Term Sheet

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One reason to flood the Facebook market

August 17, 2012: 12:26 PM ET

Selling shares before the tax rates rise.

FORTUNE -- Accel Partners yesterday distributed approximately 50 million shares of Facebook (FB) stock, following the expiration of a 90-day lockup. We don't yet know how many of those shares made it to market, but we do know that many limited partners in venture capital funds are effectively required to liquidate upon receipt.

My first thought was to criticize Accel for such a massive distribution. Sure 50 million shares represented less than half of the VC firm's holdings, but wouldn't it risk depressing the company's stock price by flooding the market with shares? And, in so doing, reduce returns for some of those limited partners who needed to sell?

But then an emailer reminded me that the capital gains tax rate is scheduled to increase on January 1, from 15% to 20% (plus a bit more, if healthcare-related taxes are included).

This is where it gets tricky. Lots of Accel's investors are nonprofit institutions like university endowments and charitable foundations. They would prefer the higher stock price, since tax rates are irrelevant to them.

But others, like corporations and high-net-worth individuals, are subject to capital gains taxes. And put Accel's partners into that latter category, in terms of both returns from monies invested into funds and for carried interest generated by third-party investments. For all of these folks, capital gains rates matter.

Look, I'm not arguing that Accel distributed such a large number of shares for the purpose of tax arbitrage. First, because I think proper portfolio management makes much more sense as the primary driver. Second, because it could have bled the shares out over the next couple of months, thus protecting both the stock price and the tax incentive.

But it's worth remembering, particularly for the next lockup expiration, that certain investors will benefit from getting shares out in 2012 rather than in 2013. Including the VC firms themselves.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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