numerator: Netincomeasreported Reallocationofnetincomeduetoproforma adjustments Netincomeattributabletoparticipating securities Netincomeattributabletocommon stockholdersforproformabasic EPScomputation Denominator: WeightedaveragesharesusedforbasicEPS computation Proformaadjustmenttoreflectassumed conversionofpreferredstocktoClassB commonstock Proformaadjustmenttoreflectassumed vestingofPre2011RSUs Numberofsharesusedforproforma basicEPScomputation ProformabasicEPS ProFormaDilutedEPS: Numerator: Netincomeattributabletocommon stockholdersforproformabasicEPS computation Reallocationofnetincomeattributableto participatingsecurities Reallocationofnetincomeasaresultof conversionofClassBtoClassA commonstock ReallocationofnetincometoClassB commonstock Netincomeattributabletocommon stockholdersforproformadiluted EPScomputation
85 (31)
915 31 (2)
18 (6)
187 6
54
944
12
193
110
1,184
117
1,230
110 0.49
548 188 1,920 0.49
117 0.10
546 233 2,009 0.10
54 2
944
12
193
944
193
$ F20
1,000
953
205
194
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YearEnded December31,2011 ClassA ClassB ThreeMonthsEnded March31,2012 ClassA ClassB
Denominator: Numberofsharesusedforproformabasic EPScomputation ConversionofClassBtoClassAcommon stock Weightedaverageeffectofdilutive securities: Employeestockoptions RSUs Sharessubjecttorepurchase Warrants Numberofsharesusedforpro formadilutedEPS computation ProformadilutedEPS Note3.PropertyandEquipment
110 1,920
1,920
117 2,009
2,009
204 93 3 2
204 93 3 2
169 64 2
169 64 2
2,332 0.43
2,222 0.43
2,361 0.09
2,244 0.09
Propertyandequipmentconsistsofthefollowing(inmillions):
Networkequipment Land Buildings Leaseholdimprovements Computersoftware,officeequipmentandother Constructioninprogress Total Lessaccumulateddepreciationandamortization Propertyandequipment,net
$478 29 58 61 194 820 (246) $ 574
$1,016 34 355 120 73 327 1,925 (450) $1,475
$ 1,382 34 373 148 76 379 2,392 (537) $ 1,855
PropertyandequipmentatDecember31,2010and2011andMarch31,2012includes$298million,$881million,and $979million,respectively,acquiredundercapitalleaseagreements.Accumulatedamortizationundercapitalleasestotaled $85 million, $210 million, and $280 million at December 31, 2010 and 2011, and March 31, 2012, respectively. Amortizationofassetsundercapitalleasesisincludedindepreciationandamortizationexpense. Constructioninprogressincludescostsprimarilyrelatedtotheconstructionandnetworkequipmentofdatacentersin Oregon and North Carolina in the United States and in Sweden, and our new corporate headquarters in Menlo Park, California.Interestcapitalizedduringtheyearspresentedwasnotmaterial. F21
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Note4.GoodwillandIntangibleAssets Goodwillandintangibleassetsconsistofthefollowing(inmillions):

Acquiredpatents Acquirednoncompeteagreements Acquiredtechnologyandother Accumulatedamortization Netacquiredintangibleassets Goodwill Goodwillandintangibleassets
$33 11 27 (12) 59 37 $ 96
$51 18 43 (32) 80 82 $ 162
$ $
83 18 43 (37) 107 82 189
Acquiredpatentshaveestimatedusefullivesrangingfromfourto18yearsatacquisition.Theaveragetermofacquired noncompeteagreementsisgenerallytwoyears.Acquiredtechnologyandotherhaveestimatedusefullivesoftwototen years.AmortizationexpenseofintangibleassetsfortheyearsendedDecember31,2009,2010,and2011was$2million,$9 million,and$20million,respectively. DuringtheyearendedDecember31,2011,wecompletedbusinessacquisitionsfortotalconsiderationof$68million. These acquisitions were not material to our consolidated financial statements individually or in the aggregate. Our acquisitions prior to 2011 were also not material individually or in the aggregate. There were no business combinations completedduringthethreemonthsendedMarch31,2012. Thefollowingtablepresentstheaggregatedestimatedfairvalueoftheassetsacquiredforallacquisitionscompleted duringtheyearendedDecember31,2011(inmillions): Acquiredtechnologyandother Acquirednoncompeteagreements Netassetsacquired Deferredincometaxliabilities Goodwill Total $16 7 4 (7) 48 $68
Proformaresultsofoperationsrelatedtoour2011acquisitionshavenotbeenpresentedbecausetheyarenotmaterialto ourconsolidatedstatementsofincome,eitherindividuallyorintheaggregate.Forallacquisitionscompletedduringtheyear endedDecember31,2011,acquiredtechnologyandotherhadaweightedaverageusefullifeofthreeyearsandthetermof thenoncompeteagreementsisgenerallytwoyears. F22
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) The changes in carrying amount of goodwill for the years ended December 31, 2010 and 2011 are as follows (in millions): BalanceasofDecember31,2009 Goodwillacquired BalanceasofDecember31,2010 Goodwillacquired Effectofcurrencytranslationadjustment BalanceasofDecember31,2011 $11 26 37 48 (3) $82
AsofDecember31,2011,expectedamortizationexpensefortheunamortizedacquiredintangibleassetsforthenext fiveyearsandthereafterisasfollows(inmillions): 2012 2013 2014 2015 2016 Thereafter Total Note5.LongtermDebt InMarch2010,weenteredintoaseniorunsecuredtermloanfacilitywithcertainlenders.Thisfacilityallowedforthe drawdownofupto$250millioninunsecuredseniorloanswithamaturityoffiveyears.InApril2010wedrewdownthefull amountavailableunderthefacilityataninterestrateof4.5%,payablequarterly.Theloancouldberepaidbyusatanytime withoutpenalty.Debtissuancecostsofapproximately$1millionwererecordedinothernoncurrentassetsandwerebeing amortizedtointerestexpenseoverthecontractualtermoftheloan.OnMarch2,2011,werepaidinfullthelongtermdebt balanceof$250million,andexpensedtheremainingunamortizeddebtissuancecosts. In2011,weenteredintoanagreementforanunsecuredfiveyearrevolvingcreditfacilitythatallowedustoborrowup to$2,500million,withinterestpayableonborrowedamountssetattheLondonInterbankOfferedRate(LIBOR)plus1.0%. NoamountsweredrawndownunderthisagreementasofDecember31,2011.InFebruary2012,weterminatedthiscredit facilityandenteredintoanewagreementforanunsecuredfiveyearrevolvingcreditfacilitythatallowsustoborrowupto $5,000millionforgeneralcorporatepurposes,withinterestpayableontheborrowedamountssetatLIBORplus1.0%.Prior toourinitialpublicoffering,wecanborrowupto$2,500millionunderthisfacility.Originationfeesareamortizedoverthe termofthecreditfacility.Underthetermsofthenewagreement,weareobligatedtopayacommitmentfeeof0.10%per annumonthedailyundrawnbalance. Concurrent with our entering into the new revolving credit facility, we also entered into a bridge credit facility that allowsustoborrowupto$3,000milliontofundtaxwithholdingandremittanceobligationsrelatedtothesettlementof RSUsinconnectionwithourinitialpublicoffering,withinterestpayableontheborrowedamountssetatLIBORplus1.0%, andanadditional0.25%payableondrawnbalancesoutstandingfromandafterthe180thdayofborrowing.Wemaymakea singleborrowingunderthisbridgefacilitybeginningontheclosing F23 $21 11 7 7 6 28 $80
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) dateofourinitialpublicofferingandendingonthedatethatis240daysafterthatdate.Anyamountsoutstandingunderthis facilitywillbedueoneyearafterthedatewedrawonthefacilitybutnolaterthanJune30,2014.Duringthetermofthis bridgefacility,thelenderscommitmentsaresubjecttoreductionandamountsborrowedthereunderaresubjecttorepayment intheeventweraisecapitalthroughcertainassetsales,debtissuances,orequityissuances.Originationfeesareamortized overthetermofthefacility,andweareobligatedtopayanadditionalupfrontfeeof0.20%oftheaggregateamountofthe borrowings requested on any applicable funding date. Under the terms of the agreement, we are obligated to pay a commitmentfeeof0.10%perannumonthedailyundrawnbalancefromandafterthe90thdayfollowingthedateweentered intothebridgefacility. Note6.FairValueMeasurements Assetsmeasuredatfairvalueonarecurringbasisaresummarizedbelow(inmillions):
FairValueMeasurementat ReportingDateUsing Quoted Pricesin Active Significant Marketsfor Other Identical Observable Assets Inputs (Level1) (Level2) (unaudited)
Description
March31, 2012
Significant Unobservable Inputs (Level3)
Cashequivalents: Moneymarketfunds U.S.governmentsecurities U.S.governmentagencysecurities Totalcashequivalents Marketablesecurities: U.S.governmentsecurities U.S.governmentagencysecurities Totalcashequivalentsandmarketablesecurities
$ $
333 120 100 553 1,570 1,058 3,181
333 120 100 553
1,570 1,058 $ 3,181
FairValueMeasurementat ReportingDateUsing Quoted Pricesin Active Marketsfor Identical Assets (Level1) Significant Other Observable Inputs (Level2)
Description
December31, 2011
Cashequivalents: Moneymarketfunds U.S.governmentsecurities U.S.governmentagencysecurities Totalcashequivalents Marketablesecurities: U.S.governmentsecurities U.S.governmentagencysecurities Totalcashequivalentsandmarketablesecurities
$ $ F24
892 60 50 1,002 1,415 981 3,398
$ 892 60 50 1,002 1,415 981 $ 3,398
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FairValueMeasurementat ReportingDateUsing Quoted Pricesin Active Markets for Identical Assets (Level1)
Description
December31, 2010
Significant Other Observable Inputs (Level2)
Cashequivalents: Moneymarketfunds Totalcashequivalents
$ $
1,450 1,450
$1,450 $1,450
$ $
$ $
GrossunrealizedgainsorlossesforcashequivalentandmarketablesecuritiesasofDecember31,2010and2011and March31,2012werenotmaterial. The following table classifies our marketable securities by contractual maturities as of December 31, 2011 and March31,2012(inmillions):
December31, 2011 March31, 2012 (unaudited)
Dueinoneyear Dueinonetofiveyears Total Note7.CommitmentsandContingencies Leases
$ $
1,964 432 2,396
$ $
1,818 810 2,628
Weenteredintovariouscapitalleasearrangementstoobtainpropertyandequipmentforouroperations.Additionally, onoccasionwehavepurchasedpropertyandequipmentforwhichwehavesubsequentlyobtainedcapitalfinancingunder saleleasebacktransactions.Theseagreementsaretypicallyforthreeyearsexceptforbuildingleaseswhicharefor15years, with interest rates ranging from 2% to 13%. The leases are secured by the underlying leased buildings, leasehold improvements,andequipment.Wehavealsoenteredintovariousnoncancelableoperatingleaseagreementsforcertainof ouroffices,equipment,landanddatacenterswithoriginalleaseperiodsexpiringbetween2012and2027.Wearecommitted to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangementsonastraightlinebasis. F25
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Thefollowingisaschedule,byyears,ofthefutureminimumleasepaymentsrequiredundernoncancelablecapitaland operatingleasesasofDecember31,2011(inmillions):

