Facebook shares fall in first full week of trading, but employees face larger tax bills

Facebook’s first full week on the Nasdaq hasn’t started well, after the company’s shares dropped more than 11% overnight, bringing the price well below the initial public offering starting point of $38.

The move is sure to disappoint employees, keenly watching the market after their shares were transformed from “restricted” stock into normal units – although they won’t vest until October.

Analysts point out Facebook’s unusual method of giving employees “restricted stock units” (RSUs) that turned into normal stock after the IPO. These stock units will vest during a very quick period of time – within about five or six months.

But the problem is that the American tax regulator judges RSUs as ordinary income on the full market value once they vest, not capital gains. That means Facebook employees will be paying huge tax bills – as much as an average of $1 million each – and the lower the stock goes, the lower their gains.

Zynga and Twitter have used similar methods as well, with some analysts saying they are starting to replace the prior method of just giving normal shares. But some have criticised it, saying the RSUs limit what employees can do with regard to realising gains from their shares at the best time.

Facebook’s RSUs also had some rules, including that no employee could receive more than 2.5 million shares a year, except for new employees, while the RSUs don’t have any voting rights.

These employees will have watched Facebook’s share price shrink from $US38 last Friday to just $US34.03 last night.

But it may not be investors’ lack of enthusiasm about the product that is to blame for the declining Facebook share price. Nasdaq chief executive Robert Greifeld said yesterday the float – rife with trading glitches – “was not our finest hour”.

Traders have told Reuters they didn’t get confirmations until the end of the day and at 3pm Nasdaq had only confirmed a small amount of trades. “There was definitely some uncertainty around the open because people didn’t have their positions,” one unnamed source is quoted as saying.

Greifeld has said the Nasdaq board has met and will make changes to its IPO process, adding the company was “humbly embarrassed” by the glitches.