Facebook's early investors and a handful of directors become eligible today to sell stock they own in the social networking company, putting downward pressure on the stock as up to 1.9 billion more shares could flood the stock market over the next several months.
So-called "lock-up" periods, which prevent insiders from unloading shares too close to an initial public offering, generally start to expire 90 days after a stock makes its public debut.
Lock-ups are designed to prevent a stock from experiencing the kind of volatility that might occur if too many shareholders decide to sell a newly traded stock all at once.
"If all of these founders try to get their money out too rapidly, the stock will be driven down, because, first of all, all that excess stock would naturally drive down the price, but also because what it signals about the future prospects of the company," Dave Valliere, a business professor at Ryerson University in Toronto, told CBC News.
"Certainly if any of the people at the very top start to sell — and they clearly don't need the money right now — then that's a signal that something is not good at Facebook, and maybe we're heading for a train wreck of sorts."
The progressive phasing-in of various shareholders allows early owners to shed their stock and make way for new investors, Peter Zaleski, a professor of economics at the Villanova School of Business in Pennsylvania, told the Associated Press.
That's a problem the company can't afford. On Wednesday, the stock closed at $21.20 US, down 44 per cent from its IPO price of $38.
In all, 271 million shares will become eligible this week, according to Facebook's regulatory filings. Firms ranging from Accel Partners to Goldman Sachs, Zynga CEO Mark Pincus and Facebook board members James Breyer, Peter Thiel and Reid Hoffman are among those free to sell stock they own. Microsoft Corp., another early Facebook investor, will be eligible to sell, too.
Zynga Inc., the company behind "FarmVille" and other games played largely on Facebook, was sued last month for waiving lock-up restrictions for insiders, including Pincus, before the company's first-quarter results in April.
Zuckerberg has further limits
Facebook's 28-year-old chief executive, Mark Zuckerberg, won't be able to sell his shares until mid-November. Facebook hasn't explained why Zuckerberg didn't become eligible this week. He controls about a third of the 1.22 billion shares and stock options that will become unlocked on Nov. 14.
Wedbush analyst Michael Pachter believes it's unlikely that top executives will sell their shares as soon as they can. It would look bad for the company, Pachter says, if Facebook's No. 2 executive and operating chief Sheryl Sandberg or finance chief David Ebersman decide to sell.
"The only people who would sell are people who need the money," Pachter says. "I would be very worried if Sheryl Sandberg or Ebersman sell, but they are not that dumb."
Following this week's lock-up expiration date, about 243 million more Facebook shares and stock options will enter the public stock market between Oct. 15 and Nov. 13. That's when current and former Facebook employees will be able to sell stock they earned as compensation.
Market value plummeted
Then there's the Nov. 14 expiration, and another a month later. Next May, a year after Facebook's IPO, the Russian internet company Mail.ru Group and DST Global — both of which made early investments in Facebook — will be able to sell their shares.
The early investors who sold their stock to the public as part of Facebook's IPO did so at $38 each. If they sell now, they will make far less money from each share than they did in the IPO. Facebook's stock has not hit its IPO price since its first day of trading. As a result, the company's market value has plummeted from $104 billion to $59.1 billion in roughly three months.
Goldman Sachs and a few other investors are in an unusual position to profit if they sell Facebook's stock at its current price. A January 2011 investment round from Goldman Sachs and others valued Facebook at $50 billion.
Even before Facebook's IPO, Silicon Valley merchants — those who sell real estate, cars and other luxury items — had been expecting a boost to the local economy from rank-and-file Facebook employees who received stock options as part of their compensation. Now, experts are cautioning those merchants to temper their expectations.
Private sales possible
"In light of the company's market value being half of what was expected, and the fact that the big gainers are not in Silicon Valley year-round, I would not expect a new boom in Silicon Valley resulting from this," Villanova economist Peter Zaleski says.
Jon Burgstone, professor at the Center for Entrepreneurship and Technology at the University of California, Berkeley, points out that many of Facebook's shareholders had already been able to sell their stock through private stock markets before the company's IPO. In many ways, he added, "Facebook's IPO was really a secondary public offering. A number of large shareholders and early employees have already been cashing out."
As for flashy cars and fancy clothes?
"People here generally don't spend their money on expensive clothing, jewelry, etc.," Burgstone says. "The ethos of Silicon Valley remains — what have you done, and what can you do now? — not what label are you wearing."
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