Capital Leases Operating Leases
2012 2013 2014 2015 2016 Thereafter Totalminimumleasepayments Lessamountrepresentinginterestandtaxes Lesscurrentportionofthepresentvalueofminimumleasepayments Capitalleaseobligations,netofcurrentportion
322 228 109 17 11 130 817
$ $
180 130 113 102 95 325 945
(140) (279) $ 398
Operatingleaseexpensetotaled$69million,$178million,and$219millionfortheyearsendedDecember31,2009, 2010,and2011,respectively.Wealsohave$500millionofnoncancelablecontractualcommitmentsasofDecember31, 2011,primarilyrelatedtoequipmentandsuppliesforourdatacenteroperations,andtoalesserextent,constructionofour datacentersites.Themajorityofthesecommitmentsareduein2012. Contingencies LegalMatters OnMarch12,2012,YahoofiledalawsuitagainstusintheU.S.DistrictCourtfortheNorthernDistrictofCalifornia, claiming that we infringe certain patents that Yahoo claims relate to advertising, social networking, privacy, customization, and messaging. Yahoo is seeking unspecified damages, a damage multiplier for alleged willful infringement,andaninjunction.Weintendtovigorouslydefendthislawsuit,andonApril3,2012,wefiledouranswerwith respecttothiscomplaintandassertedcounterclaimsthatYahoosproductsinfringetenofourpatents.Thislitigationisstill in its early stages and the final outcome, including our liability, if any, with respect to Yahoos claims, is uncertain. At present, we are unable to estimate a reasonably possible range of loss, if any, that may result from this matter. If an unfavorableoutcomeweretooccurinthislitigation,theimpactcouldbematerialtoourbusiness,financialcondition,or resultsofoperations. Wearealsopartytovariouslegalproceedingsandclaimswhichariseintheordinarycourseofbusiness.Intheopinion ofmanagement,asofDecember31,2011andMarch31,2012,therewasnotatleastareasonablepossibilitythatwehad incurredamaterialloss,oramateriallossinexcessofarecordedaccrual,withrespecttosuchlosscontingencies. Indemnifications Inthenormalcourseofbusiness,tofacilitatetransactionsofservicesandproducts,wehaveagreedtoindemnifycertain partieswithrespecttocertainmatters.Wehaveagreedtoholdcertainpartiesharmlessagainstlossesarisingfromabreachof representationsorcovenants,oroutofintellectualpropertyinfringementorotherclaimsmadebythirdparties.Inaddition, wehavealsoagreedtoindemnifycertaininvestorswithrespectto F26
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) representationsmadebyusinconnectionwiththeissuanceandsaleofpreferredstock.Theseagreementsmaylimitthetime within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylawscontainsimilarindemnificationobligations. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.Historically,paymentsmadebyusundertheseagreementshavenothadamaterialimpactonourconsolidated financial position, results of operations or cash flows. In our opinion, as of December 31, 2011, there was not at least a reasonablepossibilitywehadincurredamateriallosswithrespecttoindemnificationofsuchparties.Wehavenotrecorded anyliabilityforcostsrelatedtoindemnificationthroughDecember31,2011. Note8.StockholdersEquity ConvertiblePreferredStock Ourcertificateofincorporation,asamendedandrestated,authorizestheissuanceof569,001,400sharesof$0.000006 par value convertible preferred stock. The following table summarizes the convertible preferred stock outstanding as of December31,2011,andtherightsandpreferencesoftherespectiveseries:
Shares Authorized (inthousands) Issuedand Outstanding (inthousands) Aggregate Liquidation Preference (inmillions) Dividend PerShare PerAnnum Conversion Ratio PerShare
SeriesA SeriesB SeriesC SeriesD SeriesE Total
134,747 226,032 95,768 67,454 45,000 569,001
133,055 224,273 91,410 50,590 44,038 543,366
$ $
1 13 26 375 200 615
$0.00036875 0.00456 0.02297335 0.593 0.3633264
1.000000 1.004910 1.004909 1.012561 1.000000
AsofDecember31,2011,therights,preferences,andprivilegesofthepreferredstockholderswereasfollows: Dividends TheholdersofsharesofSeriesA,SeriesB,SeriesC,SeriesD,andSeriesEconvertiblepreferredstockareentitledto receive noncumulative dividends, out of any assets legally available for such purpose, prior and in preference to any declarationorpaymentofanydividendontheClassAcommonstockorClassBcommonstock,payablequarterlywhen,as andif,declaredbyourboardofdirectors.Afterpaymentofsuchdividendtothepreferredstockholders,outstandingsharesof preferredstockshallparticipatewithsharesofClassAcommonstockandClassBcommonstockonanasconvertedtoClass Bcommonstockbasisastoanyadditionaldividends.AsofDecember31,2011,wehadnotdeclaredanydividends. Conversion EachshareofSeriesA,SeriesB,SeriesC,SeriesD,andSeriesEpreferredstockisconvertible,attheoptionoftheholder thereof,atanytimeafterthedateofissuanceofsuchshare,intosuchnumberoffullypaid F27
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) andnonassessablesharesofClassBcommonstockasisdeterminedbydividingtheapplicableoriginalissuepricebythe conversionpriceapplicabletosuchshareineffectonthedateofconversion. The conversion price of each series of preferred stock may be subject to adjustment from time to time under certain circumstances.Theconvertiblepreferredstockissuedtodatewassoldatpricesrangingfrom$0.004605to$7.412454per share,which,inallcases,exceededthethenmostrecentreassessedfairvalueofourClassBcommonstock.Accordingly, therewasnointrinsicvalueassociatedwiththeissuanceoftheconvertiblepreferredstockthroughDecember31,2011,and therewerenootherseparateinstrumentsissuedwiththeconvertiblepreferredstock,suchaswarrants.Therefore,wehave concludedthattherewasnobeneficialconversionoptionassociatedwiththeconvertiblepreferredstockissuances. Each share of Series A, Series B, Series C, Series D, and Series E convertible preferred stock shall automatically be convertedintofullypaid,nonassessablesharesofClassBcommonstockimmediatelyupontheearlierof:(i)thesalebyus ofourClassAcommonstockorClassBcommonstockinafirmcommitmentunderwrittenpublicofferingpursuanttoa registrationstatementundertheSecuritiesActof1933,asamended(SecuritiesAct),thepublicofferingpriceofwhichresults inaggregatecashproceedstousofnotlessthan$100million(netofunderwritingdiscountsandcommissions),or(ii)the datespecifiedbywrittenconsentoragreementoftheholdersofamajorityofthethenoutstandingsharesofpreferredstock, votingtogetherasasingleclassonanasconvertedbasis,provided,however,thatif(a)theholdersofamajorityofthethen outstandingsharesofSeriesDconvertiblepreferredstockdonotconsentoragreeor(b)theholdersofamajorityofthethen outstandingsharesofSeriesEconvertiblepreferredstockdonotconsentoragree,thenineithersuchcasetheconversion shallnotbeeffectiveastoanysharesofpreferredstockuntil180daysafterthedateofthewrittenconsentofthemajorityof thethenoutstandingsharesofpreferredstock. LiquidationPreferences In the event we liquidate, dissolve, or wind up our business, either voluntarily or involuntarily, the holders of our Series A, Series B, Series C, Series D, and Series E convertible preferred stock shall be entitled to receive, prior and in preferencetoanydistributionofanyofourassetstotheholdersofClassAcommonstockorClassBcommonstock,an amountpershareequalto$0.004605,$0.0570025,$0.2871668,$7.412454,and$4.54158pershare(asadjustedforstock splits,stockdividends,reclassifications,andthelike),respectively,plusanydeclaredbutunpaiddividends. If, upon the occurrence of any of these events, the assets and funds distributed among the holders of the Series A, Series B, Series C, Series D, and Series E convertible preferred stock shall be insufficient to permit the payment to such holdersofthefullaforesaidpreferentialamounts,thenourentireassetsandfundslegallyavailablefordistributionshallbe distributedratablyamongtheholdersoftheSeriesA,SeriesB,SeriesC,SeriesD,andSeriesEconvertiblepreferredstockin proportiontothepreferentialamounteachsuchholderisotherwiseentitledtoreceive. IfthereareanyremainingassetsuponthecompletionoftheliquidatingdistributiontotheSeriesA,SeriesB,SeriesC, SeriesD,andSeriesEconvertiblepreferredstockholders,theholdersofourClassAcommonstockandClassBcommon stockwillreceiveallourremainingassets.Themergerorconsolidationofusintoanotherentityinwhichourstockholders ownlessthan50%ofthevotingstockofthesurvivingcompany,orthesale,transfer,orleaseofsubstantiallyallourassets, shallbedeemedaliquidation,dissolution,orwindingupofus.Astheredemptioneventsarewithinourcontrolforall periodspresented,allsharesofpreferredstockhavebeenpresentedaspartofpermanentequity. F28
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) VotingRights TheholderofeachshareofSeriesA,SeriesB,SeriesC,SeriesD,andSeriesEconvertiblepreferredstockshallhavethe samevotingrightsastheholdersofClassBcommonstock,isentitledtonoticeofanystockholdersmeetinginaccordance withourbylaws,andtogetherwiththeholdersofClassAcommonstockandClassBcommonstock,theSeriesA,SeriesB, SeriesC,SeriesD,andSeriesEconvertiblepreferredstockwillvotetogetherasasingleclassonallmatterswhichholdersof ClassAcommonstockandClassBcommonstockhavetherighttovote,unlessotherwisestated.EachholderofClassA commonstockisentitledtoonevoteforeachshareofClassAcommonstockheldeachholderofClassBcommonstockis entitledtotenvotesforeachshareofClassBcommonstockheldandeachholderofSeriesA,SeriesB,SeriesC,SeriesD, andSeriesEconvertiblepreferredstockisentitledtotenvotesforeachshareofClassBcommonstockintowhichsuch convertiblepreferredstockcouldbeconverted. CommonStock OurcertificateofincorporationauthorizestheissuanceofClassAcommonstockandClassBcommonstock.Weare authorizedtoissue4,141,000,000sharesofClassAcommonstockand4,141,000,000sharesofClassBcommonstock,each withaparvalueof$0.000006pershare.HoldersofourClassAcommonstockandClassBcommonstockareentitledto dividends when, as and if, declared by our board of directors, subject to the rights of the holders of all classes of stock outstandinghavingpriorityrightstodividends.AsofDecember31,2011,wehadnotdeclaredanydividends.Theholderof each share of Class A common stock is entitled to one vote, while the holder of each share of Class B common stock is entitledtotenvotes.Afterourinitialpublicoffering,atransferofsharesofClassBcommonstockwillgenerallyresultin those shares converting to Class A common stock. Class A common stock and Class B common stock are referred to as commonstockthroughoutthenotestothesefinancialstatements,unlessotherwisenoted. SharebasedCompensationPlans Wemaintaintwosharebasedemployeecompensationplans.InJanuary2005,ourboardofdirectorsandstockholders adoptedandapprovedthe2005StockPlan,asamended,whichprovidesfortheissuanceofincentiveandnonstatutorystock optionsandRSUstoqualifiedemployees,directors,andconsultants.InNovember2005,ourboardofdirectorsadoptedand approvedthe2005OfficersStockPlan(togetherwiththe2005StockPlan,theStockPlans),whichprovidesfortheissuance ofincentiveandnonstatutorystockoptionstocertainemployeesorofficers. Thetermofstockoptionsissuedunderthe2005StockPlanmaynotexceedtenyearsfromthedateofgrant.Underthe 2005StockPlan,incentivestockoptionsandnonstatutorystockoptionsaregrantedatanexercisepricethatisnottobeless than100%ofthefairmarketvalueofourClassBcommonstockonthedateofgrant,asdeterminedbyourcompensation committee. Stock options become vested and exercisable at such times and under such conditions as determined by our compensationcommitteeonthedateofgrant. The2005OfficersStockPlanprovidesfortheissuanceofupto120,000,000sharesofincentiveandnonstatutorystock options to certain of our employees or officers. The 2005 Officers Stock Plan will terminate ten years after its adoption unlessterminatedearlierbyourcompensationcommittee.Stockoptionsbecomevestedandexercisableatsuchtimesand undersuchconditionsasdeterminedbyourcompensationcommitteeonthedateofgrant.InNovember2005,weissueda nonstatutorystockoptiontoourCEOtopurchase120,000,000sharesofourClassBcommonstockunderthe2005Officers StockPlan.AtDecember31,2011,theoptionwasoutstandingandfullyvested,andnooptionswereavailableforfuture issuanceunderthe2005OfficersStockPlan. F29
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) The following table summarizes the stock option and RSU award activity under the Stock Plans between January 1, 2009andMarch31,2012:
SharesSubjecttoOptionsOutstanding Weighted Weighted Average Average Remaining Aggregate Numberof Exercise Contractual Intrinsic Shares Price Term Value(2) (inthousands) (inyears) (inmillions) OutstandingRSUs Weighted Average Grant Outstanding DateFair RSUs Value (inthousands)
Shares Available forGrant(1) (inthousands)
BalanceasofDecember31,2008 Increaseinsharesauthorized RSUsgranted Stockoptionsgranted Stockoptionsexercised Stockoptions forfeited/cancelled RSUsforfeitedandcancelled BalanceasofDecember31,2009 Increaseinsharesauthorized RSUsgranted Stockoptionsgranted Stockoptionsexercised Stockoptions forfeited/cancelled RSUsforfeitedandcancelled BalanceasofDecember31,2010 Increaseinsharesauthorized RSUsgranted Stockoptionsexercised Stockoptions forfeited/cancelled RSUsforfeitedandcancelled BalanceasofDecember31,2011 RSUsgranted(unaudited) Stockoptionsexercised (unaudited) RSUsforfeitedandcancelled (unaudited) BalanceasofMarch31,2012 (unaudited) Stockoptionsvestedandexpectedto vestasofDecember31,2011 Stockoptionsexercisableasof December31,2011 Stockoptionsvestedandexpectedto vestasofMarch31,2012 (unaudited) Stockoptionsexercisableasof March31,2012(unaudited)
15,257 251,969 (159,167) (13,885) 5,996 10,511 110,681 25,000 (68,058) (4,706) 2,066 11,399 76,382 10,000 (55,126) 2,560 18,502 52,318 (1,947)
479,811 $ 0.17 13,885 2.54 (57,459) 0.15 (5,996) 430,241 4,706 (69,910) 0.80 0.25
1,780 7,415 7,360
136,833 $ 1.72 159,167 2.35 (10,511) 285,489
6.39
1.81 2.07
11.57 0.09 0.22 0.42 5.37
68,058 10.56 (11,399) 13.12 342,148 3.39 55,126 26.32 (18,502) 7.97 378,772 6.83 1,947 30.46 (2,290) 13.54 378,429 6.88
(2,066) 362,971 (101,872) (2,560) 258,539 (21,783)
0.27 1.60 0.47 4.38
2,290 52,661
0.22
236,756 $ 0.49 258,468 $ 0.47 244,849 $ 0.19
4.15 $ 4.38 $ 4.19 $
7,194 7,359 7,040
236,653 $ 0.49 224,185 $ 0.19
4.15 $ 3.97 $
7,191 6,879
(1) After excluding 195 thousand restricted stock awards not included in the table above, 52,123 and 52,466 thousand shares are available for grant under the Stock PlansasofDecember31,2011andMarch31,2012,respectively. (2) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the assessed fair value of our commonstockasofDecember31,2009,2010,and2011andMarch31,2012.
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) ThefollowingtablesummarizesadditionalinformationregardingoutstandingandexercisableoptionsundertheStock PlansatDecember31,2011:

