Placing a value on a free product: The Facebook case study

Hard to argue with the logic….

Mr. Zuckerberg, who planned to pay for Instagram mostly with stock, asked Mr. Systrom what he thought Facebook would be worth, the people said. If he believed Facebook would one day be worth as much as a company like Google at $200 billion or more, then the equivalent of 1% of Facebook would be sufficient to meet his price, Mr. Zuckerberg told Mr. Systrom, the people said.

It was as good an argument as any, considering that traditional ways of valuing a company—by its cash flow, or the sum of its parts—are ineffective when that company makes only one product and gives it away free.

In Facebook Deal for Instagram, Board Was All But Out of Picture – WSJ.com.