Lockup Ends At Facebook: Will Employees Sell Stock? What's Next For Facebook's Stock Compensation?

Earlier this year (see 23 April and 25 May), as Facebook was in the process of going public, we looked at Facebook's S-1 registration statement, the taxes for employees and the company stemming from its IPO, and the potential issues for employees. Most of the company's pre-IPO stock compensation, which became almost all restricted stock units (RSUs) in 2007, vest after two conditions: a specified length of employment at the company plus a specified length of time after a liquidity event such as an IPO. In its prospectus, Facebook disclosed that vesting and employee share delivery would occur between 151 to 180 days after May 17, 2012, as the company can do this 30 days before or after the date when the liquidity condition is satisfied.

The company moved the vesting date forward to October 25 for current employees, who hold 220 million RSUs, and the net amount of shares are eligible to be sold starting today, October 29 (see the 8-K filed on September 4). The company waived the market-standoff provisions that had prohibited employees from selling or otherwise transferring any of their common stock or securities convertible into or exchangeable for shares of common stock until November 14, 2012. For its former employees and nonemployee directors, who hold 51 million RSUs, the vesting and settlement date is still November 14, 2012 (see page 9 of the 10-Q referencing this).

The end of the lockup became a major news story that attracted coverage by television news media (see video from ABC station KGO-TV in San Francisco), along with scrutiny by various news outlets (e.g. an article at CNN Money) and blogs (see posts at All Things D and Policy Mic). They all wonder what Facebook employees will do with their stock, which has a total value of over $5 billion.

Almost all the news reports also noted that employees will owe taxes on the income from these pre-IPO RSUs at ordinary income rates. For many, this will equal 45% of the value of their shares. Commentators also discuss Facebook's intention to net-settle the shares at vesting, instead of leaving employees to sell shares for the withholding taxes they owe. According to CNBC, Facebook explained during its earnings call that it would withhold 120 million shares from the vested RSUs to cover roughly $2.4 billion in taxes. Facebook will use its own cash and credit lines to pay the estimated tax bill, according to the article at CNN Money.

The big question many of the journalists and bloggers try to answer is whether many employees will sell their stock. We also wonder whether Facebook will consider granting stock options. Given the company's lowered stock price, stock options would offer attractive value for current employees, would help with corporate recruiting, and would send a message to the market about its growth potential.

Comments

[Dan Walter]

I am more interested in finding out what the company is really worth.

The $4.2 billion tax payment was announced. We have to assume that this has been built in to the current $22 stock price.

The question in my mind is whether Facebook is worth $22 x the number of shares that will be outstanding by year end? 1.2 billion new shares will be issued via RSU releases by the end of 2012.

Is the real face book value is current market cap divided by its shares (included the new 1.2 billion) or is it the current stock price multiplied by the total number of shares?

All investors have been aware of the upcoming releases. I just wonder if they have built those shares into pricing, or if pricing will suffer. Then...what will be the impact on taxes to employees and payouts by Facebook?