OptionsOutstanding Weighted Average Remaining Life (inyears) OptionsExercisable Weighted Average Exercise Price Numberof Shares (inthousands) Weighted Average Exercise Price
Exercise Price(Range)
Numberof Shares (inthousands)
$0.000.04 0.06 0.100.18 0.290.33 1.78 1.85 2.95 3.23 10.39 15.00
27,694 135,863 34,186 37,665 5,328 5,715 2,888 4,500 3,500 1,200 258,539
3.14 3.85 4.38 5.30 6.58 7.03 7.63 7.82 8.56 8.80 4.38
$ 0.01 0.06 0.13 0.31 1.78 1.85 2.95 3.23 10.39 15.00 $ 0.47
27,694 135,863 34,186 37,665 2,637 3,423 1,356 2,025 244,849
$ 0.01 0.06 0.13 0.31 1.78 1.85 2.95 3.23 $ 0.19
TheaggregateintrinsicvalueoftheoptionsexercisedintheyearsendedDecember31,2009,2010,and2011andthe threemonthsendedMarch31,2012,was$149million,$492million,$2,380million,and$629million,respectively.The totalgrantdatefairvalueofstockoptionsvestedduringtheyearsendedDecember31,2009,2010,and2011andthethree monthsendedMarch31,2012was$16million,$16million,$6million,and$1million,respectively.Thetotalnumberof unvestedsharessubjecttooptionsandRSUsoutstandingasofDecember31,2009,2010,and2011andMarch31,2012was 395million,374million,392million,and386millionrespectively. SharesReservedforFutureIssuance WehavethefollowingsharesofClassBcommonstockreservedforfutureissuanceasofDecember31,2011andMarch 31,2012(inthousands):

