Stock vs Cash When Selling a Business: Instagram's $1 Billion

Cash settles a sale. Stock converts it into an investment in the buyer. Sellers paid in cash know the price on the day it is wired; sellers paid in shares have usually agreed to a number of shares, and what those shares are worth gets decided on closing day and every day after. Paper is worth taking only when the contract fixes the dollars, or when the owners would buy that company on purpose.

In April 2012, Facebook announced it was buying Instagram for roughly $1 billion.¹ The composition was less memorable than the headline: about $300 million in cash, and the balance — roughly 23 million shares — in Facebook stock,² valued at a price implied by the company's private valuation, because Facebook had not yet gone public.³ It listed in May.⁴ The stock fell hard through the summer while the deal waited on regulatory review,⁵ and by the time the acquisition closed the same share count was worth considerably less. The package announced at about $1 billion was carried in Facebook's subsequent filings at roughly $715 million.⁶ Instagram had not lost a user. The currency moved. The transaction is a matter of public record, used here to show how a price travels between signing and closing; nothing in this piece is a recommendation regarding any company's shares.

Dozens of clauses shape what a seller actually nets. An earnout moves with the business being sold — a separate risk, worked through on this shelf in what eBay learned from Skype. Acquirer stock moves with a company the seller is leaving behind, and that is the risk most often waved through at the handshake. Three questions decide whether accepting it is a way of getting paid or a way of staying invested.

Is the price fixed in dollars, or fixed in shares?

The governing principle is that one of those two numbers is locked between signing and closing, and sellers need to know which. Either the buyer promises a dollar value and adjusts the share count at closing to deliver it, or the buyer promises a share count and lets the dollar value float. Most announcements quote a dollar figure. Most agreements lock the shares. The press release and the contract are describing different things.

Instagram's deal fixed the shares. Twenty-three million shares were twenty-three million shares whether the stock traded at the April level or well below it,⁵ and nothing was added when it fell. Some agreements contain a collar — a band around the agreed price within which the share count stays put, with adjustments if the stock breaks through a floor or a cap. This one did not.⁵ The sellers owned the entire gap.

The pull here is psychological as much as legal: a headline number lodges itself first and the mechanics arrive second, which is the same trap as the number in a founder's head before a sale begins.

If the dollars are fixed, the seller holds something close to cash with a delay, and the buyer carries the market risk for the months in between. It is worth asking why a buyer would resist that. A company confident in its own shares should be willing to stand behind their value for a quarter. Reluctance is information.

If the dollars are not fixed, the decision was effectively made at signing rather than at closing, and the useful exercise before signing is arithmetic, not prediction: what is this package worth if the buyer's shares are materially lower on closing day, and what is it worth if closing slips by a quarter? If the answer is unlivable, the offer is not yet an offer at a price.

Does the cash leg cover the bills only cash can pay?

Stock is not spendable proceeds. The governing principle is that the fixed portion of the price has to cover the fixed obligations the sale itself creates: the tax due, any debt the owners personally guaranteed, the reserve held against later claims, and the household's needs while the rest of the plan is built. Shares that are unvested, locked up, or privately held cannot do those jobs on the day they are promised.

In the Instagram transaction, the $300 million was the only leg that did not depend on a closing-day price — less than a third of the announced number.² The rest arrived as stock, and a meaningful portion of it went to employees in unvested form, earned out over subsequent years of continued service.⁷ Even the shares that were fully owned could not simply be sold the next morning; newly listed companies carry lockups, meaning an agreed period during which insiders cannot sell.

Sellers of private operating businesses face a stricter version of this. The stock leg is often rollover equity — a continuing stake in the buyer's company — with no daily quoted price and frequently no right to sell. The absence of a ticker makes the risk feel smaller. It is larger. A figure that cannot be looked up can still change, and it cannot be sold when it does.

Tax cuts the other way, and it is the most respectable reason to take paper. In plain terms, cash is generally taxed when it arrives, while stock received in a transaction the tax rules treat as a swap of one ownership stake for another can sometimes defer that tax until the shares are eventually sold. The rules are specific enough that counsel has to apply them to the actual contract. The deferral can be genuinely valuable — but it does not pay a bill due in cash, and a deferral on a position that shrinks is not a saving.

If the cash cannot cover those obligations, the mix is wrong however flattering the headline. What changes is the split: raise the cash until taxes, guarantees and reserves are cleared, or do not sign. Where founders, family holders and outside investors have different bills, a cash election — a provision letting some sellers take cash while others take shares — is how one transaction survives more than one honest answer.

Would these owners buy the buyer's shares on purpose?

The governing principle is that accepting stock is economically identical to taking cash and immediately spending it on the acquirer's shares. Framed that way, it stops being a question about the sale and becomes an ordinary question about a business: does this company generate cash dependably, is that cash likely to grow, and is the price sensible? Owners who spent a decade asking those questions about their own company are better equipped to answer them than they assume — provided they ask, rather than letting the deal's momentum answer on their behalf.

In April 2012 the honest answer was hard. Facebook was enormous and growing, but it had not yet shown it could make money from users on phones; the shift to mobile was flagged as a central risk in its own listing documents,⁸ and the market's treatment of the stock that summer turned largely on that doubt. Accepting the shares meant taking a side in an argument nobody outside the company could settle. That is not a criticism of the sellers. It is the nature of the instrument: stock pays in someone else's unresolved questions.

There is a second cost that rarely appears in the term sheet. The instinct after a sale, for people who have spent years inside one company, is to be done — to hold proceeds that do not depend on a single board, a single product line, a single share price. Buyer's paper postpones that, and can leave a family's capital concentrated in the acquirer at the exact moment the operating business is let go, which is the problem WhatsApp's Facebook stock picks up after the closing statement. Cash can always be used to buy the buyer's shares later, in a size and at a moment of the holder's choosing. A restricted block that was the purchase price cannot be unchosen.

If the answer is no, the stock is the wrong currency for that portion, however confident the buyer sounds. What changes is posture: the stock leg gets sized deliberately, as an investment made with capital that can move without threatening the rest of the plan — or it gets declined. A buyer unwilling to pay all cash has stated a fact about its own balance sheet. That fact is not an argument that the sellers should want the shares.

Taken together, the three answers separate a price that can be spent, a price that is allowed to move, and a price that is really a second investment. Most announced deals contain all three, and the work before a headline is permitted to feel like money is to label each dollar. If the dollars are fixed through closing, if the cash covers what only cash can pay, and if the stock is a block the owners would buy on purpose, paper can be a rational part of getting paid — including, where the structure qualifies, as a way to defer tax.

The negotiation that matters is not whether the number sounds like $1 billion. It is whether that number is still a number on the day it has to be.