by VentureDig on November 1, 2009
The business models within the social media realm are much different than traditional businesses. In social networking, they’re ever-changing, backed by eye-opening revenue and have very little documentation.
Reason: as soon as someone sits down to outline ways social networks can be monetized, another model emerges, and another model ceases. For this reason, this piece will be routinely updated with new models and new feedback from your comments.
Below are the Four Primary Business Models in the social networking space that I’ve experienced–they primarily are concerned with Facebook Applications. There may be others, or extensions of these, or even ideas out there that have yet to be tested yet are profoundly viable. All additions are welcomed.
I. Display Ads:
This is your bread and butter business model. It centers on showing showing Display/Context Ads. The two major forms of this are CPC (cost per click) and CPA (cost per action or acquisition).
Example:

With the ad above, the user clicks the ad, they take a quiz, and usually they fill out their email address or phone number. The advertiser (IQ Quiz), will pay the Facebook developer (you) each time a user fills out their email address or phone number. Usually, there’s a middle man involved. The middle man is called an ad network.

These types of ads can pay out a CPM of $0.05 – $0.80 (*Depending on Country*)
Say you serve 1 million impressions of these per day, at a $0.20 CPM, you can expect to make $200 per day, or $6,000 a month.
II. Branding Certain Elements within an Application
This business model is rather new, and personally, my favorite. This model centers on branding a certain element within your application.
For instance, LivingSocial is an application where users can make a list of their favorite things. Big brands, like Porsche, may want to get in front of their audience and have users speak about their brand in a viral, social networking space. Therefore, Porsche will pay LivingSocial for each exposure to their audience. By exposure, I mean hitting the newsfeed of the user on Facebook:
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by VentureDig on August 14, 2009
I attended a venture finance event a while back in Palo Alto, which was put on DLA Piper. They had a nice segment on legal aspects of venture finance and law.
While this post is geared towards the investor, venture capitalist and angel, if you’re an entrepreneur, you will obviously gain value from understanding this overall concept.
Calculation of Number of Shares To Be Offered to Existing Investors Pursuant to Preemptive Rights:
To determine the number of shares to be offered to a current shareholder pursuant to preemptive rights to maintain ownership percentage, you must first determine the basis on which the calculation of the holder’s ownership is to be made {e.g., fully diluted including all options in pool, fully diluted excluding ungranted options, based on shares actually outstanding [on an as-converted basis], including warrants, etc.).
In a venture-backed company, these rights typically will be contractural rather than statutory {i.e., pursuant to the company’s charter or state incorporation laws). The calculation of statutory preemptive rights will vary depending on the law of the state of incorporation.
The actual number of shares to be offered to existing investors pursuant to preemptive rights is the difference between the aggregate offering size and the shares to be offered to new investors.
To calculate the aggregate offering size, use a standard “gross up” calculation by dividing the number of shares being offered to new investors other than the holder(s) with preemptive rights by a fraction which is (1 – [the holder's percentage ownership of the company after making the determination above]). For example, if the company proposes to offer 8,000,000 shares to new investors prior to the offering the existing investor with preemptive rights owns 5% (or .05) of the company then the existing investor would have the right to purchase the following number of shares:
Aggregate Offering:
8,000,000/(1 – 0.05) = 8,000,000/(0.95) = 8,421,053
Offering to Existing Investor: 8,421,053 – 8,000,000 = 421,053
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