December31, 2011 March31, 2012 (unaudited)
2005StockPlan: Sharessubjecttooptionsoutstanding Restrictedstockunitsoutstanding Sharesavailableforfuturegrants 2005OfficersStockPlansharessubjecttooptionsoutstanding Convertiblepreferredstock,allseries
138,539 378,772 52,123 120,000 545,551 1,234,985
116,756 378,429 52,466 120,000 545,401 1,213,052
Inaddition,wehavereservedsharesofClassAcommonstockforfutureissuancepursuanttotheconversionofany sharesofClassBcommonstockthatarecurrentlyoutstandingorthatmaybeissuedinthefuture. F31
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Note9.IncomeTaxes ThecomponentsofincomebeforeprovisionforincometaxesfortheyearsendedDecember31,2009,2010,and2011 areasfollows(inmillions):

2009 YearEndedDecember31, 2010 2011
Domestic Foreign Totalincomebeforeprovisionforincometaxes Theprovisionforincometaxesconsistedofthefollowing(inmillions):
$ 260 (6) $ 254
$ 1,027 (19) $ 1,008
$ 1,819 (124) $ 1,695
2009
Current: Federal State Foreign Totalcurrenttaxexpense Deferred: Federal State Totaldeferredtaxexpense(benefit) Provisionforincometaxes
$ $
83 14 1 98 (60) (13) (73) 25
$ $
325 57 1 383 13 6 19 402
$ $
664 60 8 732 (34) (3) (37) 695
A reconciliation of the U.S. federal statutory income tax rate of 35% to our effective tax rate is as follows (in percentages):
YearEndedDecember31, 2009 2010 2011
U.S.federalstatutoryincometaxrate Stateincometaxes,netoffederalbenefit Researchtaxcredits Sharebasedcompensation Foreignlossesnotbenefited Changeinvaluationallowance Other Effectivetaxrate F32
35.0% 0.2 (1.2) 0.8 1.1 (25.6) (0.3) 10.0%
35.0% 4.0 (0.8) 0.3 0.8 0.6 39.9%
35.0% 1.9 (1.0) 1.5 3.3 0.3 41.0%
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Excesstaxbenefitsassociatedwithstockoptionexercisesandotherequityawardsarecreditedtostockholdersequity. The income tax benefits resulting from stock awards that were credited to stockholders equity were $50 million, $107 million,and$433millionfortheyearsendedDecember31,2009,2010,and2011. Ourdeferredtaxassets(liabilities)areasfollows(inmillions):
December31, 2010 2011
Deferredtaxassets: Netoperatinglosscarryforward Taxcreditcarryforward Sharebasedcompensation Accruedexpensesandotherliabilities Totaldeferredtaxassets Less:valuationallowance Deferredtaxassets,netofvaluationallowance Deferredtaxliabilities: Depreciationandamortization Purchasedintangibleassets Deferredforeigntaxes Totaldeferredtaxliabilities Netdeferredtaxassets
$ $
2 28 38 68 68 (21) (8) (29) 39
$ $
3 9 79 58 149 (9) 140 (69) (10) (1) (80) 60
Thevaluationallowancewasapproximately$9millionasofDecember31,2011,relatedtostatetaxcreditsthatwedo notbelievewillultimatelyberealized.TherewasnochangetothevaluationallowancefortheyearendedDecember31, 2010.Thevaluationallowancedecreasedbyapproximately$76millionfortheyearendedDecember31,2009. AsofDecember31,2011,wehadU.S.federalandCalifornianetoperatinglosscarryforwardsof$7millionand$17 million,whichwillexpirein2027and2021,respectively,ifnotutilized.Wealsohavestatetaxcreditcarryforwardsof$9 million,whichcarryforwardindefinitely. Utilizationofournetoperatinglossandtaxcreditcarryforwardsmaybesubjecttosubstantialannuallimitationsdueto the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitationscouldresultintheexpirationofthenetoperatinglossandtaxcreditcarryforwardsbeforetheirutilization.The eventsthatmaycauseownershipchangesinclude,butarenotlimitedto,acumulativestockownershipchangeofgreater than50%overathreeyearperiod. Our net foreign pretax losses include jurisdictions with both pretax earnings and pretax losses. Our consolidated financialstatementsprovidetaxesforallrelatedtaxliabilitiesthatwouldariseuponrepatriationofearningsintheforeign jurisdictions where we do not intend to indefinitely reinvest those earnings outside the United States, and the amount of taxesprovidedforhasbeeninsignificant. F33
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Thefollowingtablereflectschangesinthegrossunrecognizedtaxbenefits(inmillions):

