MENLO PARK, Calif. -- Facebook's early investors and a handful of directors will become eligible Thursday to sell stock they own in the social networking company. It marks the beginning of a time-honored process for public companies, one that will give many Facebook employees the same right to sell their shares this fall.
It's conceivable none of them will sell. But if they do, up to 1.91 billion more shares could flood the stock market over the next several months -- more than four times the 421 million shares that have been trading since Facebook's initial public offering in May.
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.
Lock-ups are designed to prevent a stock from experiencing the kind of volatility that might occur if too many shareholders decide to sell a newly traded stock all at once. The progressive phasing-in of various shareholders allows early owners to shed their stock and make way for new investors, says Peter Zaleski, a professor of economics at the Villanova School of Business in Pennsylvania.
But there's risk involved, too. If too many people sell, Facebook Inc.'s stock price could decline.
That's a problem the company can't afford. The stock closed Tuesday at $20.38, down 46 percent from its initial public offering price of $38.
In all, 271 million shares will become eligible this week, according to Facebook's regulatory filings. Firms ranging from Accel Partners to Goldman Sachs, Zynga chief executive Mark Pincus and Facebook board members James Breyer, Peter Thiel and Reid Hoffman are among those free to sell their stock. Microsoft Corp., another early Facebook investor, will be eligible to sell, too.
Facebook's 28-year-old 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 this week. He controls about a third of the 1.22 billion shares and stock options that will become unlocked on Nov. 14.