Facebook IPO: What you need to know

Social networking juggernaut Facebook filed for a $5bn IPO yesterday. But what is an IPO anyway? And what does this cash mountain mean for normal Facebook users like you? Read on for the lowdown...

What is an IPO? And why is Facebook doing it?

IPO stands for initial public offering -- initial because it's the first sale of shares by a private company to the public. Up to now, Facebook has been owned by a group of private investors -- with Microsoft and former Napster founder Sean Parker among them. By filing for an IPO it's giving Joe Public the chance to own his very own slice of ZuckVille.

How much of Facebook is up for grabs is uncertain at this point, as Zuck & co haven't specified exactly how many shares are being offered or the price per share -- what they have said is they hope to raise $5bn. Analysts are speculating the total proposed value of Facebook is between $75bn and $100bn.

Raising a cash mountain is one of the reasons why companies IPO. Sure, Facebook isn't short of cash -- as its freshly opened financial accounts indicate -- but its numbers don't match up to the might of tech giants such as Apple. In Cupertino, Apple CEO Tim Cook is sitting Smaug-like atop a $100bn cash reserve.

But it also appears that Facebook's hand is being forced somewhat by a federal law requiring companies with more than 500 investors and $10m in assets to go public.

Hang on, is Facebook really worth $100bn?

The short answer is nobody knows -- valuations based on shares are a measure of investor confidence in the future profitability of the company. But as part of the IPO process, Facebook has had to crack open its accounts and there are some not-to-be-sniffed at numbers on show. Last year its revenue doubled to $3.7bn, while profit rose by 65 per cent to a cool $1bn. Not bad for a company that was only founded about seven years ago.

$100bn might sound like a lot when profit is a hundredth of that, but share-buyers are banking on Facebook's future profitability delivering them truckloads of filthy lucre for years and years to come.

And let's not forget that Facebook does have a massive 845 million active users -- who spend oodles of their spare time (and most of their work day) playing Words With Friends, gossiping on chat and uploading photos of their drunken night out in Bromley to their Facebook wall. That's got to be worth something, right?

What's Facebook going to spend its cash mountain on then?

We like to think Mark Zuckerberg will buy himself something nice -- like a giant goat farm, or all of Greece's islands. But again, we can only speculate. One interesting titbit to come out of the IPO filing is that Facebook leans heavily on FarmVille-maker Zynga for its revenue -- 12 per cent of Facebook's cash flow came via the social game giant last year.

This because Facebook takes a tidy 30 per cent transaction fee for Facebook Credits -- a virtual currency which can be used to buy FarmVille's own in-game currency. Yep, alchemists haven't found a cost-effective way to turn base metals into gold, but plenty of people have managed to transform virtual money into real moolah.

So, with so much revenue riding on Zynga, it might make sense for Facebook to use its freshly raised cash mountain to buy it outright. The two companies haven't always had the smoothest relations, and Facebook's IPO filing warns its business would suffer if it doesn't keep Zynga sweet, so grabbing FarmVille could be a good way to ensure this is one virtual cash cow that keeps on pumping out the milk.

Another possible area is mobile. Up to now Facebook has worked with mobile makers such as HTC and INQ to bake Facebook into their devices. But there have long been rumours that Zuck & co harbour a burning desire to build their very own bona fide 'Facebook phone' -- not least so you can spend your Credits on the bus.

Having $5bn in the bank would surely boost the prospects of developing a full-fat Facebook phone -- one that's capable of giving the iPhone a run for its money.

What does the IPO mean for me? How will Facebook change?

Not much in the short term. As a public company, Facebook will be required to be less private about its own data because it will need to regularly report financials and be transparent about business risks -- being as it's now answerable to investors.

Mark and his Zuckerfriends will also be under more pressure to make money. Shareholders don't buy shares for the love, it's all about the cold hard return on their investment, so the direction of the business is likely to be influenced by the influx of new investors.

And if these cash-hungry shareholders start clamouring to flog the inner secrets of your Facebook IM chats to your parents and girlfriend... well, you'd better hope Zuckface feels like shouting them down that day.

How do I buy Facebook shares?

Talk to a stockbroker -- one that deals in US shares. And start hoping the price per share is right. Or start amassing your own mini cash mountain...