To avoid an IPO, Twitter makes its top employees keep 80% of their stock

A stock restriction enforced by social giant Twitter, which stops employees from selling more than 20% of their stock, reportedly became the catalyst for some of its more high-profile resignations, CNNMoney has revealed.

According to the report, the rule has been in place for more than a year but was only recently outed in emails obtained by the website. The emails contained information detailing the resignation of Twitter’s senior technical engineer, Evan Weaver, who left the company in August over “policy disagreements” with the company.

Weaver is said to have taken issue with the 20% stock sale restriction, leading Twitter CEO Dick Costolo to issue a company-wide email that explained the reasons behind it. According to the email, the main reason is to avoid Twitter going public, by keeping under the “500 shareholder rule”.

CNN explains the rule:

When companies have more than 500 shareholders owning one class of equity shares, the SEC requires the business to begin disclosing its financial results. Companies aren’t required to go public at that point, but most choose to. The rule was a catalyst in Facebook’s recent IPO filing: Facebook moved past the 500 shareholder mark last year.

By keeping under that level, it can remain a private company.

Costolo wrote in his email that Twitter doesn’t “want to be public until [it has] very predictable quarterly earnings growth,” adding that it was “not ready to be a public company for a couple years.”

In order to do this, Costolo explains that it had to “artificially limit the supply of stock being sold,” by letting “everybody with vested common stock sell only some fraction of their shares.”

The practice isn’t uncommon; companies want to remain private and so enforce limits on how much stock a shareholder can sell, but according to CNN, Twitter’s practice is not common. By restricting the amount of stock that can be sold on secondary markets, it is able to keep some control over who buys shares in the company and ensure it doesn’t have too many independent shareholders.

In December, Saudi Prince Alwaleed bin Talal’s Kingdom Holding firm confirmed it had made a $300 million investment in Twitter, taking a 3% stake in the company. Kingdom Holding called it a “strategic investment”, ensuring that the Prince could continue to “invest in promising, high-growth businesses with a global impact”.

The deal saw shares transferred from existing stockholders, something that only Twitter’s first employees and investors hold. Twitter’s first employees are likely to be the only members whose stock will be fully vested.

However, all of Twitter’s staff hold equity in the company.

New Twitter employees are now issued “restricted stock units” which can only be made into common stock after a “liquidity event”, which includes an IPO or a buyout. The restricted stock units cannot be sold and do not figure towards the 500-shareholder limit.

For many, it isn’t a problem; they aren’t able to sell their stock regardless of whether they wanted to or not. However, for Twitter’s earlier employees, it may restrict them from leaving the company as they won’t generate enough from these to make it worth quitting.

Given the buzz around Facebook’s $5 billion IPO, all eyes turned to Twitter for clues as to when it would look to go public. The social giant is currently moving forward with plans to monetize its service and wishes to wait until it see reliable quarterly revenues before opening itself to outside investment and shareholder pressure.

Understandable by most people, but for early Twitter employees it is a restriction they could do without.