Secrets don't exist in Silicon Valley. News travels along the grape vine at broadband speeds, the latest tech gossip being parlayed from local rag The Mercury News; to online journal Silicon Alley Insider; to investment bible Venture Beat until it ends up at the local geek watering holes where it is talked about over a cold beer after a hard day and night of coding. Whether the topic du jour is the birth of a new startup, the mind boggling sale price of an established one or the axing of a top executive from a troubled one, it's dissected with the morbid fascination of kids pulling legs off of a beetle. So understandably tongues were wagging when the news leaked that some current and former employees of Facebook including social networking wunderkind Mark Zuckerberg and executive Matt Cohler were quietly shopping some of their shares in the vaunted company.

The tech community debated the significance of this news in light of all the fawning press coverage that Facebook had received in the past years. Ever since Microsoft forked over $240 million dollars for a sliver of the company it has been seen as the brightest star in the social networking firmament. The software giant got 1.6 % in exchange for its injection of cash, an exchange that implied a valuation of $15 billion making Zuckerberg's stake worth $1.5 billion and by Forbes estimates the world's youngest billionaire. The sky high valuation was met with skepticism from some analysts and even Facebook investors but it had the desired effect in the press. Suddenly Facebook eclipsed MySpace as the yard stick by which to measure success in the new internet era. It became to Web 2.0 what Yahoo had been to the past web generation. Some even suggested that the social network would auger in a bold new age of computing on a platform that would lay siege to those citadels of traditional computing the software vendors Microsoft et al rewriting the way we process information. Why else was the world's largest software maker so eager to get a piece of their pie? This was the social revolution and Facebook was standing at the vanguard of the movement.

The dizzying trajectory the company took from collegiate bulletin board to poster child of the social age was a result of two significant milestone decisions that opened up Facebook. Firstly the network that had previously marketed itself to the Ivy League and by extent the white collar professional set opened up to anyone with an email address a move that put it on a path to surpass MySpace as the world's most oft visited social site. Though Rupert Murdoch's baby remained the biggest kid in the US school yard, with 65 million monthly visitors to Facebook's 25 million, both clocked in at 115 million globally with once second fiddle Facebook leading by a hair. Now MySpace's membership has reached 225 million a 513 % growth rate while Facebook's growth rate stands at 550 % for the same period. That is 80 million users in the US so far.

Secondly and maybe more significant was the opening up of the closed social networking platform to third party developers a decision that may have been the best idea they've had to date. Suddenly hundreds of applications were flooding the site from both big companies and bedroom programmers. There were the utilitarian ones like an Amazon app that lets you review books and another that takes you from Facebook to Linked In. There were the impossibly cute and highly addictive ones like Fluff which lets you adopt and raise a fantasy pet, feed it, pet and race other pets. And there were the patently inane ones like Super Wall and the what-were-they-thinking ones like Scrabulous (a popular word game app with 500, 000 daily players) that was eventually disabled by Facebook after Hasbro the company which makes board game Scrabble issued a cease-and-desist order to the developers.

As illustrated by "Scrabulous gate" it certainly hasn't been all smooth sailing for the company which experienced its share of missteps. There was the time they stuck their foot in that big pile of poop called Beacon. The Beacon social advertising platform was released as an opt-out system instead of opt-in so if you forgot to decline to share something, Beacon went ahead and shared it with people in your list of friends leading to some embarrassing situations. Say you got out of having to watch some chick flick with your girlfriend citing an urgent need to study and then she was sent a Beacon alert that you scored tickets to see some rock concert the same night you were supposed to be in the library? Awkward. Zuckerberg issued his mea culpa a little too late and the incident tarnished Facebook's shiny façade. Then there was the exodus of several key execs from the company and the even more troubling allegation that the entire concept for the website was poached by Zuckerberg from former colleagues at Harvard on whose similar site he worked as a programmer. The ramifications of this were huge since Facebook was now a multi-billion dollar company. Last I heard the parties had reached a settlement.

Facebook fell victim to its popularity and encountered its own problems with stolen ideas in the form of copycat sites. Indian based Agriya markets a $400 software package called Kootali to developers which is essentially a "make your own Facebook, just add water" kit. Meaning that anyone who wants to could churn out their own Facebook clone with photos, friend networks, mini feeds down to the same font but with enough customization to avoid a lawsuit. And some have, like Germany's StudiVerzeichnis or StudiVZ for short which is German for "Student Index". It has 6 million registered users and is currently facing a copyright infringement suit. Facebook has a German language site along with a Spanish, Italian and French one in a bid to expand its overseas reach. And then there is China's clone Xiaonei which translates to "In the school" in Mandarin and Russia's clone VKontakte, meaning "In Contact," which at 13.3 million registered users claims to be the most popular site in Russia. Both Xiaonei and VKontakte mimic the spare blue and white motif of Facebook and the founder of the Chinese site freely admits to borrowing heavily from Facebook's design.

