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Facebook shares drop 4% as employees sell shares

October 31, 2012: 11:20 AM ET

Click the chart to track Facebook's stock.

Many of Facebook's rank-and-file employees got their first chance to dump their shares Wednesday as U.S. financial markets opened for the first time this week.

Shares of Facebook (FB) declined more than 4%, as a total of 234 million shares became newly eligible for sale. About 50 million Facebook shares exchanged hands in the first hour of trading.

For many of Facebook's employees, whose so-called restricted stock units (RSUs) converted to common stock last week at the price of $23.23 a share, Wednesday marked their first opportunity to unload their shares of Facebook. The anticipated day would have been Monday, but with the two-day market-wide shutdown due to Superstorm Sandy, employees had to wait a couple of extra days.

Similar to a lockup agreement that requires some shareholders to hold on to their stock for a certain period, the RSUs for employees aim to prevent the market from being swamped with too many of a company's shares immediately after an IPO.

Back in August, on a day when some of Facebook's early investors and executives had their first chance to sell their shares of the company, shares of Facebook fell 6%.

Related: Paul Ceglia arrested on fraud charges for Facebook lawsuit

Though Facebook's employees are finally getting their chance to cash out, they won't be able to pocket all the earnings from their Facebook stock, as the IRS taxes RSUs as ordinary income on their full market value as of the day they vest.

Employers are required to withhold taxes when they settle RSUs. For many at Facebook -- whose windfalls can easily reach into the millions -- that will mean paying taxes at the top income tax rate. That's 35% this year for federal taxes. California, where most Facebook employees live, levies an additional 10.3% tax on individual income over $1 million.

Facebook says the tax rates will average around 45%, so it plans to withhold a significant portion of its employees' shares to cover the bill. Instead of selling those shares on the open market, Facebook will hang on to them and dip into its own cash stash and credit lines to pay the estimated tax bill of nearly $2.3 billion. The maneuver essentially functions like a stock buyback and reduces Facebook's outstanding share count.

--CNNMoney's Julianne Pepitone contributed to this report. 

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Hibah Yousuf
Hibah Yousuf
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Hibah Yousuf is a reporter at CNNMoney, where she covers stocks, bonds, commodities and currencies trading across the globe, as well as corporate earnings and other markets-related news. Prior to joining the site in 2009, she interned at Money Magazine.

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