In three years, Groupon has grown to 11,000 employees in 48 countries, and in the past year alone has acquired 11 companies and launched 11 new products.

“Although there are risks in moving too fast, companies often don’t survive long enough to apologize for moving too slow,” Mason writes. “Perhaps more importantly, by moving quickly, we reached a scale that has helped us solidify our market leadership, and accumulated data that is enabling our future and helping us continuously improve the experience of our customers.”

Mason writes that now it has that scale, the company’s mission is “to become the operating system for local commerce.” He promises to share new products soon.

The letter follows a particularly tough week, where the daily deal company’s shares slid 3.3 percent, or 34 cents, to settle at $9.97 a share, marking the first time its stock closed in single digits. Today, the stock is trading up 5.5 percent, or 55 cents, to $10.52 a share.

At that price, Groupon’s value still hovers around $6.8 billion, which is uncomfortably close to Google’s $6 billion buyout offer, which the Chicago company turned down in late 2010.

Groupon has been unable to regain investor confidence since revising its fourth-quarter results at the end of March, despite putting out a string of press releases. Over the past couple of weeks, it has hired a new SVP, Kal Raman, and appointed two new directors with accounting expertise.

In the letter, Mason attempts to outline what the company has done to date, and where he believes it is heading. Mason writes: “Groupon’s chief accomplishment to date has been discovering a business model that brings the power of the Internet to local commerce.”

Going forward, the company is building a suite of tools and services that it believes will profoundly change the way everyone shops. Today, it might be a glorified mailing list or daily deals company that is easy to replicate. “Tomorrow, we aim to move upstream and serve as the entry point for local transactions,” Mason explains.

A couple of metrics Mason provides detailing its successes:

• Groupon says emails sent to people using its targeting algorithm have a 50 percent higher purchase rate.
• 30 percent of its North American transactions were completed on mobile devices in April, compared to 25 percent just four months ago.
• According to a research report commissioned by Groupon, its U.S. consumer satisfaction score is 83, placing Groupon 11 points higher than the e-commerce benchmark. Merchants give Groupon a satisfaction score of 79.

Dear Stockholders,

2011 was an exceptional year for Groupon. I will start by listing a few of our achievements:

• By year-end, we sold more than 170 million Groupons to more than 33 million active customers on behalf of more than 250,000 merchants in 48 countries around the world.
• We drove well over $2 billion to the small businesses of Main Street, helping them to overcome challenging global economic conditions.
• We launched 11 new products and services, including Groupon Goods, Getaways, Rewards, Now!, and Scheduler.
• We completed 11 acquisitions, which both expanded our geographic footprint and accelerated our product roadmap. Additionally, these acquisitions brought dozens of talented entrepreneurs to our team.

Along the way, we delivered strong growth and improved our operating leverage. Revenues grew 415% year-over-year to $1.6 billion, and we improved our operating margin from negative 134% to negative 14% for the full year. We improved our GAAP EPS during the year from a loss of $0.48 per share in the first quarter of 2011 to a loss of $0.12 per share in the fourth quarter of 2011. And so, though the six months since our IPO have been rocky to say the least, the fundamentals of our business have continued to improve.

As much as this letter is intended to catalog our achievements in 2011, I would also like to use it as an opportunity to share our vision for Groupon and the tangible progress we are making. We are more excited than ever for our future.

Our Mission: To Become the Operating System for Local Commerce

Entertainment, media, politics, and the way we buy products, connect with each other, and consume information—nearly every aspect of life has been fundamentally changed by the Internet. But there’s a huge exception—the way we shop locally.

Groupon’s chief accomplishment to date has been discovering a business model that brings the power of the Internet to local commerce. During the past three-and-a-half years, that business model has allowed us to connect with millions of consumers and hundreds of thousands of merchants and build a brand that they deeply trust.

Upon the shoulders of this business model, Groupon is setting out to reinvent the multi-trillion-dollar local commerce ecosystem. We are building an integrated suite of tools and services that we believe will profoundly change the way we shop locally. Today, Groupon is a marketing tool that connects consumers and merchants. Tomorrow, we aim to move upstream and serve as the entry point for local transactions.

Why Groupon? Aren’t we a daily deals company? A glorified mailing list? What our competitors have learned is that success in local commerce requires an unusual combination of skills—a proficiency in both technology and people-driven operations. With a world-class engineering team—built quietly over the last several years in Chicago, Silicon Valley, and Berlin—and with thousands of salespeople who have cultivated relationships with hundreds of thousands of small-business owners, we believe that we are uniquely in possession of both sides of the equation. That makeup is why we remain the clear leader in local commerce, despite the efforts of hundreds of competitors—from start-ups to the world’s largest technology companies—who have validated the consumer and merchant value created by our business model through their attempts to replicate it.