Xiaonei reported 15 million unique visitors in April and secured $430 million in venture capital from Japanese investment firm Softbank. This is cause for concern since China has about 220 million internet users who are being courted by Facebook which launched a Chinese language version of their site. Xiaonei could prove to be a hurdle to their plans of tapping into the world's most populous country. The site's parent company claims to have registered over 90 % of the Chinese college student population in what could be a repeat of the problem American grown sites face when they try to scale the Great Wall of China. Google was trounced in its search ambitions by home grown Baidu and eBay stopped short when it came face to face with auction and ecommerce site Alibaba. Suing internationally tends to be expensive, time consuming and unpredictable because even though both China and Germany are part of the Berne convention, proving infringement in website cases is highly subjective since even slight changes may be enough to avoid copyright violation. Also overly aggressive action on the part of Facebook could backfire if someone follows their playbook and in turn sues them for infringement.

Legal woes aside there was also the fact that despite its dizzying growth the company had yet to articulate a concrete plan for monetization. It's expected to earn $50 on revenues somewhere in the $300 to $350 million range this year but it's also expected to spend $200 million on developing its infrastructure meaning it will have a minus $150 cash flow. The reason that selling advertising on social platforms is so difficult is the nature of the networks themselves. People log onto Facebook or MySpace to socialize, not to search as is the case with Google. Since most searches are for products or services it is much easier for Google to interest a visitor in brands related to his search than it is for a social network to hawk the same product to their visitors no matter how many unique visitors they have or how long they spend on the site. A user who visits a site actively seeking something is infinitely more valuable to an advertiser than one who logs on just to hangout. Google built a $16.6 billion business largely on the back of search related advertising. Banner ads on Facebook and MySpace cost 13 cents per thousand served (CPM) while the same CPM on Yahoo averages $13. Clearly there is still work to be done.

So when word hit the street that some former and current Facebook people were unloading a portion of their shares at a price point that was way below the supposed $15 billion valuation, the web was abuzz with speculation. The fact that Zuckerberg, de facto figurehead of the company, was selling out had some leaping to the conclusion that something was rotten in Denmark and the rats were leaving the proverbial sinking ship but nothing could be further from the truth. Among the dozens estimated to be shopping their stock, several are selling for a $5 billion to $3.75 billion valuation. When this news trickled down to the rank and file employees morale took a nose dive forcing the company to authorize the sale and purchase of stock by employees in a one-time program. Under this scheme they would be allowed to divest themselves of up to 20 % of their stock. Keep in mind that this is common stock with a valuation of $4 billion and not preferred stock which comes with special beneficial privileges for its holders. For example Microsoft's 1.6 % stake is all in preferred stock which has liquidation privileges meaning that Microsoft gets paid before common stockholders if the company is ever sold. This preferred stock has a presumed valuation of $15 billion (presumed being the operative word here mind you).

Since Facebook keeps insisting that it has no immediate interests in going public and none at all of being acquired this could turn out to be a nifty way of placating long time employees who are growing antsy waiting for an IPO and the cash windfall that would follow. As yet it has not been announced whether there will be any restrictions over who can purchase said shares. Buyers of the stock already unloaded include two investment firms. In any event it is not going to be a large chunk of change. Let us say the total employee stock option pool makes up 15 % of the company's total equity, then 20 % (which is what they are allowed to sell) would be 3 %. 3 % of a $4 billion valuation is $120 million. Now since employee stock options typically mature over 4 years and Facebook is just over 4 years old then most employees who have been there barely two years would not be eligible for sell much of their options under the program

Facebook's official internal valuation is $3.75 billion based on an estimate that the company is obligated to provide to the IRS for tax purposes. If buyers purchase the stock at a much higher valuation this means that Facebook will have to recalculate itself at a much higher valuation and the employee stock holders will have to pay more taxes to the IRS - something that would make it difficult to recruit the fresh young talent which the company needs. So Facebook is imposing a cap on what departing employees are allowed to sell their stock for, i.e. not more than the $3.75 valuation. The restriction may encourage them to hang onto the shares longer believing them to be worth much more. Like the housing market and the economy the once hot IPO market has gone tepid as investors have lost their appetite but despite its vacillation make no mistake that Facebook plans to go public at some more favorable point in the future. So the stock sale is a good way to keep the natives from revolting and burning down the house before the long awaited day arrives.