The LinkedIn S-1: Social Networks, Legally Drawn

LinkedIn is the first major social network to test the IPO market. Right now, it is on track to raise up to $274 million, with a valuation of $3 billion. Here is a link to their S-1. One of the great parts of gaining SEC approval is you have to get outside counsel to sign off. And if they are good, they grill company executives on all aspects of the filings, and scrutinize the back-up documentation relied upon to prepare them. Especially interesting are the Risk Factors. These are something you hope no potential investors ever read, but something you'll gladly throw in the face of the class action lawyers if needed somewhere down the road. Here's LinkedIn's RF #5; it really reveals a lot about the core reality of social networks: The number of our registered members is higher than the number of actual members, and a substantial majority of our page views are generated by a minority of our members. The number of registered members in our network is higher than the number of actual members because some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of registered members as our measure of the size of our network. Further, a substantial majority of our members do not visit our website on a monthly basis, and a substantial majority of our page views are generated by a minority of our members. If the number of our actual members does not meet our expectations or we are unable to increase the breadth and frequency of our visiting members, then our business may not grow as fast as we expect, which will harm our operating and financial results and may cause our stock price to decline. Rather bracing, when you think about it. Since LinkedIn publicly claims more than 100 million registered members worldwide, people reading this risk factor learn that the real number of "regular users" is, at best, an "insubstantial minority." We will see if the SEC allows LinkedIn to use "… the number of registered members as our measure of the size of our network." LinkedIn is careful not to call the 100 million "users;" others in the media, not so much. I see how it would be hard to know how many fictitious members it has. To be helpful, here's one: Yes, when the practice of law gets old, I really wish I would have pursued an Interface Fugleman major. Knowing that tech companies like LinkedIn are all about metrics, I have to assume that they know exactly how many registered members are regular users (log in at least once a month). I also assume that use that they track people like Peter and weed them out over time. But the real takeaway from the LinkedIn S-1 is how this information is a proxy for the true user reality of online networking sites. Here is my summary: Many join, few use. Why is this? Who knows. This is my theory: We all want something. You go first. Most people join business networks hoping to get something (help, information, a referral, a job lead, cash money). If all want, and none give, then Social Network X is yet another username to remember and password to forget. As long as lawyers proceed with legal social networking mindful of these realities, then they can sign up and network away. And LinkedIn has two things that many social networks never achieve: rising revenues and real profits.

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