Unlike in other recent initial public offerings such as Facebook, where some early investors sold shares right away and officers could start dumping in just three months after the deal, Twitter insiders will need to hold on for a longer period of time.
Some rank-and-file employees can sell 9.9 million shares starting Feb. 15, 2014, to cover income tax expenses from vesting shares. But that's just 1% of the company's shares outstanding. More important, executives, directors and owners of large chunks of Twitter stock have agreed to not sell their shares for at least 181 days after the IPO. That means these shares are locked up for sale until May 6, 2014, saving early investors from this avalanche of supply of stock. The 181-day lockup is a relief to investors, since the release of shares for sale can apply significant pressure on a fledgling stock.
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Twitter "really tightened up the lockup," says Francis Gaskins of IPO Desktop Premium. "This is not going to be a problem in the market."
Twitter's decision to go with a 181-day lockup period of its shares post IPO is interesting because it's a:
• Return to past norms. A 181-day lockup on shares had been the norm for a long time with IPOs and is still the most commonly followed practice, says Jay Ritter of the University of Florida. But that standard was being chipped away by high-profile technology companies such as Google and Facebook, which allowed some investors to start selling sooner. Google, for instance, first started releasing shares to be sold by insiders in 15 days following the IPO, with more shares being available for sale at 90 days.
• Reaction to Facebook's troubled IPO. Facebook remains a blueprint for a IPO done incorrectly, ranging from everything from trading problems to the stock ! falling below its IPO price in the first week, Gaskins says. But another aspect Twitter likely wanted to avoid was the constant fear of stock pressure caused by a slate of unlocks. Facebook, for instance, freed up a massive 268 million shares just 91 days following its IPO.
• Reminder of Twitter's business challenges. Rather than worrying about lockups or situations that might affect trading, investors in Twitter are now going to be focused on the company's efforts to turn a profit, Gaskins says. Twitter is going to have to find ways to make a profit if it's going to justify its roughly $30 billion market value.
Holding selling at bay at least might make investors more patient with the company in its earliest days. "The idea of a lock up is to give confidence the insiders are not going to be dumping shares at the first opportunity," Ritter says.