Kai Ryssdal: So I'll tell you, this is looking to be a tricky week for some newly minted public companies. Shares of Angie's List -- the consumer review site that had its IPO in November -- tumbled nearly 16 percent yesterday after its lockups expired.
I know, I know -- right about now you're sayin': What's a lockup?
We'll tell you. Right after we mention that the lockup for Facebook -- an oh-so-much-more famous freshly public company -- ends tomorrow.
Here's Queena Kim with our explainer.
Queena Kim: On the day a company goes public, insiders -- like employees and early investors -- are not allowed to sell their stock. Their shares are “locked up” for anywhere from 90 days to a year. Tomorrow, the first of Facebook’s stock restrictions expires.
James Angel is a professor at Georgetown University’s Business School.
James Angel: This is the moment of truth.
Facebook trades at about 70 percent of what it earns. Simply put, that means investors are betting that Facebook will make 70 times more than it does now. Angel says, tomorrow, insiders will signal whether Facebook’s going to hit that target anytime soon.
Angel: If they dump their shares as fast as possible, that says one thing.
It says “people in the know” don’t think the company is growing fast enough. But if lots of insiders don’t sell?
Angel: That sends a good signal.
It says Facebook’s going to live up to expectation and the stock price will keep moving up.
Peter Wendell is a managing director of the venture capital firm Sierra Ventures. He says people read too much into lockups. If you look at the last 100 companies on the day their lockups expired...
Peter Wendell: I bet you 90 times out of a 100 the price would be down that day.
Wendell’s point? Insiders will sell and Facebook’s stock will fall. Wendell says in volatile sectors like social media, it’s not uncommon for a stock to fall up to 10 percent on the day a lockup expires. And that’s not necessarily a “no confidence” vote.
I’m Queena Kim for Marketplace.