MENLO PARK (AP) — Facebook's early investors and a handful of directors will become eligible on Thursday to sell stock they own in the social networking company. It marks the beginning of a time-honored process for public companies, one that will give many Facebook employees the same right to sell their shares this fall.
It's conceivable none of them will sell. But if they do, up to 1.91 billion more shares could flood the stock market over the next several months — more than four times the 421 million shares that have been trading since Facebook's initial public offering in May.
So-called "lock-up" periods, which prevent insiders from unloading shares too close to an IPO, 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. The progressive phasing-in of various shareholders allows early owners to shed their stock and make way for new investors, says Peter Zaleski, a professor of economics at the Villanova School of Business in Pennsylvania.
But there's risk involved, too. If too many people sell, Facebook Inc.'s stock price could decline.
That's a problem the company can't afford. On Tuesday, the stock closed at $20.38, down 46 percent from its initial public offering 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.
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.
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.
"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.
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.
"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," 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."