YearEndedDecember31, 2009 2010 2011
Grossunrecognizedtaxbenefitsbeginningofperiod Increaserelatedtoprioryeartaxpositions Decreasesrelatedtoprioryeartaxpositions Increasesrelatedtocurrentyeartaxpositions Grossunrecognizedtaxbenefitsendofperiod
$ $
3 6 9
$ $
9 1 (2) 10 18
$ $
18 5 (2) 42 63
During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provisionforincometaxesontheconsolidatedstatementsofincome.FortheyearendedDecember31,2011,werecognized interestof$1millionandpenaltiesof$3million.TheamountofinterestandpenaltiesaccruedasofDecember31,2010and 2011was$1millionand$6million,respectively. Iftheremainingbalanceofgrossunrecognizedtaxbenefitsof$63millionasofDecember31,2011wasrealizedina futureperiod,thiswouldresultinataxbenefitof$51millionwithinourprovisionofincometaxesatsuchtime. We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictionsinwhichwearesubjecttopotentialexaminationbytaxingauthoritiesincludetheUnitedStatesandIreland.In 2011, the Internal Revenue Service (IRS) commenced its examinations of our 2008 and 2009 tax years. We believe that adequateamountshavebeenreservedforanyadjustmentsthatmayultimatelyresultfromtheseexaminationsandwedonot anticipateasignificantimpacttoourgrossunrecognizedtaxbenefitswithinthenext12monthsrelatedtotheseyears.Our 2010 and 2011 tax years remain subject to examination by the IRS and all tax years starting in 2008 remain subject to examinationinIreland.Weremainsubjecttopossibleexaminationsorareundergoingauditsinvariousotherjurisdictions thatarenotmaterialtoourfinancialstatements. Althoughthetimingoftheresolution,settlement,andclosureofanyauditsishighlyuncertain,itisreasonablypossible thatthebalanceofgrossunrecognizedtaxbenefitscouldsignificantlychangeinthenext12months.However,giventhe numberofyearsremainingthataresubjecttoexamination,weareunabletoestimatethefullrangeofpossibleadjustmentsto thebalanceofgrossunrecognizedtaxbenefits. ThreeMonthsEndedMarch31,2011and2012 Our effective tax rate for the three months ended March 31, 2012 increased compared to the same period in 2011 primarilyduetotheimpactofnondeductiblesharebasedcompensationexpense,lossesarisingoutsidetheUnitedStatesin jurisdictionswherewedonotreceiveataxbenefit,andtheexpirationofthefederaltaxcreditforresearchanddevelopment activitiesattheendof2011. F34
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Note10.GeographicalInformation RevenuebygeographyisbasedonthebillingaddressoftheadvertiserorPlatformdeveloper.Thefollowingtablesets forthrevenueandlonglivedassetsbygeographicarea(inmillions):

