August 14, 2012

AP’s Writeup on Expiration of Facebook ‘Lock-up’ Period Fails to Note Founder Zuckerberg’s $1B IPO Cash-out

In her story this afternoon on the imminent expiration of the company’s “lock-up” period during which certain employees and insiders must hold onto their company stock, Associated Press Technology writer Barbara Ortutay reports that Facebook founder Mark Zuckerberg will be locked into his holdings until mid-November — while omitting out of apparent ignorance the fact that he previously cashed out to the tune of over $1 billion.

The relevant excerpts (full story saved here for future reference, fair use, and discussion purposes) follow the jump:


Facebook’s early investors and a handful of top executives become eligible on Thursday to sell stock they own in the social networking company. It marks the beginning of a time-honored process for public companies, which will culminate in the fall, when many Facebook employees receive the same right to sell their shares.

… So-called “lock-up” periods, which prevent insiders from unloading shares too close to an IPO, generally start to expire 90 days after a stock makes its public debut.

Facebook’s 28-yearold 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.

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.

Uh, Barbara — Zuckerberg was among those “early investors who sold their stock to the public as part of Facebook’s IPO,” as numerous media outlets reported at the time of the IPO. Just one of them was CNet:

Zuckerberg cashes in $1.1 billion selling Facebook stock
The CEO and founder completed selling a portion of his stock — at a price that few other sellers have been able to get since.

Turns out, Mark Zuckerberg — like all the insiders who sold shares into the IPO — got a good deal.

Facebook’s CEO has completed a transaction of the 30.2 million shares that he was slotted to sell, according a document filed with the SEC.

He sold them at $37.58 a share, netting him more than $1.1 billion. His price was just below the offering price of $38 because the underwriters take a cut. Zuckerberg had planned to sell the stock mainly as a way to pay taxes, according to the company’s S-1 IPO filing.

Ms. Ortutay’s strange “Facebook hasn’t explained” language makes me wonder whether she tried to contact the company at all in advance of her writeup.

My understanding, which is a little dated but I believe still quite accurate, is that it is very, very unusual for an initial public offering’s underwriters to allow founders and key early investors to immediately cash out when its stock begins trading, for the very reasons cited in the AP story. Supporting that view, I was unable to find any evidence that Google’s founders were able to cash out in such a way when that firm went public eight years ago; the coverage at the New York Times that day gives no hint of a cash-out.

They’re free to make whatever deal they want, of course (such negotiations are apparently not subject to SEC regulation). Even though the company did disclose the cash-outs in its final S-1, the company and its underwriters apparently didn’t disclose their intent to allow certain insider sales until May 16, only two days before the company went public. As I wrote at my home blog at the time, the hasty and/or hastily disclosed move certainly should make people wonder if Zuckerberg and others were ensuring that they got theirs, so to speak, in anticipation of the stock never returning to its IPO level or even in anticipation of the company someday heading in the direction of MySpace, i.e., virtually worthless.

Back to Ms. Ortutay’s reporting. It certainly leaves the impression that Zuckerberg has had to hold onto all of his pre-IPO holdings, and makes him appear to be in the same boat as other company insiders and executives (actually worse, since he can’t sell for another three months). It simply isn’t so.

Cross-posted at


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