In the run up to Twitter’s much-anticipated IPO, the company has done its utmost to distance itself from the troubles that beset Facebook when it went public. But one risk Wall Street may be overlooking is how the supply of Twitter shares will be made available for sale.
The supply of Twitter shares is set to increase dramatically in the months following the company’s IPO. For the first three months of Twitter’s life as a listed company, only the shares issued as part of the IPO will trade on the public markets; the remaining 87% of its outstanding shares will remain in “lock-up”—shares doled out to high-ranking employees and longterm investors that can’t be sold until long after the IPO. The lock-up structure is meant to stabilize the share price by staggering the available supply of shares.
Of the remaining 87% in lock-up, about 10 million shares held by non-executive employees will be available for sale in February; the bulk of the rest will hit the market in May.
When the expiration of Facebook’s lock-up period approached, short-sellers anticipated that employees and longterm shareholders would cash out and cause a glut of shares on the market, driving down the stock price. Groupon shares suffered a similar fate.
Twitter acknowledges the risk of a similar fate in its IPO filing, the S-1 (p.46). But no one on Wall Street seems all that concerned. That’s partly because many analysts think Twitter will IPO with a more reasonable valuation than Facebook’s, which would in theory make its post-lock up shares more attractive and stable in price.
But there’s another potential problem. Aside from the ordinary shares in lock-up, there are also restricted stock units (RSUs) to consider. Twitter, like many Silicon Valley startups competing for talent, has awarded large amounts of restricted stock to its employees, which vest after certain length of service and performance hurdles are met.
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Twitter’s S-1 puts the company’s share count following the IPO at around 545 million, including lock-up shares. But restricted stock, options and other shares Twitter has issued would bring its total share count closer to 705 million at the time of the IPO, according to an estimate by SunTrust. Then there are any additional shares Twitter issues after the IPO, which would raise the share count to 723 million by the end of 2015, according to an estimate by Wedbush Securities. As more shares are issued, existing shares will account for a smaller percentage of the company.
The question is whether Twitter’s growth potential can outweigh the dilutive effect of more shares hitting the market. That’s anyone’s guess in a frothy market like this one; Twitter is an unprofitable company being valued at north of $15 billion, and Pinterest, which has yet to make any money, is valued at $4 billion.