Many of the seeds we’ve planted in pursuit of our mission are beginning to bear fruit:

• Site and Email Personalization In the past year, we doubled the efficacy of SmartDeals, our deal personalization algorithm. For example, in markets with high deal density such as Chicago, emails sent using SmartDeals have a 50% higher purchase rate. It has taken time to get deal relevance right, but progress has begun to accelerate, and we believe that we’re still in the early stages. We’re excited to finally have begun rolling out SmartDeals outside of the U.S., and we are targeting a broad international rollout by the end of 2012.
• Mobile Adoption The rapid adoption of Groupon on mobile devices demonstrates the importance of smart phones to local e-commerce. Our average North American mobile customer, for example, spends well over 50% more than customers who have never purchased on a mobile device. In April 2012, nearly 30% of our North American transactions were completed on mobile devices, compared to 25% just four months ago. This growth has created momentum for Groupon Now!, our real-time deals service offering deals for whenever you’re hungry or bored, which recently surpassed 1.5 million purchases. Our Now! customers buy approximately twice as many Groupons as customers who only buy daily deals.
• Groupon Rewards: Making Groupon Customers a Merchant’s Best Customers Groupon Rewards allows customers to effortlessly earn rewards at their favorite merchants, simply by paying with a normal credit card. Thousands of merchants are already participating in our pilot cities, and we expect many more to join. During the past two months, about 30% of eligible daily deal merchants in those cities have signed up for the program. As part of Rewards, we are also providing merchants with deep payment analytics to assess the profitability of their Groupon campaigns. Though the preliminary dataset is small, pilot results show that Groupon Rewards customers are more loyal than other customers.
• Groupon Scheduler: The Foundation for Automated Yield Management Groupon Scheduler is a bookings management system that addresses a fundamental need of many of our merchant partners—but that’s only half the story. As we begin to feed merchant inventory to our demand-generation services such as Groupon Now!, we plan to offer a fully automated yield management system for every local business. Scheduler embodies our intent to provide every mom and pop store with powerful technology solutions that were once reserved for sophisticated corporations with multimillion-dollar budgets.

Though our transformation from daily deal provider to local commerce platform will not happen overnight, in the coming quarters, we will release the products that we believe complete the foundation for our ecosystem. We look forward to sharing them soon.

—

In my letter to potential stockholders that accompanied Groupon’s S-1, I warned investors of a bumpy road—an unfortunate side effect of our unprecedented growth. Groupon has scaled to more than 11,000 employees and 48 countries in only three-and-a-half years. Why move so fast? We believe that Groupon is standing before an enormous opportunity, one that hundreds of competitors large and small have seen. Although there are risks in moving too fast, companies often don’t survive long enough to apologize for moving too slow. Perhaps more importantly, by moving quickly, we reached a scale that has helped us solidify our market leadership, and accumulated data that is enabling our future and helping us continuously improve the experience of our customers.

Bumpiness aside, there are three things I come back to again and again that give me confidence in our ability to execute against our mission:

1. Consumers and merchants love Groupon.
Making merchants and consumers happy is core to the Groupon culture and at the center of everything we do. It’s not surprising, then, that we like to talk about how much consumers and merchants love Groupon, and why we go to great lengths to measure their satisfaction. You don’t have to take our word for it—we commissioned ForeSee, a leading third-party research firm and a standard in e-commerce for measuring customer satisfaction, to use their internal methodology to evaluate our relative positioning versus other top Internet retailers, and their results validate our internal research.

Looking at previous ForeSee online retail satisfaction reports, our U.S. consumer satisfaction score of 83 places Groupon among the highest—11 points higher than the e-commerce benchmark, 6 points above the ForeSee Internet Retailer 100 benchmark, and within approximately 2 points of the average #1 satisfaction score for online retailers during the past five years. We believe the #1 spot is within our reach.

What about merchants? The B2B satisfaction benchmark in the United States is a score of 64, and our merchant satisfaction score is a very strong 79. This is a significant number: not only is it 15 points higher than the B2B benchmark, it is a full 10 points higher than the Fortune 500 benchmark.

2. We have an enormous, untapped opportunity in our core business.
Through smarter deal targeting, there is significant growth waiting to be unlocked in our core daily deal business. In the United States alone, we have more than 10 million geo-located subscribers engaging with Groupon every month who have yet to make a purchase. We are kicking off a campaign to activate these customers, primarily by featuring deals that are closer to them; as you might imagine, deal proximity is a major driver of purchase behavior.

3. We are most excited about our long-term potential.
We are focused on what is arguably the last great white space in the consumer landscape that has yet to be disrupted by the Internet. We are deploying significant capital and talent toward the opportunity to bridge the large but fragmented local commerce ecosystem. The opportunity before us is substantial: merchants need customers, and customers crave simple tools to discover and buy locally at a great price, tools we believe we are best positioned to provide.

Armed with our mission, strong execution, and courage, Groupon has the opportunity to become one of the world’s great companies. We believe it is our duty to you, our stockholders, to pursue our mission with unyielding perseverance. Thank you for joining us as we continue on this journey.

Sincerely,

Andrew D. Mason

Chief Executive Officer

Groupon, Inc.

A letter sent to shareholders today by founder and CEO Jeff Bezos, titled “The Power of Invention,” tackles the publishing industry head-on by explaining how both authors and customers are benefiting from its Kindle publishing business.

