REDWOOD CITY, Calif. (CN) - Twitter investors claim in court that poor structuring of employee pay has kept the company from flourishing and caused stock prices to drop.
Investors Johnny Hosey and George Shilliare brought a class action Friday in San Mateo County Superior Court, taking aim against Twitter, its executives and several prominent investment banks. The class accuses the social media company of lying in its public disclosures when it went public in November 2013. The lawsuit was Top Download for Courthouse News on Monday
"Unbeknownst to investors who purchased shares in the company's IPO, the company's registration statement contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and/or was not prepared in accordance with the rules and regulations governing their preparation," the complaint states.
Specifically, they claim say the Silicon Valley heavyweight failed to disclose the risks inherent in its employee compensation system.
Twitter rewards many of its employees and executives in particular with large amounts of company stock as part of its compensation system. While many companies have similar structural arrangements, the Wall Street Journal found that Twitter used stock-based compensation far more than other large companies.
The stock-based compensation costs as a percentage of Twitter's revenue came in at over 30 percent in 2015. As a point of comparison, LinkedIn's stock-based compensation was 17 percent of its revenue, second for major Silicon Valley-based technology companies, while Facebook was third at roughly 16 percent.
Hosey and Shilliare say this arrangement has caused a toxic spiral in the stock prices since the IPO offering of $26 a share three years ago. The stock closed at $18.41 on Monday.
After the stock price stumbled due to slower than expected user growth in mid-2015, many employees left because the decline in stock price lowered their compensation. Accordingly, employee retention has been more difficult — including the type of top-tier talent needed to help steer the company through the dynamic, rapidly-shifting environment of the Silicon Valley technology sector, the investors say.
"Twitter's steep stock price drop reflects more than a challenging business environment," the investors say in the complaint. "It significantly challenged Twitter's ability to perform a key function, namely, to retain and hire talented employees."
The loss of intellectual capital means the prospect of Twitter stock returning to its IPO price remains dubious, according to the complaint.
"Ultimately a 'death spiral' ensues: departing employees weaken the company's competitiveness; a less competitive company results in lower user growth which hurts the growth of advertising revenue; the company's poor performance causes its stock price to fall; a falling stock price results in reduced compensation to current and prospective employees causing them to leave for better prospects, which in turn further weakens the company," the complaint states.
Prior securities class actions against Twitter have focused almost exclusively on the statements the company made about user growth expectations during the IPO, expectations it has fallen short of particularly when compared to Facebook.
The sag in Twitter's share price has been widely attributed to the user growth problem, although others say the platform is too prone to harassment and abuse.
Friday's lawsuit opens a new front in exploration of the company's problem — employee retention and its ties to stock-based compensation models.
This past January, product head Kevin Weil joined three other top-level company executives — HR head Brian Schipper, engineering head Alex Roetter and media head Katie Jacobs Stanton — in walking away from Twitter.
The investors say the stock-based compensation plan and its potential to affect employee compensation was not disclosed during the IPO in violation of the Securities Act of 1933. They seek class certification and damages.
They are represented by Lawrence Rosen in Los Angeles.Follow @@MatthewCRenda
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