Lock-ups are designed to prevent a stock from experiencing the kind of volatility that might be caused 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 economics at the Villanova School of Business in Pennsylvania. But there's risk involved too. If too many people sell, Facebook's stock price could decline. (Read More: A Steep Climb Back for Facebook’s Stock)
That's a problem the company can't afford. On Monday, the stock closed at $21.60, down 43 percent from its initial public offering price of $38.
This week, Facebook's operating chief and No. 2 executive Sheryl Sandberg, Facebook's, as well as finance chief David Ebersman and firms ranging from Accel Partners to Goldman Sachs will be free to sell stock they own. In all, 271 million shares will become eligible this week, according to Facebook's regulatory filings. Microsoft, 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 with the other top executives 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. Zynga, the online game maker behind "FarmVille," was sued last month for waiving lock-up restrictions for insiders, including CEO Mark Pincus, before the company's first-quarter results in April.
"The only people who would sell are people who need the money," says Pachter. "I would be very worried if Sheryl Sandberg or Ebersman sell, but they are not that dumb."
Following this week's expiration date, about 243 million more Facebook shares and stock options will become eligible for sale into the public stock market between Oct. 15 and Nov. 13. 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 the shares.
The early investors who sold their stock to the public as part of Facebook's IPO did so at a price of $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 a unique 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 the Facebook's disappointing 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," says Zaleski.
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 before the company's initial public offering, through secondary stock markets set up to allow trading in private businesses. 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."