While Bezos fails to address the DOJ lawsuit, which accused Apple and five major book publishers of conspiring to raise e-book prices, he provides a glimpse at how he’s changing the economics of the business on a small scale.

Bezos says Amazon’s Kindle Direct Publishing division has already produced more than a thousand authors who are selling more than a thousand copies a month. Some have reached hundreds of thousands of sales, and two have joined the Kindle Million Club.

Authors who use KDP get to keep their copyrights, keep their derivative rights, get to publish on their schedule – a typical delay in traditional publishing can be a year or more from the time the book is finished – and … saving the best for last … KDP authors can get paid royalties of 70%. The largest traditional publishers pay royalties of only 17.5% on ebooks (they pay 25% of 70% of the selling price which works out to be 17.5% of the selling price). The KDP royalty structure is completely transformative for authors. A typical selling price for a KDP book is a reader-friendly $2.99 – authors get approximately $2 of that! With the legacy royalty of 17.5%, the selling price would have to be $11.43 to yield the same $2 per unit royalty. I assure you that authors sell many, many more copies at $2.99 than they would at $11.43.”

If you can’t take Bezos at his own word, the letter includes eight quotes from customers and authors who have benefited from Amazon’s services, including its publishing, fulfillment and Web services.

“These innovative, large-scale platforms are not zero-sum — they create win-win situations and create significant value for developers, entrepreneurs, customers, authors, and readers,” he wrote.

The company’s stock was trading down 1.81 percent, or $3.46 a share today, to $187.23. In recent months, the stock has slipped from its 52-week high of $246.71 a share.

Less than five months after going public, Groupon’s stock is trading at more than half-off.

Today, the daily deals company’s shares slid another 3.2 percent, or 48 cents, to close at $14.54 a share. That’s less than half the $31.14 that some investors paid at the stock’s high point, just after it went public in early November.

At today’s close, the company’s stock hits a new low, though it slumped to similar levels at the end of November.

The stock has not recovered since last Friday, when Groupon revised its results for the fourth quarter due to higher-than-expected return rates during the holiday period.

Today, lawyers announced that multiple class actions have been filed against the Chicago company. The law firms, however, don’t have a lead plaintiff, and are looking for someone who participated in the company’s IPO and suffered financial losses. The complaint charges that certain officers issued materially false and misleading statements regarding financial results.

As part of the announcement on Friday, Groupon reaffirmed its guidance for the first quarter, and is still expecting revenue of up to $550 million, and net income from operations of up to $35 million. The company will release its first-quarter results on May 14.

Details from the press release:

“Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.

Additionally, the Company’s Board of Directors has authorized a $10 billion share repurchase program commencing in the Company’s fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.”

The money will come from Apple’s domestic cash pile, which allows the company to avoid the heavy tax hit it would face if it “repatriated” its overseas holdings.

My hunch is that CEO Tim Cook and CFO Peter Oppenheimer won’t have a whole lot more to say during their call, but we’ll check in, anyway. You never know! You can listen for yourself at this link, or follow along here for live coverage:

9:07 am: After some technical difficulties, we’re joining the call in progress. CFO Peter Oppenheimer is speaking.

Apple wants to, among other things, attract new investors. The dividend, as already disclosed, will be $2.65. The main intent is to offset the dilution expected from employee RSU.

We will expect first year’s dividend payments to be $10 billion, Oppenheimer says.

Commencing in fiscal year 2013, Apple will begin repurchasing shares, primarily from employee stock grant. Cash use to consume $4 billion in the first fiscal year.

That will eat up $45 billion in domestic cash over three years.

Now open for Q&A:

Barclays asks about the philosophy on dividend growth. He’s wondering if the $2.65 will get higher.

Oppenheimer: We’ll review the payments periodically with the board. Payments will be more than $2 billion a quarter, making it one of the highest dividend payers in the U.S. Still avoiding the tax hit from repatriating cash held outside the U.S. Sensitive issue there.

Barclays analyst is asking a follow-up. Can you reiterate confidence in future product pipeline?

Tim Cook is speaking. We had an incredible growth last quarter of 73 percent, despite the base on the growth being large. The pipeline is full of stuff. Our customers will be incredibly pleased with what they see.

Morgan Stanley question. She’s asking about international cash, almost $100 billion overseas. How does the board think about putting that to us?

Oppenheimer: Today, we’ve got plenty of U.S. cash to invest, pay dividends and buy back shares. Repatriating cash would incur significant taxes. We have expressed our views to Congress and the White House. We think there’s a significant disincentive. He didn’t answer the question, really.

Gene Munster of Piper asks about potential for stock splits.

Cook: We have looked at it. The current information we have would suggest there’s little support that it helps the stock. We are in a unique position, so this is something we continue to look at, and if we thought it were in the best interest of shareholders, we would do it.

Munster: Any color on iPad?

Cook: Record weekend, and we’re thrilled with it.

Goldman Sachs: How do you think about growth in repurchases versus growth in dividends? Which is more important?