YearEnded December31, 2010 ThreeMonthsEnded March31, 2011 2012 (unaudited)
2009
2011
Revenue: UnitedStates Restoftheworld (1) Totalrevenue
$ 518 259 $ 777
$ 1,223 751 $ 1,974
$ 2,067 1,644 $ 3,711
$ 427 304 $ 731
$ 536 522 $ 1,058
(1) Noindividualcountryexceeded10%ofourtotalrevenueforanyperiodpresented. December31, 2010 2011 March31, 2012 (unaudited)
Longlivedassets: UnitedStates Restoftheworld Totallonglivedassets Note11.RelatedPartyTransactions
$ 567 7 $ 574
$ 1,444 31 $ 1,475
$ $
1,781 74 1,855
During2009,ourboardofdirectorsauthorizedustoawardtwomillionsharesofClassBcommonstocktoafamily member of our CEO. This award was made in satisfaction of funds provided for our initial working capital and potential relatedclaims.Werecordedsharebasedcompensationexpenseof$9millionrelatedtothisstockawardfortheyearended December31,2009. Note12.SubsequentEvents For our consolidated financial statements as of December 31, 2010 and 2011, and for each of the three years in the periodendedDecember31,2011,weevaluatedsubsequenteventsthroughFebruary1,2012,whichisthedatethefinancial statementswereavailabletobeissued. InJanuary2012,ourboardofdirectorsadoptedour2012EquityIncentivePlan,subjecttostockholderapproval,which planwillbecomeeffectiveontheeffectivedateofourinitialpublicoffering.The2012EquityIncentivePlanwillsucceed our2005StockPlanandwewillceasegrantingawardsunderthe2005StockPlan.Wehavereserved25millionsharesof ClassAcommonstockforissuanceunderour2005StockPlan,plusanadditionalnumberofsharesofClassAcommonstock equaltoanysharesreservedbutnotissuedorsubjecttooutstandingawardsunderour2005StockPlanontheeffectivedate ofourinitialpublicoffering,plus,(i)sharesthataresubjecttooutstandingawardsunderthe2005StockPlanwhichceaseto besubjecttosuchawards,(ii)sharesissuedunderthe2005StockPlanwhichareforfeitedorrepurchasedattheiroriginal issueprice,and(iii)sharessubjecttoawardsunderthe2005StockPlanthatareusedtopaytheexercisepriceofanoptionor withheld to satisfy the tax withholding obligations related to any award. The 2012 Equity Incentive Plan provides for automaticincreasesinthenumberofsharesreservedforissuanceonJanuary1ofeachyear. F35
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Table of Contents FACEBOOK,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(CONTINUED) (InformationasofMarch31,2012andforthethreemonthsendedMarch31,2011and2012isunaudited) Note13.SubsequentEvents(unaudited) ForourinterimconsolidatedfinancialstatementsasofMarch31,2012,andforthethreemonthsthenended,wehave evaluatedsubsequenteventsthroughApril23,2012,whichisthedatethefinancialstatementswereavailabletobeissued. InApril2012,weenteredintoanagreementtoacquireInstagram,Inc.,whichhasbuiltamobilephonebasedphoto sharingservice,forapproximately23millionsharesofourcommonstockand$300millionincash.Followingtheclosingof this acquisition, we plan to maintain Instagrams products as independent mobile applications to enhance our photos productofferingsandtoenableuserstoincreasetheirlevelsofmobileengagementandphotosharing.Thisacquisitionis subject to customary closing conditions, including the expiration or early termination of all applicable waiting periods undertheHartScottRodinoAntitrustImprovementActof1976,asamended(HSR),andiscurrentlyexpectedtocloseinthe second quarter of 2012. We have agreed to pay Instagram a $200 million termination fee if governmental authorities permanently enjoin or otherwise prevent the completion of the merger or if either party terminates the agreement after December10,2012. Also,inApril2012,weenteredintoanagreementwithMicrosoftCorporationpursuanttowhichwewillbeassigned Microsoftsrightstoacquireapproximately650patentsandpatentapplicationsthataresubjecttotheagreementbetween AOLInc.andMicrosoftenteredintoonApril5,2012,inexchangeforatotalcashpaymentofapproximately$550million. Aspartofthistransaction,wewillobtainalicensetotheotherAOLpatentsandpatentapplicationsbeingpurchasedby MicrosoftandwillgrantMicrosoftalicensetotheAOLpatentsandpatentapplicationsthatweacquire.Inaddition,wewill beassignedMicrosoftsrightstoacquiretheoutstandingsharesofawhollyowned,nonoperatingsubsidiaryofAOLthat holdsaportionoftheaforementionedpatentandpatentapplications.ThetransactionissubjecttotheclosingofMicrosofts transactionwithAOLaswellascustomaryclosingconditions,includingtheexpirationorearlyterminationofallapplicable waitingperiodsunderHSR. F36
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Table of Contents PARTII INFORMATIONNOTREQUIREDINPROSPECTUS Item13. OtherExpensesofIssuanceandDistribution ThefollowingtablesetsforthallexpensestobepaidbytheRegistrant,otherthanestimatedunderwritingdiscountsand commissions,inconnectionwithourinitialpublicoffering.AllamountsshownareestimatesexceptfortheSECregistration feeandtheFINRAfilingfee: SECregistrationfee FINRAfilingfee InitialNASDAQGlobalSelectMarketListingfee Printingandengraving Legalfeesandexpenses Accountingfeesandexpenses Blueskyfeesandexpenses(includinglegalfees) Transferagentandregistrarfees Miscellaneous Total
* Tobecompletedbyamendment.
$573,000 75,500 250,000 * * * * * * $ *
Item14. IndemnificationofDirectorsandOfficers Section145oftheDelawareGeneralCorporationLawauthorizesacourttoaward,oracorporationsboardofdirectors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended(theSecuritiesAct). AspermittedbytheDelawareGeneralCorporationLaw,theRegistrantsrestatedcertificateofincorporationthatwillbe ineffectattheclosingoftheofferingcontainsprovisionsthateliminatethepersonalliabilityofitsdirectorsformonetary damagesforanybreachoffiduciarydutiesasadirector,exceptliabilityforthefollowing: anybreachofthedirectorsdutyofloyaltytotheRegistrantoritsstockholders actsoromissionsnotingoodfaithorthatinvolveintentionalmisconductoraknowingviolationoflaw under Section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases)or anytransactionfromwhichthedirectorderivedanimproperpersonalbenefit.
As permitted by the Delaware General Corporation Law, the Registrants restated bylaws that will be in effect at the closingofourinitialpublicoffering,providethat: theRegistrantisrequiredtoindemnifyitsdirectorsandexecutiveofficerstothefullestextentpermittedbythe DelawareGeneralCorporationLaw,subjecttoverylimitedexceptions theRegistrantmayindemnifyitsotheremployeesandagentsassetforthintheDelawareGeneralCorporationLaw II1
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Table of Contents theRegistrantisrequiredtoadvanceexpenses,asincurred,toitsdirectorsandexecutiveofficersinconnection withalegalproceedingtothefullestextentpermittedbytheDelawareGeneralCorporationLaw,subjecttovery limitedexceptionsand therightsconferredinthebylawsarenotexclusive.
TheRegistranthasentered,andintendstocontinuetoenter,intoseparateindemnificationagreementswithitsdirectors andexecutiveofficerstoprovidethesedirectorsandexecutiveofficersadditionalcontractualassurancesregardingthescope oftheindemnificationsetforthintheRegistrantsrestatedcertificateofincorporationandrestatedbylawsandtoprovide additionalproceduralprotections.Atpresent,thereisnopendinglitigationorproceedinginvolvingadirectororexecutive officeroftheRegistrantregardingwhichindemnificationissought.Referenceisalsomadetotheunderwritingagreementto befiledasExhibit1.1tothisregistrationstatement,whichprovidesfortheindemnificationofexecutiveofficers,directors and controlling persons of the Registrant against certain liabilities. The indemnification provisions in the Registrants restatedcertificateofincorporation,restatedbylawsandtheindemnificationagreementsenteredintoortobeenteredinto betweentheRegistrantandeachofitsdirectorsandexecutiveofficersmaybesufficientlybroadtopermitindemnificationof theRegistrantsdirectorsandexecutiveofficersforliabilitiesarisingundertheSecuritiesAct. TheRegistrantcurrentlycarriesliabilityinsuranceforitsdirectorsandofficers. Item15. RecentSalesofUnregisteredSecurities SinceFebruary1,2009,wehavemadethefollowingsalesofunregisteredsecurities(aftergivingeffecttoa5for1stock spliteffectedinOctober2010): PreferredStockIssuances On May 26, 2009, we sold 44,037,540 shares of our Series E preferred stock to one accredited investor at a purchasepriceof$4.54pershare. OnFebruary2,2011,weissued3,257,280sharesofourSeriesApreferredstockand2,960,240sharesofourSeries Bpreferredstocktooneaccreditedinvestoratpersharepurchasepricesrangingfrom$0.00to0.06pursuantto exercisesofwarrants. OnDecember29,2011,weissued1,750,827sharesofourSeriesBpreferredstocktooneaccreditedinvestorata persharepurchasepriceof$0.06pursuanttoexerciseofawarrant.
PlanRelatedIssuances FromFebruary1,2009throughApril20,2012,wegrantedtoourdirectors,officers,employees,consultantsand otherserviceprovidersoptionstopurchase14,263,370sharesofourClassBcommonstockwithpershareexercise pricesrangingfrom$1.78to$15.00underour2005StockPlan. FromFebruary1,2009throughApril20,2012,weissuedtoourdirectors,officers,employees,consultants,and other service providers an aggregate of 251,104,912 shares of our Class B common stock at per share purchase pricesrangingfrom$0.00to$2.95pursuanttoexercisesofoptionsgrantedunderour2005StockPlan. FromFebruary1,2009throughApril20,2012,wegrantedtoourdirectors,officers,employees,consultants,and other service providers an aggregate of 257,697,957 RSUs to be settled in shares of our Class B common stock underour2005StockPlan. FromFebruary1,2009throughApril20,2012,wesoldtoourdirectors,officers,employees,consultants,andother serviceprovidersanaggregateof214,724sharesofourClassBcommonstockatpersharepurchasepricesranging from$0.00to$30.03grantedunderour2005StockPlan. II2
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Table of Contents OtherCommonStockIssuances OnMay26,2009,weissued48,065sharesofourClassBcommonstocktooneexistinginvestorpursuanttothe antidilutiontermsofsuchinvestorsoriginalinvestment. OnDecember30,2009,weissued2,000,000sharesofourClassBcommonstocktoafamilymemberofourCEO. This award was made in satisfaction of funds provided for our initial working capital and a potential release of claims. OnJune2,2010,weissued5,000sharesofourClassBcommonstocktooneaccreditedinvestoratapurchase priceof$7.27pershare. OnDecember27,2010,wesold21,582,733sharesofourClassAcommonstocktothreeaccreditedinvestorsata purchasepriceof$20.85pershare. On December 31, 2010, we sold 2,398,081 shares of our Class A common stock to one accredited investor at a purchasepriceof$20.85pershare. On January 21, 2011, we sold 47,961,630 shares of our Class A common stock to one accredited investor at a purchasepriceof$20.85pershare. On September 15, 2011, we issued 29,640 shares of our Class B common stock as consideration to a former employeeforservicesprovided.
Acquisitions OnAugust14,2009,weissued11,052,955sharesofourClassBcommonstockasconsiderationtotenindividuals andoneentityinconnectionwithouracquisitionofalltheoutstandingsharesofacompany. On May 18, 2010, we issued 3,625,000 shares of our Class B common stock as consideration to a company in connectionwithourpurchaseofpatentsfromthecompany. On June 16, 2010, we issued 238,000 shares of our Class B common stock as consideration to a company in connectionwithourpurchaseofcertainassetsfromthecompany. On July 7, 2010, we issued 590,900 shares of our Class B common stock as consideration to a company in connectionwithourpurchaseofcertainassetsfromthecompany. OnAugust18,2010,weissued289,350sharesofourClassBcommonstockasconsiderationtotwoindividualsin connectionwithouracquisitionofalltheoutstandingsharesofacompany. OnOctober29,2010,weissued1,309,284sharesofourClassBcommonstockasconsiderationtoacompanyin connectionwithourpurchaseofcertainassetsfromthecompany. OnNovember12,2010,weissued350,000sharesofourClassBcommonstockasconsiderationtoacompanyin connectionwithourpurchaseofcertainassetsfromthecompany. On December 15, 2010, we issued 1,030,000 shares of our Class B common stock as consideration to two individualsinconnectionwithouracquisitionofalltheoutstandingsharesofacompany. OnFebruary28,2011,weissued681,357sharesofourClassAcommonstockasconsiderationtoacompanyin connectionwithourpurchaseofcertainassetsfromthecompany. OnApril5,2011,weissued1,659,430sharesofourClassAcommonstockasconsiderationto13individualsand sixentitiesinconnectionwithouracquisitionofalltheoutstandingsharesofacompany. OnAugust1,2011,weissued75,426sharesofourClassAcommonstockasconsiderationtothreeindividualsin connectionwithouracquisitionofalltheoutstandingsharesofacompany. II3
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Table of Contents OnOctober7,2011,weissued360,883sharesofourClassAcommonstockasconsiderationto21individualsand eightentitiesinconnectionwithouracquisitionofalltheoutstandingsharesofacompany. OnOctober10,2011,weissued183,750sharesofourClassBcommonstockasconsiderationtoacompanyfora licenseofcertaintechnologyfromthecompany. OnJanuary3,2012,weissued90,000sharesofourClassAcommonstockasconsiderationtofourindividualsand 13entitiesinconnectionwithourpurchaseofcertainassetsfromacompany. On February 1, 2012, we issued 212,250 shares of our Class A common stock as partial consideration to two entitiesinconnectionwithourpurchaseofcertainassetsfromacompany. On April 13, 2012, we issued 40,000 shares of our Class A common stock as consideration to a company in connectionwithourpurchaseofcertainassetsfromthecompany.
Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the SecuritiesActinrelianceuponSection4(2)oftheSecuritiesAct(orRegulationDorRegulationSpromulgatedthereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offeringorpursuanttobenefitplansandcontractsrelatingtocompensationasprovidedunderRule701.Therecipientsof thesecuritiesineachofthesetransactionsrepresentedtheirintentionstoacquirethesecuritiesforinvestmentonlyandnot withaviewtoorforsaleinconnectionwithanydistributionthereof,andappropriatelegendswereplaceduponthestock certificatesissuedinthesetransactions. II4
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Table of Contents Item16. ExhibitsandFinancialStatementSchedules (a)Exhibits.Thefollowingexhibitsareincludedhereinorincorporatedhereinbyreference:

