Why Twitter's stock plunge is especially bad for its employees

Twitter (NYSE: TWTR) shares plunged 27 percent in the past two weeks as potential acquirers withdrew their interest. On Friday, Salesforce.com (NYSE: CRM) became the latest to drop out.

While investors are hurting, the slide is a bigger problem for employees.

That's because Twitter has been highly reliant on stock as a form of employee pay. Twitter's stock-based compensation expense in 2015 of $682.1 million represented 18 percent of revenue, more than any other U.S. technology company with a market value of at least $1 billion, according to FactSet.

Twitter is trading 35 percent below its IPO price, punishing company morale and leaving many employees holding paper with sinking value. They're not forecasting much improvement. Only 54 percent of Twitter employees surveyed by company review site Glassdoor have a positive business outlook, down from 73.9 percent a year ago.

With Alphabet (NASDAQ: GOOGL), Disney (NYSE: DIS), Apple (NYSE: DIS) and now Salesforce declining to make an offer, an employee rush for the exits wouldn't be surprising.

"It makes it easier for someone to go poach them, no question," said Brian Wieser, an analyst at Pivotal Research Group who still has a "buy" rating on the stock.

A Twitter spokesperson declined to comment for this story, citing the company's quiet period ahead of earnings.

Palo Alto Networks (NYSE: PANW), a security vendor, has the second-highest ratio of stock-based compensation expense to revenue at 17 percent. Other companies with high ratios are LinkedIn (NYSE: LNKD), which is being acquired by Microsoft (NASDAQ: MSFT), at 12 percent, and Yelp (NYSE: YELP) at 11 percent, according to FactSet.

Facebook's expense equals 10 percent of revenue and Alphabet's is 4.9 percent.

Stock options and restricted stock units (RSUs) are popular forms of compensation at emerging tech companies, who don't have the cash to compete for talent with more established businesses but can lure recruits with the hope of future riches.

When it works, it really works.

Just ask Facebook (NASDAQ: FB) or Google employees who received options at a few dollars per share and stuck around long enough to see them vest and convert to tradeable stock. Google parent Alphabet now trades at over $800 a share and Facebook is over $125.

But after last week's slide, Twitter shares are worth $16.88 a piece. The company debuted on the New York Stock Exchange at $26 in 2013.

At its IPO, Twitter had more than 85 million outstanding shares subject to RSUs with an average grant-date value of $16.89. With about 3,900 employees, Twitter is almost twice as big today as it was then.

When the stock was trading in the $40s and $50s from 2013 to early 2015, employees were getting paid in restricted stock at those prices.

Of course, early employees are still in good shape. The weighted per-share average price of options issued in 2010 and 2011 was 55 cents and $1.34, respectively, according to Twitter's IPO prospectus.

There's a positive spin to the stock's slide, according to Wieser. Employees and prospects who see Twitter's impressive reach and view the stock as beaten down could be excited about the opportunity to accumulate equity at a discount.

"If they believe in the company, they have to believe the stock is cheap, in which case they know the next issuance will provide value," Wieser said.

That's a big if. Twitter has a business conundrum that's proving difficult to address.

Facebook keeps growing and Snapchat is capturing the younger generation, but Twitter has stagnated with the number of monthly active users increasing only 3 percent in the second quarter from the previous period to 313 million. Sales growth of 20 percent in the quarter was by far the lowest rate of expansion since the company's IPO.

Stock compensation "is more a symptom of the problem than a problem by itself," said Aswath Damodaran, a finance professor at New York University's Stern School, in an e-mail. "Twitter's problems are more fundamental. They cannot figure out how to monetize their users."

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