Oppenheimer. We remain very confident in what we’re doing. We are squarely focused on achieving our potential in the business. We will continue to assess our plans periodically. Nothing further to say today.

Cross Research: How did you arrive at the numbers you announced today?

Oppenheimer: We opted to go with a hybrid approach after doing a lot of analysis and listening to input we were getting from the shareholders. Emphasis behind the dividend. Most cash is going there. $10 billion in first year is going out in dividends. He keeps repeating the “neutralize dilution from employee RSU.” We also want to maintain sufficient U.S. cash to take advantage of strategic opportunities from time to time.

I totally missed Shannon Cross’s second question.

Cook is speaking about using domestic cash versus overseas cash. Our emphasis will always be on creating innovative products. He says even with all this cash going out the door, the domestic war chest will be big enough to do whatever they need to do. Plus, they see it as good for shareholders.

Oppenheimer says there are 17.7 million RSU (restricted stock units) outstanding.

That’s it! We’re done.

A person familiar with the matter had said that Zynga investors planned to sell stock in the near future, just three months after the company’s December initial public offering, breaking a 165-day lockup early in an attempt to reduce future volatility of the stock price.

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Let’s put this in the simplest terms: Yahoo cannot spend the next half year in any kind of testy proxy battle with activist shareholder Daniel Loeb.

Not shouldn’t. Can’t.

Having closely covered the last goat rodeo in 2008 with corporate troublemaker Carl Icahn — which ended in big shareholders dinging the board badly and the controversial activist joining it — I can say definitively that the experience damaged the Silicon Valley Internet company in ways that are still resonating.

Angry shareholders (whose anti-Yahoo votes were initially miscounted in a stunning bumble), distracted management, media story after story about the fight, it eventually led to the departure of then CEO Jerry Yang by the holidays of that year, a rejiggered board and a new CEO, Carol Bartz, and fervent promises of change and turnaround.

Fast forward to today: Bartz was ousted in the fall of last year, a newish board is coming in, there’s another new CEO and, of course, more fervent promises of change and turnaround.

This is like the movie “Groundhog Day,” except not nearly as funny.

Speaking of funny, a Heard on the Street in The Wall Street Journal yesterday actually went fabulously snarktastic with its headline on Yahoo’s current tussle with Loeb of Third Point: “Is Yahoo Ready for a Loebotomy?”

Heh.

Opening with the line, “How many activists does it take to screw in Yahoo’s light bulb?,” the piece went on to ponder back and forth the impact of Loeb on the already dicey situation at Yahoo.

It concluded: “Yahoo investors shouldn’t expect a quick fix whoever the directors are. But, given how long Yahoo has been struggling to gain traction on its own, having a champion of shareholder value on the board can’t hurt.”

Nope, it can’t, as long as said investor wants to help find the successful fix previous Yahoo leaders have been heretofore unable to.

Another commentary in the Journal, “Dealpolitik: The Yahoo Paradox” took an opposite tack.

“Even giving Mr. Loeb a single seat could further weaken Yahoo. As a gadfly Mr. Loeb could challenge each board decision,” it read.

Actually, given this board changes direction more often than Republican presidential candidate Mitt Romney — witness the now non-talks with its Asian partners this past week and, before that, with private equity investors — I am not sure Loeb would change the status quo all that much if he threw one tantrum per meeting.

So, which is it? Will a settlement with Loeb lead to more trouble or will it create the kind of change that Yahoo has long needed and never gotten?

At this point, I have no idea — but I do know that a fight between Loeb and Yahoo is good for no one, except lawyers and perhaps page views on this site and others.

And, frankly, I don’t want them.

That’s because — even as the rest of Silicon Valley reinvents and innovates more aggressively than ever these days — Yahoo and its still deeply committed employees will be caught up in more fraught financial mishegas and machinations and will be unable to do anything to attract new talent and begin to truly fix itself and its products in the profound ways it needs to.

And new CEO Scott Thompson — who seems intent on setting a new course for Yahoo in a non-advertising arena — will be inevitably distracted, no matter the also inevitable protestations that he will not be.

And, it won’t just be Loeb who is hovering — there is no doubt a panoply of other interested outside investors still waiting in the wings to see what tasty bits of Yahoo might come available if the crisis deepens.

It’s certainly not come to roadkill yet by any measure. But it’s not a recipe for hitting the ground running, either.

Here is a video of me talking about the problematic situation on WSJ.com’s “Digits” online show:

In a written statement Wednesday, the company said its board and management team “remain firmly committed” to creating value for its shareholders. “We will continue to aggressively execute on our strategy in 2012 as we continue the turnaround of AOL,” the company said. AOL added that it had cut costs, sold noncore assets and made “significant investments for our future” during the past two years.

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The sharks are coming from all directions. The majority shareholders of Yahoo’s operations in China and Japan want to buy out Yahoo. So much so that there are reports that they may try to bid for the whole company. Others may be putting together bids as well. And this time no one is talking anything like the premiums that Microsoft offered back in 2008. Why would they when Yahoo has been so weakened?

