May 5 makes it six months since microblogging service Twitter Inc. (TWTR) went public. It’s not just a meaningless milestone, however. Six months also marks the point in which the Twitter “share lockup” ends – and event that has the potential to tank a stock.
What’s a Share Lockup?
Startups often reward early employees and investors with stock options. Often, it’s because offering partial ownership is the only way a small company can attract quality talent, since they don’t have the cash to compete with the big guys.
At the beginning of a company’s run, those stock options are essentially lottery tickets. If the company gets bought out or goes public, those stock options suddenly become much more valuable.
With a buy out, shareholders of record are usually paid out all at once. However, if a company goes public, as Twitter did in November, a company has to take precautions.
To avoid having employees and investors cash out their options at the earliest possible moment – that is, at the moment of the IPO – the insiders are often legally prevented from selling those shares for a set time period, around 3 to 6 months. Then employees and early investors can finally cash in and unload their privately held shares on the open market.
Ready, Set, Sell… or Hold.
So on May 6 Twitter’s lockup expires, meaning all those early employees can finally notch their big payday. However, something curious has happened. And as of May 5, Twitter is not experiencing unusual volume, and their stock is actually up.
It appears one of two things have happened. One, it’s possible the market already priced in the expiration of the lockup period. Twitter has been hammered as of late, dropping more than 10 percent over the last week. So it’s conceivable that the stock has already adjusted to its lower valuation.
Or, there’s another option to what happened with those stock options: the majority might not have clamored to cash out just yet. After all, “options” imply just that: the insiders had the option to cash out and take their social media money and run. And it could be that the majority chose the option of standing pat with their shares.
This is a huge vote of confidence from the insiders. While it’s not for certain that things are looking up for the social media play, it ‘s a good sign for outsider investors that the employees are holding... for now. Even though the company’s shares are down 40.85 percent over the last three months, the insiders think there’s an upside to staying pat.
Or they’re going down with the ship. Either way, Twitter shares were up on May 5, rising .59 percent to hit $39.25 a share.
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