Exhibit Number Description
1.1* 3.1# 3.2# 3.3 3.4 4.1# 4.2# 4.3# 4.4# 4.5# 4.6# 5.1* 10.1# 10.2# 10.3# 10.4 10.5# 10.6# 10.7# 10.8# 10.9# 10.10# 10.11# 10.12# 10.13#
FormofUnderwritingAgreement. EleventhAmendedandRestatedCertificateofIncorporationofRegistrant. BylawsofRegistrant. FormofRestatedCertificateofIncorporationofRegistrant,tobeineffectattheclosingofRegistrantsinitial publicoffering. FormofAmendedandRestatedBylawsofRegistrant,tobeineffectattheclosingofRegistrantsinitialpublic offering. FormofRegistrantsClassAcommonstockcertificate. Sixth Amended and Restated Investors Rights Agreement, dated December 27, 2010, by and among RegistrantandcertainsecurityholdersofRegistrant. FormofType1HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType2HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType3HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType4HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. OpinionofFenwick&WestLLP. FormofIndemnificationAgreement. 2005StockPlan,asamended,andformsofawardagreements. 2005OfficersStockPlan,andamendedandrestatednoticeofstockoptiongrantandstockoptionagreement. 2012EquityIncentivePlan,tobeineffectupontheeffectivenessofRegistrantsinitialpublicoffering. 2011Bonus/RetentionPlan. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandMarkZuckerberg. AmendedandRestatedEmploymentAgreement,datedJanuary27,2012,betweenRegistrantandSherylK. Sandberg. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandDavidA.Ebersman. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandMikeSchroepfer. AmendedandRestatedEmploymentAgreement,datedJanuary27,2012,betweenRegistrantandTheodoreW. Ullyot. Lease,datedFebruary7,2011,betweenRegistrantandWilsonMenloParkCampus,LLC. DeveloperAddendum,datedMay14,2010,betweenRegistrantandZyngaInc.,asamendedbyAmendment No.1toDeveloperAddendum,datedOctober1,2011. DeveloperAddendumNo.2,datedDecember26,2010,betweenRegistrantandZyngaInc. II5
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Table of Contents
Exhibit Number
Description
10.14# 10.15# 10.16# 21.1# 23.1 23.2* 24.1#

# *
CreditAgreement,datedFebruary28,2012,betweenRegistrant,theLenderspartythereto,andJPMorganChase Bank,N.A.,asAdministrativeAgent. BridgeLoanAgreement,datedFebruary28,2012,betweenRegistrant,theLenderspartythereto,andJPMorgan ChaseBank,N.A.,asAdministrativeAgent. ConversionAgreement,datedFebruary19,2010,betweenRegistrant,DigitalSkyTechnologiesLimited,and DSTGlobalLimited. ListofSubsidiariesofRegistrant. ConsentofErnst&YoungLLP,IndependentRegisteredPublicAccountingFirm. ConsentofFenwick&WestLLP(includedinExhibit5.1). PowerofAttorney.
Previouslyfiled. Tobefiledbyamendment. RegistranthasomittedportionsofthereferencedexhibitpursuanttoarequestforconfidentialtreatmentunderRule406promulgatedundertheSecuritiesAct.
(b)FinancialStatementSchedules.Allfinancialstatementschedulesareomittedbecausetheyarenotapplicableorthe informationisincludedintheRegistrantsconsolidatedfinancialstatementsorrelatednotes. Item17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwritingagreement,certificatesinsuchdenominationsandregisteredinsuchnamesasrequiredbytheunderwritersto permitpromptdeliverytoeachpurchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controllingpersonsoftheRegistrantpursuanttotheforegoingprovisions,orotherwise,theRegistranthasbeenadvisedthat intheopinionoftheSECsuchindemnificationisagainstpublicpolicyasexpressedintheSecuritiesActandis,therefore, unenforceable.Intheeventthataclaimforindemnificationagainstsuchliabilities(otherthanthepaymentbytheRegistrant ofexpensesincurredorpaidbyadirector,officerorcontrollingpersonoftheRegistrantinthesuccessfuldefenseofany action,suitorproceeding)isassertedbysuchdirector,officerorcontrollingpersoninconnectionwiththesecuritiesbeing registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressedintheSecuritiesActandwillbegovernedbythefinaladjudicationofsuchissue. TheundersignedRegistrantherebyundertakesthat: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectusfiledaspartofthisregistrationstatementinrelianceuponRule430Aandcontainedinaformofprospectusfiled by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registrationstatementasofthetimeitwasdeclaredeffective. (2)ForthepurposeofdetermininganyliabilityundertheSecuritiesAct,eachposteffectiveamendmentthatcontainsa form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offeringofsuchsecuritiesatthattimeshallbedeemedtobetheinitialbonafideofferingthereof. II6
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Table of Contents SIGNATURES PursuanttotherequirementsoftheSecuritiesActof1933,theregistranthasdulycausedthisAmendmentNo.4tothe Registration Statement on Form S1 (Amendment No. 4) to be signed on its behalf by the undersigned, thereunto duly authorized,intheCityofMenloPark,StateofCalifornia,onthis23rddayofApril2012. FACEBOOK,INC. /S/M ARKZUCKERBERG
MarkZuckerberg ChairmanandChiefExecutiveOfficer
PursuanttotherequirementsoftheSecuritiesActof1933,thisAmendmentNo.4hasbeensignedbythefollowing personsinthecapacitiesandonthedatesindicated.
Signature Title Date
/S/M ARKZUCKERBERG
MarkZuckerberg
ChairmanandChiefExecutiveOfficer (PrincipalExecutiveOfficer) ChiefFinancialOfficer (PrincipalFinancialOfficer) ChiefAccountingOfficer (PrincipalAccountingOfficer) Director Director Director Director Director Director
April23,2012 April23,2012 April23,2012 April23,2012 April23,2012 April23,2012 April23,2012 April23,2012 April23,2012
/S/DAVIDA.EBERSMAN
DavidA.Ebersman
/S/DAVIDM.SPILLANE
DavidM.Spillane
*
MarcL.Andreessen
*
ErskineB.Bowles
*
JamesW.Breyer
*
DonaldE.Graham
*
ReedHastings
*
PeterA.Thiel
*By:
/S/DAVIDA.EBERSMAN
DavidA.Ebersman Attorneyinfact
II7
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Table of Contents EXHIBITINDEX