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Even after Groupon issues 30 million shares in its initial public offering, its three founders will continue to control more than half of the company’s shares.

According to documents filed with the Securities & Exchange Commission today, Groupon has conducted a two-for-one stock split. In addition, it recapitalized all of its outstanding shares into newly issued shares of Class A and B stock.

This plan was disclosed late last month, but became official as of yesterday.

CEO Andrew Mason, Executive Chairman Eric Lefkofsky and Director Bradley Keywell will now control 58.1 percent of the voting shares through ownership of Class A stock and 100 percent of the Class B shares.

The Class B shares will have 150 votes per share, while the Class A stock will have one vote per share. There are 600.4 million shares of Class A; 2.4 million shares of Class B.

Due to the high concentration of shares owned by the founders, the filing warns that the three will be able to dictate the company’s future when it comes to directors on its board, as well as other transactions, such as a merger or other sale of the company or its assets.

Addressing shareholders, the filing continues: “This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our Class A common stock could be adversely affected.”

In particular, Mason will control 19.8 percent of the vote, Lefkofsky will control 28.1 percent and Keywell will control 10.2 percent.

Such a move is not unprecedented. Many Web companies, including Zynga and Facebook, are largely controlled by their founders.

Mr. Murdoch, speaking at the annual shareholders meeting in Los Angeles, said the current board and management “will stop at nothing to get to the bottom of this and put it right.” He said the unit at the center of the scandal represents a small piece of an otherwise healthy company that is outperforming its peers.

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Asked about the ceaseless speculation that Oracle might take advantage of HP’s current weakened state and make what would be its biggest acquisition ever — an ill-advised one, if you really think about it — Ellison didn’t give a definitive yes or no answer, but took a shot at HP chairman Ray Lane, which you can see in the 80-second video clip below. (You can see the full video of the meeting here, but only if you need some help getting to sleep.)

There is, of course, no love lost between Ellison and HP’s newly elected executive chairman. Lane is a onetime Oracle president and COO pushed out by Ellison in 2000, and his election as chairman of HP’s board last year had been, in Ellison’s eyes, apparently overshadowed only by Léo Apotheker’s selection as HP’s CEO. Now that Apotheker is gone, Lane will likely remain Ellison’s favorite punching bag, with Salesforce.com CEO Marc Benioff running a close second.

Anyhow, the shareholder’s question suggests that the “Oracle in hostile bid for HP” chatter hasn’t died yet, no matter how many ways analysts and others can dismiss it as nonsense. As you can see from Ellison’s initial reaction to the question today, he is, if nothing else, entertained by the speculation.

Update, Oct. 13: HP has just sent a statement from Lane: “I’m focused on HP, not on statements like this.”

Here’s some electric weekend reading for those interested in the push and pull between venture investors and start-ups in the frothy Web 2.0 environment.

In an email to Airbnb CEO and co-founder Brian Chesky (which I obtained, embedded below), former Facebook exec Chamath Palihapitiya, who now runs an investment fund called the Social+Capital Partnership, is passing on participating in the recent $112 million round for the hot online rental site that was announced in July.

The deal — which values the company at $1.2 billion — has not officially closed yet, but includes venture firms such as DST Global, Andreessen Horowitz and others. Previous investors include Sequoia Capital.

Palihapitiya confirmed to me that it was his email and that his possible investment in Airbnb was small.

That said, his concerns center on how much voting control of new investors’ preferred shares the founders have in the latest round and also a $22.5 million cashing out, $21 million of which is going to those founders.

Another $9.6 million is being used to buy secondary stock from current Airbnb shareholders, who have to render parts of their vested stakes for the money.

Such wrangling between investors and entrepreneurs is not uncommon in Silicon Valley these days, as ever-dumber money chases ever-more-powerful geeks. But Palihapitiya’s email is a smart, reasonable and well-written argument to stop the madness.

According to sources close to Airbnb, the numbers that he refers to below are accurate, as is what appears to be an unusual level of voting control by its founders. Presumably, it is to protect the company from possible future sales on the secondary markets and to keep control with its founders as the number of investors grows.

In any case, the Palihapitiya email to Chesky is well worth the read (I have removed email addresses as a courtesy):

From: Chamath Palihapitiya
Date: Sat, 1 Oct 2011 11:16:05 -0700

To: Brian Chesky

Subject: Airbnb financing…

Brian,

Cc Marc, Reid, my deal team

Thanks again for giving me the chance to participate in your latest financing. I had a chance to review the docs at length yesterday and I wanted to follow up as, quite honestly, I’ve never seen a deal like this over ~60 investments I’ve done and I’m pretty concerned.

I’m all for getting the best valuation you can, minimizing dilution and maximizing control. We did this brilliantly at Facebook…all of our financings (except our first $$$ from Peter Thiel) were done not out of necessity but opportunity. As such, our investors had virtually no control and it resulted in a much better outcome. As we’ve discussed, I generally don’t believe investors add much to a success story and so minimizing their impact is a great strategy when you are onto something that is working.

