Yet another reason why Twitter stock keeps dropping

Part 2
Yet another reason why Twitter stock keeps dropping (Part 2 of 3)

Why the Twitter stock dropped 18%: The company’s lockup terms

Twitter’s lockup terms

The lockup terms had already been well-disclosed in Twitter’s (TWTR) 10-K.

2014.05.06 - Twitter Comps Stock Prices Before and After LockupEnlarge Graph

Twitter states:

“A total of 489,421,608, or 85.9%, of the outstanding shares of our common stock are restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, and the perception that these sales could occur may also depress the market price of our common stock. As of December 31, 2013, there were 569,921,608 shares of our common stock outstanding. Our executive officers, directors and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us or lockup agreements with the underwriters of our initial public offering under which they have agreed, subject to specific exceptions, not to sell any shares of our common stock prior to May 6, 2014. As a result of these agreements and the provisions of our investors’ rights agreement, shares of our common stock will be available for sale in the public market as follows:

  • Beginning on February 19, 2014, up to an aggregate of 9,867,228 shares of our common stock that are held by our employees who are not executive officers became eligible for sale in the public market in order to satisfy the income tax obligations of such employees resulting from the vesting and settlement of the outstanding Pre-2013 RSUs for which we expect the service condition will have been satisfied on such date and through the end of the lockup period; and
  • Beginning on May 6, 2014, the remainder of the shares of our common stock will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rules 144 and 701 under the Securities Act of 1933, as amended, as well as our insider trading policy.”

So starting on May 6, approximately 479.6 million (489.4 million – 9.9 million) TWTR stock shares were officially “unlocked” for resale to the market. However, some major Twitter executives and investors have pledged not to sell their stake, which we will discuss in the next part of this series.

For reference, Facebook (FB) stock rose 13% after its major lockup period expired on November 14, 2012. LinkedIn (LNKD) stock dropped 3% after its lockup period expired on November 21, 2011. Zynga (ZNGA) stock dropped 8% after its lockup period expired May 28, 2012. Twitter is a minor component of certain tech and Internet ETFs, such as the Vanguard Information Technology ETF (VGT) and the First Trust DJ Internet Index Fund (FDN).

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