Snap's struggling stock faces its biggest challenge yet (SNAP)

Snap is about to face the biggest reckoning of its short history as a public company.

On Saturday, the company's post-initial public offering stock lockup is set to expire, allowing early investors, employees and insiders to sell shares for the first time.

It couldn't come at a worse time for Snap, which has plunged 19% since pricing its IPO on March 1. The company's stock has fallen more than 16% this month alone, and was down 1.7% as of 10:13 a.m. on Friday.

"We see further trouble ahead for investors in Snap as employee lock-ups expire," research provider Management CV wrote in a note to clients. Company executives "are facing slowing growth rates and we think the expiration of insider's lock-up provisions from the IPO may collide with investor interests."

Although the company is struggling, there's one group that will welcome the lock-up expiration with open arms: those traders betting against its stock price. The likely influx of new shares hitting the market will make it cheaper to borrowing the stock in order to short.

While borrowing fees of 50% to 60% have made shorting Snap prohibitively expensive to most investors, that cost will shrink to around 5%, according to data compiled by financial analytics firm S3 Partners.

For context around just how expensive Snap shorts are at present time, short sellers were paying a whopping $1.7 million a day in borrowing costs to pay for their bearish bets earlier this week. That meant Snap shares had to fall by 5% every month just to cover financing costs, S3 data show.

That's all about to change.

Here's a handy guide for tracking how many shares will be freed up from post-IPO lockup constraints over the next few weeks, courtesy of S3:

July 29 — 400 million shares from early investors
August 14 — 182 million shares from employees
August 14 — 600 million shares from directors, founders, insiders
August 29 — 20 million shares from early investors

It's likely that early investors will end up selling at least some of their shares, S3 says. The firm estimates that 10% to 30% of their shares will land in lending accounts.

As for the stock owned by employees, directors, and insiders? Don't necessarily count on their hitting the market anytime soon.

But that shouldn't matter for short sellers in the immediate term. Their borrowing costs are almost certain to come back down to previous levels, at which point it'd be open season once again.

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