This said, while several of these concepts are reflected in the current deal, there is one big thing that I am fundamentally against and violates my principles and will prevent me from participating in your round. When I saw that you guys were taking $31M out of the company, I didn’t think much of it as I just assumed it would entirely be via a secondary sale.

But as I understand the deal, it seems that you are doing only $9.6M in secondary and $22.5M as a dividend to common (of which $21M goes to you and your co-founders). I am really uncomfortable with this and don’t think its in the spirit of building a good, long term business. Effectively, it is a strategy that allows you guys to take money out of the business and not dilute yourself — I’m not sure why this is such a big deal when you guys are almost 90% vested and the financing is at $1.2B where your dilution is marginal. Further, it excludes many of the employees that probably have helped you and your co–founders get the company to this place as most of these folks probably don’t have any stock but have unexercised stock options and thus won’t get a dividend.

My basic principle on this stuff is that if you want liquidity, that’s fine, but you should make it available to everyone. Otherwise, no one should get it. Your current deal is the farthest away from this principle that I’ve seen in a while…this strategy has been done once before — at Groupon. We can see how “well” they are doing and how short term the investor community is now viewing their motives. I really think you can do better than this…and that you are better than this.

Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! Again, while I think Airbnb will be a good company, this is nowhere near the truth now — you guys still need to scale and build this thing for the future.

I really think you are onto something but I would implore you to not take the easy way out. Treat your employees the same as you’d treat yourself. Do things that you will be proud of and can defend to anyone including your Board, employees, prospective hires etc. In such a competitive hiring market, you are competing with not just your obvious competitors, but also any successful tech company who is also looking for great talent. A principle that treats your employees as well as you’d treat yourself is a huge strategy for differentiation, retention and long term happiness of the exact types of people you will need to be successful. In contrast, if you are viewed as self-dealing and shady, it will only hurt your long term prospects…

In summary, I’m passing on this financing because I strongly disagree with what’s going on. I’m not sure who advocated this approach but I did mention this to Reid [Hoffman, another Airbnb investor via Greylock Partners] last night and he was of a similar mind to myself and surprised this was the approach being taken. If you want some good advice — I would ask that you consider pinging him about different ways to think about going about the liquidity portion.

If you change your mind on how to close this financing, let me know and I’d love to reconsider. Otherwise, good luck and lets keep in touch.

Take care,

Chamath

In a move reminiscent of one done by Facebook in 2009, Twitter is close to completing an $800 million funding deal that will include a second part in which around $400 million of the total will be used to cash out current investors and also employees.

According to several sources close to the situation, the complex transaction could be completed within two weeks.

Along with basic funding needs, this is largely being done this way to give those with stakes in the San Francisco microblogging company an ability to monetize their privately held common stock and also to do this selling in a more organized — and legal — manner.

That is especially important since the company is not likely to go public for at least a year or more. And, while it could also be sold to a bigger company such as Google, that is also not in Twitter’s immediate future.

Before this secondary follow-on, the first part of the deal will be a $400 million investment for preferred shares by new and also existing shareholders, as was reported by the New York Times last week.

That round will indeed value Twitter at $8 billion, as the Times reported, which is a higher number than in other earlier reports.

This is more than double what Twitter was valued at when it got $200 million in venture funding from Kleiner Perkins in December at a $3.7 billion valuation.

Once the latest investments are complete, Twitter’s total cash haul since it was founded five years ago will be $760 million.

Key new moneybags are expected to be Russian investing heavyweight DST Global, which has invested in Facebook, Zynga and Groupon; as well as the digital growth fund of J.P. Morgan and perhaps others.

Current investors include Benchmark Capital, Union Square Ventures, Spark Capital and several other venture firms, as well as a spate of prominent angel investors.

The latest funding is an important one for Twitter and will up the pressure for its management, including CEO Dick Costolo, to really get its business growing in terms of revenue and profits.

Twitter is still struggling with coming up with a truly lucrative business model, and its execs have presented a number of them, such as promoted tweets, largely based on advertising.

It reportedly has $200 million in annual revenue from its efforts, which is still small in comparison to other Web 2.0 start-ups.

Interestingly, that was a similar situation to where Facebook found itself two years ago, when it allowed its employees to sell 20 percent of their shares.

That financing was part of a $100 million add-on to a $200 million investment in the social networking company by DST. At the time, the tender offer valued the company at $6.5 billion for the common stock, or $14.77 a share.

Of course, Facebook is worth upward of more than 10 times that now, so any Twitter sellers might want to consider their options carefully.

It is not clear exactly who can sell their Twitter shares, and in what amount, in the new deal. When Facebook did a similar move, for example, its top leadership could not sell any of their stakes.

A Twitter spokeswoman would not comment about any fund raising.

But, interestingly, in an onstage interview at a Fortune magazine tech conference this week, Costolo criticized stock trading of the shares of popular start-ups on secondary exchanges as a “distraction.” Like other companies, he said, Twitter had instituted stricter policies to limit the ability of its employees and investors to trade on those markets.

