Facebook Lockup Cheat Sheet

Lockups are designed to prevent insiders from selling their shares too quickly after a company goes public. While it used to be that lockups lasted 180 days for everyone, they’ve become increasingly complex, and Facebook (NASDAQ:FB) is stepping it up with five different key dates dictating which insiders can start selling and when.

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When Facebook was a private company, employees and early investors had to sign a contract with the company when they initially got their shares or options. Such a contract is standard — it prohibits trades for a set amount of time after a future IPO, should there be one. When the company is ready to go public, the underwriting bank or banks reaffirm the existing agreements in new contracts.

Investors usually want shorter lockups, giving them the option to cash out sooner, but underwriting banks want longer ones so as to keep insiders from flooding the market with shares, thus lowering the stock’s trading price. The two groups must compromise.

And compromise they did. In the case of Facebook, large investors had the bargaining power to get an earlier exit. In February 2010, for example, Mail.Ru Group and Digital Sky Technologies worked out an agreement to be able to sell as many as 75 million shares just 90 days after an IPO, but had to agree to hold on to 47 million shares for a full year, according to Facebook’s prospectus. Billionaire investor Peter Thiel sold most of his remaining stake in Facebook over two days last week at the end of Facebook’s first lockup period, only 90 days after the company went public.

Other regulations are also in place that dictate when lockups expire for certain types of shareholders. Employees, for instance, can’t always exercise their options if they’re not yet vested. And according to a regulation known as Rule 144, a company can extend a lockup for up to a year for corporate officers and large shareholders, though the lockup period an also be as low as 90 days.

Facebook’s lockup schedule is certainly front-loaded — by November 14, six months after its IPO, the majority of insider shares will be freed up. The August 16 lockup expiration that just passed allowed original investors, excluding Mark Zuckerberg, to start trading 271 million shares. The next period, October 16 to November 14, will see directors and employees allowed to sell some stock and options that could total 247 million shares.

November 14 is the big day, though. Almost 1.2 billion shares will become available, and for the first time, Zuckerberg will be allowed to trade his 60 million shares. Another 149.43 million share will be free to trade come December 14, and at the one-year mark, on May 18, 2013, Mail.Ru Group and Digital Sky Technologies will be allowed to trade their remaining 47.32 million shares.

However, not all of this is set in stone. Underwriters of an IPO have the authority to grant one-off waivers to the lockup, based on their own discretion. In Facebook’s case, the company itself, rather than its underwriter, retained the right to decide whether some investors could sell earlier.

Zynga (NASDAQ:ZNGA) executives, including CEO Mark Pinkus, got a waiver to shorten the lockup period by almost two months, allowing them to sell the stock at twice what it would have fetched when the original lockup date finally came around. However, that action has prompted a potential class-action lawsuit for insider trading, which may discourage Facebook from granting any more waivers.

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