Facebook's early investors and a handful of directors became eligible today to sell stock they own in the social networking company, putting more downward pressure on the stock.
So-called "lockup" 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.
Lockups 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 [is] 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 end of lockups aren't normally so dramatic, but after a disastrous IPO, Facebook can ill afford any more downward pressure. On Wednesday, the stock closed at $21.20 US, down 44 per cent from its IPO price of $38. Late in the trading session on Thursday, Facebook shares were off more than five per cent to a new low below $19.91. It had earlier been as low as $19.61, a new low for the stock and within striking distance of a 50 per cent loss from its IPO level.
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.
It's not yet clear which insiders may have sold because they have three business days to disclose any sales, said Sam Hamadeh, the CEO of PrivCo, which researches privately held companies.
"A lot of people have been waiting," Hamadeh said. "Facebook was expected to go public a long time ago." Venture capitalists, some of whom bought in as far back as 2005, were likely eager to get out, Hamadeh said.
"With VCs, they know that waiting for a better price is a fool's game," he said.
Thursday's trading action was brisk — 140 million Facebook shares traded on the Nasdaq, more than four times the normal volume.
Zynga Inc., the company behind FarmVille and other games played largely on Facebook, was sued last month for waiving lockup restrictions for insiders, including Pincus, before the company's first-quarter results in April.
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 lockup 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.
"There is no way around it. It'll be painful," Hamadeh said. "But hopefully once that selling pressure is gone, it will find its floor and could be a basis for a more stable stock through 2013."
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.
All told, 1.9 billion additional shares could eventually be sold into the marketplace.
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," 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."