The stock pushed higher despite yesterday’s mixed financial results, which included a huge plunge in profits.

Why so? Because it’s clear that investors are happy with the company’s top-line revenue increases and are salivating at Amazon’s growth story, which increasingly has to do with both physical and digital products.

A letter sent to shareholders from the company’s founder and CEO Jeff Bezos today probably helped fuel the fire as well.

Instead of spicing up yesterday’s dry earnings call with a guest appearance, Bezos typed out his thoughts, revealing some of the company’s technical inner workings in a two-page missive filed with the SEC.

The gist of the Bezos letter–although he didn’t come out and say it–was that there were several justifications for the investments Amazon is making, which is what has been weighing down its bottom line.

Bezos essentially explained that since Amazon is doing something that has never been done before, there’s no off-the-shelf technology that can solve the problems the company is tackling.

Said the letter, in part:

While many of our systems are based on the latest in computer science research, this often hasn’t been sufficient: Our architects and engineers have had to advance research in directions that no academic had yet taken. Many of the problems we face have no textbook solutions, and so we–happily–invent new approaches.

Despite the dozens of warehouses that Amazon has and the nine-plus new distribution centers it’ll build this year, Bezos also argued that the company was a “services” business.

If that’s the case, you have to wonder what is Amazon building? Will they be bigger than Wal-Mart Stores? Will it snuff out eBay? Can it be the next big rival to Apple?

In fact, finding a company to compare Amazon to is increasingly difficult. After eBay announced its earnings today, it couldn’t be any more apparent: The Silicon Valley online auction site wants to connect the physical and online retail worlds together, and is focusing on its PayPal division, which now makes up 39 percent of the company’s revenues.

Meanwhile, Amazon’s new endeavors cross a wide range of categories, but definitely don’t mingle with physical retail presences. If anything, it is headed in the other direction by focusing on digital content–stuff you store in the cloud. Its recent launches, such as the Cloud music player and the Android Appstore, are only two examples.

Also in the letter, Bezos went on a tangent about how to build a specialized syncing technology that allows customers to seamlessly read the same books across multiple devices, before moving back to the key money quotes.

“I will awaken you by pointing out that, in my opinion, these techniques are not idly pursued,” he wrote. “They lead directly to free cash flow.”

The review by the Securities and Exchange Commission, disclosed in a letter to a lawmaker, could fuel the fast-growing market in private shares of technology firms such as Facebook Inc., Twitter Inc. and Zynga Inc. The steps under consideration would help such privately held companies raise more money without incurring the increased reporting and other requirements of becoming a public company.

According to the letter and people familiar with the matter, the likely changes would include raising from 499 the number of shareholders private companies can have without being required to open their books, and also making it easier for such companies to publicize share offerings.

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But the current market tempts VCs to change the game plan by buying shares of late-stage Web companies wherever they can find them–from start-ups directly or from employees and previous investors.

VCs didn’t start the fire; folks like Yuri Milner from Digital Sky Technologies (Facebook, Zynga, Groupon) and private company marketplaces that help stave off IPOs, like SecondMarket and SharesPost, did.

But these new Web giants’ valuations just keep going up. Think Facebook’s valuation was bloated at $50 billion? After seeing huge demand at that price, a month later, the company is exploring selling employee shares at a $60 billion valuation.

Watching those numbers rise so quickly makes VCs lose their hang-ups about price and just want to get in on the hotness.

Kleiner Perkins is reportedly buying $38 million worth of Facebook shares from existing shareholders at a $52 billion valuation, according to VentureWire. Meanwhile, Andreessen Horowitz bought $80 million worth of Twitter shares on the secondary market, after not participating in the company’s recent $200 million funding round, led by Kleiner Perkins.

Both those firms, along with Battery Ventures and Greylock Partners, also invested in Groupon’s last huge round, after the daily deal site walked away from talks of a $6 billion buyout by Google.

It’s not just the big names doing such deals. Venture capitalists were the buyers in more than 40 percent of transactions on SecondMarket in the fourth quarter of 2011.

VC activity easily outpaced other buyers, which were individuals, hedge funds, mutual funds, secondary funds and asset managers.

According to SecondMarket Head of Public Affairs Mark Murphy, VCs representing the largest percentage of buyers is a recent trend that started in the third quarter of 2010.

This comes at a time when raising money for a VC firm is tougher than ever.

What are VCs buying on SecondMarket? Facebook accounts for the single largest portion of transactions, at 39 percent. After that are LinkedIn, Etsy, Chegg, Epocrates, Silver Spring Networks, CafePress and Reply, and some other companies that declined to be named.

SecondMarket does not share pricing or volume stats or trends, except to say it sold $157.8 million worth of stock in the fourth quarter, up from $75 million in the third quarter.

Some VCs are steering clear of secondary markets and late-stage deals. Redpoint’s Geoff Yang was willing to go on the record about it in a recent interview. “What do venture capitalists know about being a momentum hedge fund?” he said.

