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Why Facebook didn’t have to go public

August 30, 2012, 2:56 PM UTC

FORTUNE — It’s a strange world we live in when a financing event that raised $16 billion for an eight-year-old company is widely panned as a failure. It’s even odder when tongues wag that the young CEO of that same company, Facebook CEO Mark Zuckerberg, should be fired because of the company’s lousy reception in the public markets and his general disregard for the investing public.

The oddest thing, however, is that Facebook (FB) didn’t have to go public at all. Over and over, senior Facebook executives lamented that they were being “forced” to go public by arcane Securities and Exchange Commission rules triggered by a company’s shareholder count. Because so many of Facebook’s employees are shareholders, Facebook had to become a public company. And so the firm was dragged kicking and screaming into the world of Sarbanes-Oxley, Nasdaq bell-ringing and so on.

Too bad that isn’t true. There are two little problems with that narrative. First, the newly minted JOBS Act, which raised the shareholder cap — from 500 to 2,000 — to make it easier for small, growing companies to avoid SEC regulation, grandfathered Facebook. More to the point, the law never said Facebook had to go public. The law said Facebook had to disclose its financial results with the SEC. Big difference. Cargill and other big companies without publicly traded equity file their results with the SEC but remain private.

Well, one might counter, if you’re going to disclose all your financial secrets you might as well go public. I agree. But that’s not how the Facebook camp couched its argument. It was being coerced into this horrible situation that would put billion in its coffers — and, importantly, in the pockets of its investors and employees — and oh, by the way, force it to put up with the constant whining of mutual funds and ordinary investors alike. In fact, Facebook merely could have filed its financials, continued to allow its shares to trade on secondary markets for private companies, and gone on its merry way without having to answer to the new owners it so clearly disdains.

Of course, there was always another catch. Facebook had implicitly promised its own employees the company would go public so they could cash out the incentive equity they had been granted as part of their compensation. Several years into its existence, Facebook stopped granting plain-old stock options because each optionee was considered a stockholder, counting toward the SEC-mandated trigger. Instead it granted restricted stock units, or RSUs, which didn’t count as common shares and could only be cashed out in public markets. (Facebook could have structured its RSUs differently, but it didn’t; Doing it this way allowed the company to delay its IPO for several years.)

In Silicon Valley it is not enough for employees to be well paid for the fruits of their labor. If the “risk” they take by making the “investment” of their time doesn’t pay off, they leave. That’s what passes for loyalty in the technology industry. Employees say (read: whine, rationalize) that they need to “diversify” their investments, but that’s poppycock. Facebook easily could have found a way to cash out its employees. Asset manager Pimco recently worked out a deal with SecondMarket to hold regular private auctions for company stock. But such “shadow equity” schemes are by definition slow and gradual. They certainly allow for diversification. Tech-industry workers want their wealth, and they want it now dammit.

So instead of staying private, the option Facebook swore it wanted to pursue, the company went for the most money it could raise. Today, its shares are worth half their offering price and threaten to go lower as employees prepare to dump whatever they can, following the example of one of the company’s own directors, Peter Thiel. It’s a sorry state of affairs when the tail wags the dog such that compensation and corporate governance matters dominate the discussion. Facebook has a pretty cool business — and a $40-billion-plus market value. But nobody wants to talk about that. Yawn.

Adam Lashinsky first wrote about Facebook nearly seven years ago, when he discussed the company’s valuation, among other esoteric subjects, with Mark Zuckerberg.