Exhibit Number Description
1.1* 3.1# 3.2# 3.3 3.4 4.1# 4.2# 4.3# 4.4# 4.5# 4.6# 5.1* 10.1# 10.2# 10.3# 10.4 10.5# 10.6# 10.7# 10.8# 10.9# 10.10# 10.11# 10.12# 10.13# 10.14#
FormofUnderwritingAgreement. EleventhAmendedandRestatedCertificateofIncorporationofRegistrant. BylawsofRegistrant. FormofRestatedCertificateofIncorporationofRegistrant,tobeineffectattheclosingofRegistrantsinitial publicoffering. FormofAmendedandRestatedBylawsofRegistrant,tobeineffectattheclosingofRegistrantsinitialpublic offering. FormofRegistrantsClassAcommonstockcertificate. Sixth Amended and Restated Investors Rights Agreement, dated December 27, 2010, by and among RegistrantandcertainsecurityholdersofRegistrant. FormofType1HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType2HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType3HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. FormofType4HolderVotingAgreement,betweenRegistrant,MarkZuckerberg,andcertainpartiesthereto. OpinionofFenwick&WestLLP. FormofIndemnificationAgreement. 2005StockPlan,asamended,andformsofawardagreements. 2005OfficersStockPlan,andamendedandrestatednoticeofstockoptiongrantandstockoptionagreement. 2012EquityIncentivePlan,tobeineffectupontheeffectivenessofRegistrantsinitialpublicoffering. 2011Bonus/RetentionPlan. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandMarkZuckerberg. AmendedandRestatedEmploymentAgreement,datedJanuary27,2012,betweenRegistrantandSherylK. Sandberg. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandDavidA.Ebersman. AmendedandRestatedOfferLetter,datedJanuary27,2012,betweenRegistrantandMikeSchroepfer. AmendedandRestatedEmploymentAgreement,datedJanuary27,2012,betweenRegistrantandTheodoreW. Ullyot. Lease,datedFebruary7,2011,betweenRegistrantandWilsonMenloParkCampus,LLC. DeveloperAddendum,datedMay14,2010,betweenRegistrantandZyngaInc.,asamendedbyAmendment No.1toDeveloperAddendum,datedOctober1,2011. DeveloperAddendumNo.2,datedDecember26,2010,betweenRegistrantandZyngaInc. Credit Agreement, dated February 28, 2012, between Registrant, the Lenders party thereto, and JPMorgan ChaseBank,N.A.,asAdministrativeAgent.
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Table of Contents
Exhibit Number
Description
10.15# 10.16# 21.1# 23.1 23.2* 24.1#

# *
BridgeLoanAgreement,datedFebruary28,2012,betweenRegistrant,theLenderspartythereto,andJPMorgan ChaseBank,N.A.,asAdministrativeAgent. ConversionAgreement,datedFebruary19,2010,betweenRegistrant,DigitalSkyTechnologiesLimited,and DSTGlobalLimited. ListofSubsidiariesofRegistrant. ConsentofErnst&YoungLLP,IndependentRegisteredPublicAccountingFirm. ConsentofFenwick&WestLLP(includedinExhibit5.1). PowerofAttorney.
Previouslyfiled. Tobefiledbyamendment. RegistranthasomittedportionsofthereferencedexhibitpursuanttoarequestforconfidentialtreatmentunderRule406promulgatedundertheSecuritiesAct.
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Amendment No. 4 to Registration Statement on Form S1

S-1/A 1 d287954ds1a.htm AMENDMENT NO. 4 TO REGISTRATION STATEMENT ON FORM S-1

AmendmentNo.4to FormS1 REGISTRATIONSTATEMENT

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Table of Contents TABLEOFCONTENTS

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

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THEOFFERING ClassAcommonstockoffered Byus Bythesellingstockholders Total shares shares shares

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

noexercisebytheunderwritersoftheirrighttopurchaseuptoanadditionalsharesofClassAcommon stocktocoveroverallotmentsand thefilingofourrestatedcertificateofincorporationandtheeffectivenessofourrestatedbylawsinconnection withourinitialpublicoffering. 9

Amendment No. 4 to Registration Statement on Form S1

777 223 115 87 90 515 262 (8) 254 25 229 122

731 167 68 57 51 343 388 10 398 165 233 153

(1) Costsandexpensesin2009,2010,and2011andthefirstquarterof2011and2012includesharebasedcompensationexpenseof$27million,$20million, $217million,$7million,and$103million,respectively,asfollows:

Amendment No. 4 to Registration Statement on Form S1

Costofrevenue Marketingandsales Researchanddevelopment Generalandadministrative Totalsharebasedcompensationexpense

YearEndedDecember31, 2009 2010 2011 (inmillions) $ $ $ 9 2 2 43 6 9 114 19 9 51 $ 27 $ 20 $ 217

ThreeMonths EndedMarch31, 2011 2012 $ $ 4 3 7 $ $ 4 23 60 16 103

ConsolidatedBalanceSheetData: Cash,cashequivalents,andmarketablesecurities Workingcapital Propertyandequipment,net Totalassets Totalliabilities Additionalpaidincapital Retainedearnings Totalstockholdersequity

$3,910 3,655 1,855 6,859 1,587 2,853 1,811 5,272

$3,910 3,980 1,855 7,184 1,587 4,433 1,171 5,597

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Table of Contents theimpactofnewtechnologiesthatcouldblockorobscurethedisplayofouradsandothercommercialcontent and theimpactofmacroeconomicconditionsandconditionsintheadvertisingindustryingeneral.

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

91daysafterthedateofthisprospectus Approximatelysixmonthsafterthedateofthisprospectus 181daysafterthedateofthisprospectus 211daysafterthedateofthisprospectus Oneyearafterthedateofthisprospectus 18monthsafterthedateofthisprospectus

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

Amendment No. 4 to Registration Statement on Form S1

2,853 (7) 1,811 5,272 $5,272