It’s not just proven hits big enough for the secondary markets that are attracting funding interest. Everyone is still eager to find the next Groupon or Zynga. The Q&A site Quora, led by former Facebook CTO Adam D’Angelo, raised $11 million at a valuation of $86 million last year before it had even launched to the public. After success with early adopters, the start-up is now fending off offers of much more money than that.

So there’s pressure to either get in very early, or get in late if you can, because the time in between is fleeting.

VCs are also actively trying to get more involved in seed funding deals. For instance, Google Ventures recently set up its Startup Lab to attract early-stage companies where it charges them $5 per month for office space (see our video tour). And just this morning, NetworkEffect covered how VCs are actually more active than angels on the early-stage investment matchmaking service AngelList.

According to a global survey of 1,300 companies by Korn/Ferry, though 98 percent of companies believe a CEO succession plan to be important, only 35 percent currently have one in place. And 49 percent haven’t had one in place for the last three years.

That’s something shareholders calling for Apple to disclose its succession plan annually might want to keep in mind as they prepare for the company’s annual meeting later this month. On this issue, Apple is actually a leader in corporate governance. And it does have a good rationale for keeping its succession plan private:

• A written succession plan would give Apple’s rivals unfair advantage by publicizing its objectives and plans.
• Identifying potential successors to Steve Jobs would invite other companies to recruit those people away from Apple.

Sound reasons and ones that seem to outweigh the main reason for making it public: Making nervous shareholders less nervous.

Now backing the measure: The Laborers’ International Union of North America and Institutional Shareholder Services, one of the most influential proxy advisory outfits around.

“ISS believes that shareholders would benefit by having a report on the company’s succession plans disclosed annually,” ISS said. “Such a report would enable shareholders to judge the board on its readiness and willingness to meet the demands of succession planning based on the circumstances at that time.”

That may be so, but according to Apple, which recommends shareholders vote against it, such a report would also give the company’s rivals unfair advantage by publicizing its objectives and plans and would undermine its efforts to recruit and retain champion executives. “The company takes succession planning seriously, and the board has adopted a comprehensive process to ensure continuity and maintain the superior quality of its management team,” Apple said in its 2011 proxy statement. “This process also allows flexibility to adjust to unanticipated changes in the market.”

What it doesn’t allow for is transparency, something investors might appreciate with Jobs now on his third medical leave from Apple.

The Santa Clara, Calif., company reported its best year ever in 2010, helped by a surge in demand for tech products after a pullback in spending during the recession. Yet Intel’s shares are up only 3.1% since the end of 2009 as investors have focused on the company’s struggles to expand in the fast-growing mobile arena.

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But as we (and others) pointed out at the time, a large chunk of that money wasn’t going to the company. Instead, hundreds of millions of dollars would go straight to shareholders to give them liquidity.

Now we know exactly how much, thanks to a new regulatory filing from Groupon that shows $573 million is devoted to buy stock from existing shareholders. That means Groupon only raised $377 million in new equity.

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The various boardroom dramas that have roiled HP’s directors during the last decade have often overshadowed HP itself. Last August’s blowup involving the departure of CEO Mark Hurd following accusations of sexual harassment occurred against the backdrop of lingering memories of the 2006 scandal involving the use of illegal methods to spy on journalists that ended the tenures of three HP directors.

Before that there was a public fight against HP’s 2002 acquisition of Compaq, led by dissident director Walter Hewlett, who eventually lost his seat. The Compaq deal ultimately cost Carly Fiorina her job at HP after a boardroom confrontation in 2005.

The result of all this is that boardroom drama has become something of an HP specialty, along with printers, computers and IT services. Criticizing the board’s actions has become something of a sport, with Oracle CEO Larry Ellison serving as the most public practitioner.

Shareholders appeared to agree that a change was overdue. HP shares shot up right away as word of a shake-up began to leak right before markets closed yesterday. HP shares closed up one percent today, trading at levels not seen since before Hurd’s abrupt departure in August.

The four departing directors were deeply involved in the Hurd kerfuffle. Two were Hurd defenders, and the other two wanted him out. All four volunteered. Chairman Ray Lane, in an interview with The Wall Street Journal, said the debate over Hurd’s status “took a lot out of this board.”

It’s highly unusual for a company to change its board so deeply and so suddenly. The five new additions became directors effective today without any input from shareholders, and will serve until a vote can be held to approve them for a full one-year term at the next shareholder meeting in March.

Shareholders in theory have the power to offer their own slate of directors, but there’s little time for that, and even if some group were to do so, its only option would be to do so at its own expense. SEC rules governing the access to the proxy nominating process are currently being challenged in court by the U.S. Chamber of Commerce and Business Roundtable, and so the rules that would allow shareholders to more easily submit their own list of names are on hold pending the outcome.

Absent a proxy challenge, HP shareholders will be put in the position of accepting a board on which seven of 13 directors are brand-new. That’s a lot of new blood and may turn out to be the kind of change HP’s board needs. And getting the change done all at once rather than gradually may prove the better option.

However, I can’t help but wonder: In seeking to close out a period in which HP’s board became known more for its drama than anything else, is more drama the right answer?